Feb. 10, 2009 — The creditors of Jeffrey Prosser, former CEO and owner of Innovative Telephone, face an ultimate loss approaching half a billion dollars.
This is the Source's estimate made on the third anniversary of the bankruptcy trials. It is based on a newly completed, comprehensive review of published data.
On Feb. 10, 2006, one of Prosser's main creditors, the Greenlight companies, filed a motion in a Delaware Court seeking involuntary bankruptcy for Prosser and his corporations. An immense amount of litigation followed, largely in U.S. Bankruptcy Court.
Some of the Source's numbers may be incorrect, but they would have to be wrong by several hundreds of millions of dollars to make a real difference in the big picture; we think that is unlikely.
These are the principal findings:
— The debts owed amount to at least $650 million and counting, with interest charges being added every day. The major creditor, with at least $525 million at stake, is the Rural Telephone Finance Cooperative, a non-profit based in Virginia.
— The three years of bankruptcy proceedings have produced about $43 million, net, in sales of Prosser-related assets. The Source estimates that the remaining assets are worth no more than about $61 million under current market conditions, for a total of about $104 million. Our estimating techniques are described in detail later.
In a sense, this particular debacle is reflective of the nation's overall financial situation: There was careless lending by banks on a huge scale, there were careless consumer spending patterns by the borrowers, and the regulators and law-enforcement officials were asleep at the switch.
The Debts
The size and nature of the debts in the case are much better-defined than the assets available to pay them.
During 2006, when there were substantial negotiations designed to settle the case, the debt was announced to be $650 million. The RTFC segment was then set at $525 million. But the most recent financial report of its parent, the National Rural Utilities Cooperative Financial Corporation, for the fiscal year that ended May 31, 2008, showed $491 million; perhaps it is defined differently. Most of the balance, more than $100 million, is owed to the Greenlight Companies, former minority shareholders in a previous Prosser-controlled corporation. There are also several millions owed to various other banks for mortgages on Prosser residences, and there is more than a million in mechanics' liens on the Prosser mansion on St. Croix.
The $650 million does not include interest charges accrued in the last two and a half years.
The Assets
The Source estimates the value of the assets subject to the bankruptcy proceedings to be no more than $104 million. That can be divided into about $43 million in assets either sold or in the process of being sold, and (this is where controversy may lie) about $61 million in assets not yet sold.
Two detailed listings of these assets are shown in tables. Table I shows properties handled by the court-appointed Chapter 7 trustee, James Carroll. (To see the two pages of Table I, click here.) Table II shows those assigned to the Chapter 11 trustee, Stan Springel. (To see Table II, click here.) Carroll works with Prosser's personal finances and Springel with Prosser's corporate assets. Since there is not always a clear line between the two our allocation may be arbitrary, but the tables cover all or most of Prosser's known former properties.
In instances where sales have been made, we have recorded the net value to the estate. Where sales have not yet been made, we used published appraisals shown in court documents. Within the Table II estimates, the most important — and the most troublesome — is the one for the value of what the court terms the Group I holdings. The most significant of these is Vitelco; the others in this set are the cable and related holdings in the U.S. Virgin Islands, in the British Virgin Islands and in St. Martin.
Despite the best efforts of the Source over the years, there are no published financial reports on any of these organizations. Prosser always refused to release the figures, and the V.I. Public Services Commission, which had access to Vitelco's financial reports, would not release them, either. Some data, however, is now available from reports Springel filed with the court.
To begin the valuation estimate, the Source estimates that the Group I holdings produce an annual profit of something like $24 million a year. We got numbers close to $24 million from two quite different estimation techniques.
The first technique is an admittedly crude one. In the years before Prosser took over Vitelco, when data was available, the size of the gross profit and the size of the annual subsidy from an organization funded by the Federal Communications Commission was about the same. We know that in 2008 the U.S. Administrative Company (the FCC-funded entity) sent Vitelco about $20 million, suggesting that the Vitelco profit was something like that figure. To that we added income from the other Group I operations, as reported by Springel of about $4 million, for an annual gross profit of a little less than $24 million.
The second technique drew from the Oct. 31, 2008, operating report Springel filed with the court. It showed receipts from various former Prosser entities for the period of Sept. 21, 2007, to Oct. 31, 2008. The total was rounded to $36.5 million. From this we subtracted capital sales (such as the V.I. Daily News, the Pissarro painting and the Bentley automobile) for $9.2 million and, separately, income from non-Group I holdings of another $2.4 million. This left an operating profit of $24.9 million for a period of 13 months, or a little under $24 million a year, for the Group I assets (primarily Vitelco).
Investors routinely pay for streams of income by a multiple of earnings; this is the price/earnings (PE) ratio. The higher the quality (i.e. the projected stability) of the income stream, the higher the ratio, but many fine companies are selling at 10 or 12 times earnings these days. A troubled company in what investors might regard as a distant, small jurisdiction, and one working with what might be regarded as a mercurial public services commission, would more likely draw a price based on eight or nine times earnings.
If the $24 million is correct, eight times earnings produces a gross figure of $192 million, while a PE of nine would produce a gross figure of $216 million. Even if investors did not pay too much attention to Vitelco's capital needs — said to number in the scores of millions — they would have to factor in Vitelco's debts (which are separate from the overall Prosser debts). These debts to the U.S. Treasury, the preferred stockholders and the U.S. Pension Guarantee Corporation are said to total about $180 million. An investor would subtract that number from the $192 or $216 million, creating a net value of $12 to $36 million, shown in Table II.
That RTFC has used a credit bid for the Group I holdings, rather than accept a cash bid in what everyone regards as a depressed market, suggests to some observers that the specialized bank was not optimistic about the price the Group I holdings would bring.
Thus the assets of the estate are estimated to be worth no more than $104 million. Even if this figure is a gross underestimate and is too low by, say, another $104 million, making the assets worth $208 million, either figure is but a fraction of the debt of more than $650 million.
RTFC recognizes at least part of this grim picture. In the most recent quarterly report, for the period ended Nov. 30, 2008, it announced: "In late November the [bank] engaged an outside consultant to renew the valuation of [the Prosser properties] … as a result … the [bank] recorded an addition to the provision for loan losses of $114 million ….&
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It is not clear how large the previous Prosser-related loan loss was, but the bank's total loan loss, before the recent increase, was $530 million, a large chunk of which must have related to the Prosser loans.
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