June 27, 2004 – The Rural Telephone Finance Cooperative, stating that it is owed more than half a billion dollars by Innovative Communication Corp., has sued ICC in federal District Court in Virginia, claiming violations of a 2001 loan agreement.
The cooperative, with headquarters in Herndon, Va., is asking the court for two things:
– A judgment of $81.8 million representing what it says is a mandatory prepayment of a portion of the $163.9 million 2001 loan because of income ICC derived through the sale of shares of its stock.
– A declaration that ICC has breached its contractual obligations under the 2001 loan, that those breaches constitute "events of default" under the agreement, and that RTFC as a result "is entitled to exercise its rights and remedies under the loan agreement and related documents if the breaches are not cured by ICC within 30 days of notice of the event of default."
Those "rights and remedies," the suit states, include "that RTFC may declare all unpaid principal, all accrued and unpaid interest thereon and any other obligations under the loan and the prior loans to be immediately due and payable." They also include, it states, that the cooperative "may exercise its rights and remedies with respect to the collateral, if the breaches are not cured by ICC within 30 days of notice of the event of default."
According to the court document, "as security for the prior loans and as security under the loan agreement, RTFC required, among other things, that ICC pledge all of the common stock and preferred stock of ICC and its subsidiaries, including all of the common stock of Vitelco."
Appended to the RTFC complaint are two lists of a total of 37 companies identified as "direct" and "indirect" subsidiaries of ICC. The "direct" list of 20 firms includes Virgin Islands Telephone Corp., or Vitelco (now Innovative Telephone), Vitelcom Cellular (now Innovative Wireless/Vitel Cellular), St. Croix Cable TV Inc. and Caribbean Communications Corp./St. Thomas-St. John Cable TV (jointly now Innovative Cable TV), The Daily News Publishing Co., and Innovative Long Distance Inc.
Also appended is a listing of three "pledgors" to the security agreement:
– Emerging Communications Inc., pledging its interests in ICC and IC Air Inc., the owner of record of ICC's Boeing 727 corporate jet.
– Innovative Communication Subsidiary Company, LLC, pledging its interests in Emerging Communications Inc. and ICC, with "the pledge of ICC to become effective upon the final dissolution of ECI."
– Innovative Communication Corp., pledging its interest "in certain direct and indirect subsidiaries."
The lawsuit, filed on June 1, comes on the heels of a decision by a Delaware Chancery Court judge on May 5 ordering ICC owner Jeffery Prosser, two members of the ICC board of directors and Prosser's other V.I. companies to pay what could amount to more than $100 million to former stockholders of Emerging Communications.
That Chancery Court judge found that Prosser and the two board members knowingly undervalued the price of Emerging Communications stock when Prosser bought out the company's minority shareholders in 1998.
Holland L. Redfield II, ICC vice president for corporate affairs, said late last month that ICC would appeal the Delaware judge's decision and would "have multiple grounds" on which to do so. He said that "throughout the transaction that took Emerging Communications Corp. private, many of the world's leading law and investment banking firms provided their advice and guidance to the board which was followed to ensure that the transaction was fair and equitable." (See "Prosser Ordered to Pay Millions to Ex-shareholders".)
To date no formal judgment has been entered with the court in the matter. One legal expert in Delaware had said this was not unusual, as the legal representatives of both parties are given some time to wrangle back and forth while coming to terms for a settlement before the judge gives his final edict. After a judgment is entered, ICC then has the right to appeal it.
The Rural Telephone Finance Cooperative suit explains that ICC is the parent company of what in 2001 was V.I. Telephone Corp. and that "Vitelco, as a member of the RTFC, and ICC, as Vitelco's parent, are eligible to borrow money from RTFC and, since 1987, have borrowed money from RTFC."
The relationship dates from the beginnings of both entities. It was in 1987 that Prosser and his then partner Cornelius Prior formed Atlantic Tele-Network in order to purchase Vitelco from ITT. Prior and Prosser would go their separate ways in 1997, Prosser becoming the sole owner of Vitelco and Prior retaining ATN's other holding, Guyana Telephone and Telegraph.
It was also in 1987 that RTFC was incorporated as a cooperative, not-for-profit membership corporation to provide, secure and arrange financing for its rural telecommunications cooperative members and their affiliates.
Claim for Payment of 2001 Loan
Between 1987 and 2000, RTFC made 15 loans to ICC totaling in excess of $500 million, the RTFC complaint states. Then, on Aug. 27, 2001, RTFC and ICC entered into agreement for a loan of $169.3 million intended in part to pay off loans obtained through ICC's lines of credit and to purchase certificates representing investment in RTFC.
At that time, ICC owed the cooperative more than $550 million, according the complaint.
The 2001 agreement requires ICC to make payments on that loan under specified circumstances: "on each occasion on which any net cash proceeds are received by or on behalf of the borrower or any subsidiary, the borrower shall, within three business days after such net proceeds are received, prepay the loans in an aggregate amount equal to such net cash proceeds."
Last February, RTFC states, "Vitelco sold 85,000 shares of preferred stock with a par value of $1,000, for net proceeds of $81,859,500."
The complaint states that these allegations "are pleaded upon information and belief based on the disclosures in the audited consolidated financial statements for the years ended Dec. 31, 2003 and 2002, of Innovative Communication Corp. and subsidiaries."
"ICC, despite demand, has not made the mandatory prepayment," the complaint states.
An attorney familiar with the case drew an analogy to a homeowner with a mortgage "selling the house and not giving the money from the sale back to the bank that holds the lien on the house. And when the bank learns of the sale and asks for its money, the person refuses to hand it over."
Claim for Declaratory Judgment
RTFC contends that the alleged sale of the Vitelco stock constitutes violation of two "negative covenants" of the 2001 loan agreement and that these violations represent an "event of default." The negative covenants at issue state that ICC and its subsidiaries will not without the prior written consent of RTFC:
– Purchase or redeem or retire any of its ownership or membership interests.
– Permit any subsidiary to enter into any agreement that would impair said subsidiary's ability to pay dividends or distributions to borrower.
"Upon information and belief based on the ICC 2003 financial statements," RTFC states, Vitelco's preferred stock received "an annual dividend of 10 percent, payable quarterly in arrears."
"To the extent that ICC, without RTFC's consent, permits its subsidiary, Vitelco, to declare or pay any dividends with respect to the preferred stock, ICC has breached the negative covenant," the complaint states. "Even if Vitelco does not declare or pay dividends with respect to the preferred stock," it says, "the issuance of the preferred stock still violates" the negative
Similarly based on the 2003 financial statements, the complaint states, "Vitelco may not pay dividends on its common shares (which are pledged as collateral by ICC to RTFC) if the dividends to the preferred stock are in arrears (not declared and paid quarterly) unless holders of more than two-thirds of the preferred stock approve such payments."
"RTFC did not consent to ICC or its subsidiaries incurring dividend obligations to other parties, did not consent to ICC or its subsidiaries impairing Vitelco's ability to pay dividends to ICC with respect to pledged common stock, and did not consent to ICC's breach of the negative covenants," the cooperative states.
The agreement also provides that ICC shall not act, and shall not permit any subsidiary to act, to "sell, transfer, lease or otherwise dispose of any asset, whether now owned or hereinafter acquired," without the prior written consent of the cooperative.
Under the agreement, failure of ICC "to perform any warranty, covenant or condition to be observed or performed" constitutes an event of default.
An off-island corporate attorney who reviewed the case at the Source's request said the RTFC's request for a declaratory judgment appeared to be a move on the part of the cooperative "that would allow it to accelerate the repayment of all of the money owed by ICC."
The RTFC complaint notes that ICC's attorneys contend there has been no such event of default.
Conditions of and Collateral for the Loan
The 2001 loan agreement provides for a series of advances consisting of the internal transfer of funds within RTFC to be credited to principal due and payable under the ICC lines of credit and/or the prior loans, with no payment to be made directly to ICC.
An initial advance at closing was for ICC to do two things:
– Pay in full all principal outstanding under ICC's lines of credit, after which no further borrowing under the lines of credit would be permitted.
– Purchase subordinated capital certificates, or SCCs, representing an investment in RTFC in the amount of $12.5 million, "the amount necessary to achieve, as of the closing date, a ratio of SCCs to principal amounts outstanding under the loan and prior loans of 10 percent."
The agreement provides for ongoing principal advances to be credited to monthly payments on the prior loans and for 10 percent in each instance to go for the purchase of additional SCCs.
According to the loan agreement, as security for the loan ICC entered into a mortgage granting RTFC a "perfected prior lien" on all of ICC's real property and the borrower's personal property, and pledging all of its ownership interests in its direct subsidiaries. Such a lien would have priority over any others filed against the company other than government claims for taxes and other obligations owed.
As additional security, the agreement calls for Innovative Communication Subsidiary Company, LLC to pledge to RTFC its ownership interests in Emerging Communications Inc., with RTFC to receive a perfected prior lien on all such interests.
And it calls for ICC give RTFC "a first and priority interest" in the Boeing 727 jet.
The agreement contains a section subtitled "Special Affirmative Covenants" with which ICC is to comply. These provide for ICC to "use every good faith best effort" to:
– Dispose of the Boeing 727 jet.
– Enter into a sale/leaseback, on favorable terms, of ICC's headquarters building in Christiansted.
– File or record in each jurisdiction necessary documents giving RTFC a perfected first and prior lien on the collateral.
ICC Debt Half That of V.I. Government?
According to the RTFC complaint, the cooperative as of June 1 was owed in excess of $530 million by ICC.
By comparison, Redfield testified before the U.S. House of Representatives Committee on Resources Committee on June 16 concerning the debt of the government of the Virgin Islands: "Currently, our deficit is between $80 million and $100 million per year. Our accumulated debt is around $1 billion. Our unfunded liability to the Government Employees Retirement System is approaching one billion."
Redfield said the territory's per capita debt "based on a population of 108,000 is $9,200 per person, giving the Virgin Islands the distinction of [having] one of the highest per capita [debts] in the nation."
According to research conducted by the Source in 2002, ICC's total borrowing from the cooperative stood at $615.6 million as of May 21 of that year. (See Phone Company Borrowing Exceeds $615 Million".)
The National Exchange Carrier Association, a not-for-profit entity that administers federal subsidies to local phone companies, showed Innovative Telephone having 68,283 subscribers in 2002. Using that figure, if ICC's borrowing from RTFC now stands at $530 million, that would work out to the equivalent of $7,762 per subscriber.
A longtime observer of ICC's financial operations offered this assessment: "That the cooperative has decided to file suit regardless of what the court decides and when it decides is an indication of serious trouble for ICC … The company has apparently not developed lines of credit elsewhere. That ICC has pledged all of its assets implies non-use of that central collateral in other borrowings."
The observer further stated that the RTFC should release its annual report for the year ending May 31, 2004, later this summer. "This document in prior years has always shown the amount lent to the Virgin Islands i.e., ICC," the observer said. "Such documents in the past also have mentioned disputes with borrowers, such as we have here."
The Source asked Redfield, as ICC's spokesman, to respond to four questions. He responded directly to two:
Source: What was the nature of the sale of 85,000 shares of Vitelco preferred stock in February for $81.9 million? Whose shares were they, and to whom were they sold?
Redfield: "The non-voting, preferred stock was sold as a medium-term telecom investment to neutral, institutional funds in a standard sale and was not to any insiders or anyone otherwise connected to Mr. Prosser, ICC, Greenlight, the RTFC or (as far as I know) anyone or anything in the Virgin Islands."
[Source clarification: "Greenlight" in this reference is to Greenlight Capital Qualified L.P., Greenlight Capital L.P. and Greenlight Capital Offshore Ltd., three investment funds which jointly were plaintiffs in the lawsuit heard in the Delaware Chancery Court that is cited near the beginning of this article.]
Source: What has been ICC's response to the special affirmative covenants asking ICC to make every good faith effort to sell the corporate jet and to sell and lease back the corporate headquarters building?
Redfield: "RTFC is a major lender and ICC has a long future with it that ICC wants to remain mutually beneficial … The present concerns are with a situation which will be quickly resolved but the RTFC relationship has lasted more than 15 years. However, since the document filed with the suit is not the latest information and it does make mention of a past provision regarding the buildings and the corporate plane, I do note two things:
"(1) The document attached to the suit was from 2001 and many of its provisions have been the subject of subsequent discussions, documents and arrangements. The provisions regarding the plane and buildings are, absolutely, no longer operative … and
"(2) those old provisions are from a time when the entire telecom industry was under great financial pressures which are, happily, now fading into history. If the RTFC had any issues today with such things as how buildings or corporate assets are ret
ained or funded, you would have seen those issues in the complaint, rather than the obviously tactical and basically silly assertion that it had some right to control or share in Vitelco's assets."
The Source's other two questions were:
– What has been ICC's response to RTFC's demand for mandatory prepayment on the loan of an amount equal to the proceeds of the sale of the stock?
– On what basis does ICC argue that there was no event of default on the loan?
In his response to the questions submitted by the Source, Redfield made reference to the Deleware Chancery Court case. "As we have said previously, a judgment has not been entered there," he said, "and ICC fully expects that it will not be. ICC fully expects that the disputes will be settled soon, or the decision will be reversed."
Redfield further stated: "For several years, RTFC has had an obligation to advance a large amount of money on ICC's behalf toward the payment of Greenlight in the transaction which gave rise to the Delaware dispute. This is not a new or unknown issue to ICC, Greenlight or the RTFC. ICC has made all payments due to RTFC and has complied with all provisions of all agreements."
He continued: "RTFC's action was filed immediately following the Delaware decision … obviously RTFC wishes to position itself in a manner that may limit its responsibility or expand its options with regard to having to make such payments. Unfortunately, that desire has taken the form of a totally meritless action ICC believes was designed merely as a tactical device to apply leverage to the situation. This is unfortunate, but it is not unusual when such a situation is being worked out by all of the parties."
Redfield also faxed the Source two documents:
– A "Release of Mortgage" dated Jan. 13, 2004, stating that RTFC acknowledges that Vitelco, doing business as Innovative Telephone, "has made payment in full to the RTFC of any and all sums due and owing" and that RTFC as a result "hereby releases any and all liens that it has or may have had on the real and personal property of Vitelco…"
The release states that in connection with such payment RTFC delivered to Vitelco an original promissory note dated Sept. 9, 1998, and an amended note dated April 4, 2003, both in the amount of $74,597,358, both endorsed "paid in full."
– Excerpts from a 1989 agreement of Vitelco, ATN, RTFC, Vitelcom and the V.I. Public Services Commission. ATN at the time owned Vitelco and Vitelcom. The agreement, Redfield indicates, carried over to ICC after Prosser and Prior divided their ATN holdings.
The agreement states that "ATN, Vitelco and RTFC represent that presently all Vitelco's issued and outstanding stock is pledged to RTFC as collateral for ATN's loan. RTFC agrees that should default in that loan occur resulting in the seizure or foreclosure upon that Vitelco stock, any proposed sale of such stock shall first be submitted to the [Public Services] Commission for approval before consummation, which approval shall not be unreasonably withheld if the proposed sale will not adversely affect Vitelco's operations or rates…"
Further, the agreement states, ATN (hence, ICC) and Vitelco agree that if in the future any Vitelco stock should be used as collateral or security for any debt of obligation, "the same undertaking hereinabove given by RTFC will be required from the prospective creditor prior to creating or imposing any lien or pledge of Vitelco stock."
And, the document further states, "Vitelco and ATN agree" that any additional financing undertaken by ATN "shall in no way impact on Vitelco's access to financial markets, without the [Public Services] Commission's prior approval."
The excerpts do not state that RTFC agreed to either of the latter points. However, Redfield told the Source that under the agreement "the RTFC cannot have any lien, claims or rights which in any way interfere with or in any limit Vitelco's right to seek funding." And this, he said, "would prevent RTFC from asserting any 'claims' against ICC for transactions in Vitelco once RTFC was fully paid for all Vitelco loans."
The Source asked RTFC on Tuesday to comment on the "Release of Mortgage" document, to state whether RTFC stands by all of its positions set forth in its June 1 complaint, and to indicate what RTFC would do if granted the declaratory judgment it seeks and the alleged breaches of the 2001 agreement are not cured within the specified 30 days.
Mike O'Brien, Rural Telephone Finance Cooperative vice president for corporate communications, replied on Wednesday that "RTFC will not be able to provide you with any comments on the questions you have posed. It is our long-standing practice not to comment publicly on any matters relating to our member-borrowers. In addition, we do not comment publicly on any pending litigation matters."
For further information, O'Brien referred the Source to the RTFC Web site.
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