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Phone Company Could Have New Owner in January

Sept. 10, 2004 – The local telephone company could have new owners as early as January if Rural Telephone Financial Cooperative prevails in its suit against Innovative Telephone's parent company Innovative Communication Corp.
"We believe we will be back in January in our new role as the owners of the telephone company," Eric Cowan, RTFC legal counsel, said Friday.
In a hearing before the Public Services Commission Cowan said RTFC was "tired" of ICC's "half-truths" and "after-the-fact" notices of actions ICC had taken and so it had filed suit against the phone company in June.
Specifically at issue was an $85 million preferred stock issuance that RTFC says violated loan agreements between RTFC and Innovative Communications Corp.
"We are tired of finding out that ICC was taking monies that had been pledged as collateral in violation of the loan agreement," Jonathan Siegfried, another attorney representing RTFC, told PSC members.
Siegfried said ICC had committed 31 violations against its loan agreement with RTFC, a not-for-profit lending institution that provides rural telephone companies with low-interest loans.
"Due to the fact that RTFC has no more faith in Jeff Prosser and ICC," Siegfried said, the institution had no choice but to file the suit.
"We believe that we will prevail in this litigation and become owners of the company," Cowan, said, adding, "We are ready to work with the commission if the courts rule in our favor."
Cowan said if that happened, RTFC would hire utility specialists to run the company while it sought a suitable buyer.
Cowan promised the decision wouldn't be long in coming because the suit was filed in a federal District Court in Virginia that is dubbed the "rocket docket," because of the speed at which the court hears and decides cases.
But it wouldn't take a court ruling for RTFC to vote in a new board of directors and take over the company.
Lanny Davis, ICC's attorney, said, "There is a threat of RTFC taking over the company before we have our day in court." Because, as part of the loan agreement RTFC holds 100 percent of the common voting stock of Innovative Telephone, Davis said, "They can do this tomorrow morning."
None of the RTFC representatives disagreed with Davis's statement, nor would they agree not to do it, despite Davis' repeated requests that RTFC commit to not taking over before "we get our day in court."
The hearing, postponed two weeks earlier, was called to address the financial viability of the phone company and to discuss the pending RTFC litigation.
In opening the hearing Frederick Watts, PSC's attorney, said three critical issues could impact the commission's relationship with Innovative Telephone, which it regulates: the RTFC litigation, Innovative's issuance of preferred stock and use of the money derived from the issuance, and the so called "Greenlight" litigation.
Issuance of $85 million in preferred stock brings litigation
In the RTFC lawsuit filed against Innovative June 1, Rural Telephone said ICC owes it $600 million. Siegfried said 31 breaches of the loan agreement were RTFC's reason for calling in the entire loan. The breach that appears to have brought on the action, however, was the telephone company's $85 million preferred stock issuance. To add to RTFC's annoyance Siegfried said $30 million of the proceeds were loaned by the phone company to another ICC entity that RTFC didn't know about, to purchase a telephone company in Belize.
"This one transaction alone violated a host of ICC's loan agreements," Siegfried said, adding that ICC had a pattern of taking the assets of "one ICC entity, pledged to third parties, to secure loans to other Prosser entities."
ICC was required to notify the RTFC in advance about the sale of stock as part of its loan agreement, Siegfried told the commission. However, it did not do so.
RTFC found out about the preferred stock issuance on May 1 in the "footnote" of ICC's end of year financial statement, and he said, "it was up to us to figure out what it was."
"Without the consent of RTFC or the PSC, they saddled the company with $85 million stock obligations and transferred $30 million out of the Virgin Islands, to the government of Belize," Siegfried said.
Cowan said, "there's no guarantee" that the money would come back to the territory either, because it was an unsecured loan.
At issue specifically for the PSC is what the V.I. Code says relative to the commission's role: "No person or corporation, whether or not organized under the laws of the territory, shall sell, acquire or transfer control, either directly or indirectly, of any public utility organized and doing business in this territory, without first securing authorization from the commission."
But ICC attorney Kevin Rames told the PSC that in his opinion the code did not apply to this situation because Innovative was excused from its obligations under a 1989 agreement signed by Vitelco, RTFC and the PSC.
Rames, who rattled off the legalese of the 1989 agreement, said according to his interpretation the 1989 agreement supercedes the law and therefore the issuing of preferred stock does not require PSC approval.
"The law was not intended for the PSC to intervene every time Innovative transferred one share of stock," Rames said. "That would impede on Innovative's ability to raise capital."
Rames said the issuance of the $85 million in stock did not initiate a "change of control"; therefore ICC did not believe it was violating the PSC order.
Watts did not agree with Rames' legal interpretation of the 1989 agreement. "No matter what the PSC agreements have said, they can't trump the law of the land," Watts said.
Siegfried said the Belize loan "reflects for us the cavalier disregard for its loan agreement. When you have a $600 million loan, is it too much to ask for candor, openness and honesty?"
But Davis said ICC did not owe RTFC that much money. "The $81 million is the real subject of this lawsuit," Davis said, adding that RTFC had seized $61.6 million in patronage certificates from ICC last week and used it to pay down on the ICC debt, "as is their right," Davis said.
According to Davis, the loan to ICC for its operation in Belize was a short-term loan at 12 percent interest, which comes due at the end of November.
"Not only will that loan be repaid, but it will be repaid early," Davis said.
Davis added that ICC now has permanent financing in place for the Belize telephone company it purchased, so no more of Innovative Telephone's money will be used to fund the Belize purchase.
Davis also said Innovative is "current" on its loan payments to RTFC and that ICC owes it only $500 million.
Cowan, however, estimates that ICC's overall debt has reached nearly $1 billion. "That's billion with a 'B,'" Cowan said. "That's a lot of money."
"We have questions about how that can be sustained; that's what we are here to talk about," he said.
Cowan said ICC's debt is:
– $600 million to RTFC.
– $200 million to Greenlight.
– $85 million to preferred stock holders.
– $65 million to the Department of Agriculture's Rural Utilities Service.
(See: "Suit Seeks More from ICC; Loan Details Made Known".)
Sharp said the stock issuance "has not had any impact on the ratepayers."
Sen. Luther Renee, nonvoting member of the PSC, said it did have an impact on the territory: "You used capital monies that could have been used in the territory for Belize, instead of using it for capital projects" in the V
irgin Islands.
Watts reminded Sharp he had told the PSC in the last hearing that Innovative had to seek EDC benefits to be able to accomplish capital improvements.
"Why were you loaning money out to other entities when your company is in need of capital projects?" Watts asked.
Sharp said it was a sound business decision to loan the money, which was borrowed at 10 percent interest, to another ICC company at 12 percent interest. He said it was better than putting it into a bank where it would only earn 1 or 2 percent interest.
Greenlight litigation not settled yet
In May a judgment was rendered in a suit filed against ICC by Greenlight Securities, minority stockholders in ICC's predecessor firm Emerging Communications. In that case in Delaware state court, the judge's decision, which has not yet been converted to a monetary judgment, was that ICC had understated the value of the stock owned by the minority (Greenlight) by tens of millions of dollars. (See: "Prosser Ordered to Pay Millions to Ex-shareholders".)
The estimates of the judgment were between $100-200 million.
Davis said that ICC and all Greenlight stockholders had signed off on a memorandum of understanding Thursday night. He did not say what the monetary terms of the memoradum were.
Siegfried said the RTFC believes its loan should be paid in full before money was issued to address the Greenlight situation.
"It is our decision to end the relationship we've had with ICC," Siegfried said. "In this case, defaults do matter; the truth does matter. If the RTFC prevails, there will be a new successor to Innovative."
Frederick Joseph, sub-director of the United Steelworkers of America, in attendance at the hearing said, "I want them (RTFC) to take over tomorrow." Joseph's union represents Vitelco employees.
Sen. Louis Hill, who attended the meeting, issued a release Friday afternoon, saying he was "gravely concerned" at the issues raised at the hearing. Hill requested that the PSC "immediately" file an action in court against Innovative Telephone for violating the V.I. Code.
"Additionally, I would like the PSC to conduct an investigation to determine Innovative Telephone's ability to pay $30 million in dividends to Innovative Communication Corp. in light of the fact that Innovative Telephone is currently requesting EDC benefits to improve their communication's infrastructure," Hill wrote.
USF Certification
The PSC also voted 4-2 Friday to accept the recommendations of its consultant Gregory Mann and approve Innovative Telephone's Universal Services Fund certification plus send a letter to the Federal Communications Commission notifying it of the certification. Innovative receives substantial subsidies from the fund. This is the first time the commission, which is required to sign off on the application, has done anything more than rubberstamp the application, Valencio Jackson, PSC chairman, said at a meeting in August.
PSC Chairman Valencio Jackson, along with Alric Simmonds, Alecia Wells and Yvette Canegata-Jones voted in favor of the motion. Verne David and Desmond Maynard abstained. Jerris Browne was absent.
Attending the hearing Friday were Jackson, Canegata-Jones, David, Maynard, Simmonds, Wells and Renee. Browne and nonvoting member Sen. Shawn-Michael Malone were absent.
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