________________________________________________________________________
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
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 June 30, 1998, the registrant had outstanding 10,959,131 shares of
its common stock ($.01 par value).
____________________________________________________________________________
<PAGE>
<TABLE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Columnar Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
December 31, June 30,
ASSETS 1997 1998
(Unaudited)
------------ ------------
<S> <C> <C>
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 outstanding 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.
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<TABLE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Columnar Amounts in Thousands, Except Per Share Data)
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
1997 1998 1997 1998
<CAPTION>
<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 expenses 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 minority 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.
3
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<TABLE>
EMERGING COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Columnar Amounts in Thousands)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
---------------------------
1997 1998
<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.
4
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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 $9.1 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
5
<PAGE>
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 consulted
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.
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.
6
<PAGE>
F. GOING-PRIVATE BUYOUT OFFER
On May 29, 1998, the Company announced that its Board of Directors had
received a proposal from Innovative Communication Co. LLC, a 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.
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.
7
<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.
8
<PAGE>
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.
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.
9
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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.
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.
10
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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.
11
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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 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 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.
12
<PAGE>
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 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.
13
<PAGE>
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 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.
14
<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.
15
<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.
EMERGING COMMUNICATIONS, INC.
Date: August 14, 1998 /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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
*** (COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) ***
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
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0
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