Testimony - Terry Dorman

STATE OF VERMONT PUBLIC SERVICE BOARD

Petition of City of Burlington d/b/a Burlington Telecom, for a certificate of public good to operate a cable television system in the City of Burlington, Vermont

) ) ) )

Docket No. 7044

PREFILED TESTIMONY OF TERRY DORMAN

ON BEHALF OF THE CITY OF BURLINGTON

March 28, 2014

Mr. Terry Dorman is a principal of Dorman & Fawcett, the firm serving as advisor to the City of Burlington and manager of the City’s Burlington Telecom system. His testimony discusses the solicitation of proposals for the financing of Burlington Telecom, the terms of the proposal from the bridge financing lessor, the steps to implement and close on the financing, and that such financing is reasonable in light Burlington Telecom’s financial history and the related legal proceedings. In addition, Mr. Dorman will discuss the potential for a return to the City for its prior expenditures upon the intended sale of the Burlington Telecom system.

TABLE OF CONTENTS 1. Introduction And Background ............................................................................................. 1

2. The Citibank Settlement ....................................................................................................... 4

3. The Bridge Lease Financing ................................................................................................. 8

4. Planned Sale of Burlington Telecom .................................................................................. 11

EXHIBITS Exhibit Petitioner TD-1 Commitment Letter from Raymond C. Pecor, III

STATE OF VERMONT PUBLIC SERVICE BOARD

Petition of City of Burlington d/b/a Burlington Telecom, for a certificate of public good to operate a cable television system in the City of Burlington, Vermont

) ) ) )

Docket No. 7044

PREFILED TESTIMONY OF TERRY DORMAN

ON BEHALF OF THE CITY OF BURLINGTON

1. Introduction And Background 1

Q1. Please state your name and occupation. 2

A1. My name is Terry Dorman. I am the principal of Dorman & Fawcett (“D&F”). D&F is a 3

consulting, financial advisory, and turnaround firm located in Quechee, Vermont. Over 4

the past 27 years, D&F has represented private and public companies in the construction, 5

entertainment, hospitality, food products, printing, communications, manufacturing and 6

technology industries. All members of D&F’s senior team have been founders or key 7

executives at growth companies and all have extensive experience in crisis management. 8

Prior to founding D&F in 1987, I was the co-founder and President of a venture capital 9

backed technology company. In addition to our work assisting the City of Burlington, we 10

have worked on other telecom engagements, including Shared Technologies, a public 11

company that was ultimately acquired by Intermedia in 1997. Our scope included a 12

comprehensive operational and financial restructuring involving a secondary public 13

offering followed by a merger with Fairchild Telecommunications. We have also 14

represented bondholders in a failed municipal cable system in the midwest. 15

16

Q2. Please explain how D&F became involved with Burlington Telecom. 17

Docket No. 7044 Prefiled Testimony of Terry Dorman

March 28, 2014 Page 2 of 14

A2. In 2009, the Burlington City Council created the Blue Ribbon Committee (“BRC”), 1

comprised of City Councilors and business leaders to identify all viable options to 2

address Burlington Telecom’s (“BT”) financial situation. The committee was 3

specifically charged with assessing “all available options for the financial structure of BT 4

including but not limited to: a. Piper Jaffrey financing offer, b. other possible financing 5

options, c. joint venture of equity sale, d. outright sale of BT, and e. other options 6

recommended by consultants.” The Resolution Creating the Blue Ribbon Committee is 7

attached as an exhibit to Mr. Barraclough’s testimony. 8

9

In its 2010 report, the BRC recommended that the City retain an expert financial advisor 10

to stabilize BT’s finances and develop short and long-term strategies for bringing about a 11

suitable strategic and financial partner for BT. Following that recommendation, the City 12

engaged D&F as its financial advisor in March 2010. In September 2010, D&F’s role 13

expanded to include an operational aspect as General Manager overseeing the day-to-day 14

management of BT. Since that time, Stephen Barraclough, senior D&F executive, has 15

acted as interim General Manager of BT. 16

17

Q3. Please provide a description of your work in connection with BT. 18

Q3. Since March 2010, I have served as the financial advisor to the City on matters 19

concerning BT. In that capacity, I work closely with the Burlington Telecom Advisory 20

Board (“BTAB”), the Mayor, and other City officials on a regular basis. One of my 21

principal objectives over the past four years has been to identify and secure a financial 22



partner for BT. The scope of my work has included key participation in the weekly BT 1

status and restructuring meetings, regular review of BT’s operating plan as it relates to 2

obtaining new financial partners or financing, leading restructuring discussions with 3

Citibank, support and participation in the Citibank lawsuit, discussions with Moody’s 4

about the impact of BT on Burlington’s bond rating, participation in City Council 5

meetings involving BT, and seeking financial partners and possible buyers of the 6

enterprise, 7

8

Q4. What is the purpose of your testimony? 9

A4. My testimony describes the steps D&F undertook to seek financing for BT in order to 10

settle the Citibank litigation and to take the actions needed to effectuate the settlement 11

(“Citibank Settlement” or “Settlement”). The Citibank Settlement provides that the City 12

will obtain financing from a special purpose municipal lender to finance at least $6 13

million of the $9,031,085 payment due from the City to Citibank under the settlement. 14

15

I will also discuss the proposed terms of the proposed bridge lease financing between the 16

City and Raymond C. Pecor, III (“Lessor” or “Pecor”) (the “Bridge Lease Financing” or 17

“Lease”) and the steps needed to implement that financing. I will also offer my 18

understanding as to why the terms and conditions of the Lease are reasonable in light of 19

the current market situation, BT’s unique status as a municipal telecommunication system 20

operating under a Certificate of Public Good (“CPG”), and the pending Citibank 21

litigation (the “Citibank Action”). 22



1

2. The Citibank Settlement 2

Q5. Are there deadlines or milestones required to effectuate the Citibank Settlement that this 3

Board should be made aware of? 4

A5. Yes. The Citibank Settlement, Section 3, speaks to the stay of the federal court 5

proceedings in the Citibank Action. The parties must report back to the court in July, 6

2014, and the agreement contemplates that BT will seek interim financing and PSB 7

approval during this period. Pursuant to Sections 4.5 and 5.5 of the Citibank Settlement, 8

the City must obtain Board approval of the Settlement and the Bridge Lease Financing. 9

Under Section 7, the financing must then “close” not less than five business days after 10

PSB approval becomes final (the “Closing”). Under section 5.5, the City is also required 11

to request that the Board provide expedited treatment of the Petition. 12

13

Q6. What were the City’s options for sources to fund the bridge financing necessary to 14

implement the Citibank Settlement? 15

A6. D&F, on behalf of the City, solicited proposals for financing, and over the past week, the 16

City obtained commitment letters from two lenders willing to provide the $6 million in 17

cash financing to the City under a sale-leaseback arrangement. On Monday, March 24, 18

2014, the Burlington City Council convened a special meeting to consider both financing 19

proposals. On March 26, 2014, the City Council reconvened the special meeting and 20

approved the terms of the Bridge Lease Financing with Pecor. 21

22



I should note that the City received other proposals, both written and verbal, for bridge 1

financing that did not result in commitment letters. The terms of these other transactions 2

were less favorable than the terms the City received from the two funding sources who 3

provided commitment letters. For example, other than the proposals that resulted in 4

commitment letters, the next best proposal contemplated a 12% interest rate and a 5

maximum of 20% excess cash proceeds to the City upon a sale of the system. 6

7

Efforts to obtain the bridge financing were constrained by the pending Citibank Action 8

and certain limitations in the City Charter on financing options. For these reasons, most 9

customary financing options were not available to the City. Moreover, conventional 10

municipal financing would have required changes in state law and/or voter approval as 11

well as a significant extension of time from Citibank. The financing that was available is 12

a non-recourse financing to the City. This risk to the lender was the basis for the 13

structural terms for the extension of credit. 14

15

Q7. What are the basic terms of the Citibank Settlement? 16

A7. The Citibank Settlement requires a $10.5 million settlement payment to Citibank. 17

$1,468,915 of the $10.5 million has been paid by McNeil, Leddy & Sheahan, 18

Burlington’s co-defendant in the Citibank Action, and/or its insurance carrier. 19

Burlington’s $9,031,085 share of the settlement payment consists of (i) a minimum 20

amount of $6 million at the closing of the Bridge Lease Financing; (ii) $1.3 million which 21

may be in the form of a participation by Burlington in the bridge financing (bringing the 22



total financing to $7.3 million); (iii) $260,235.07 currently held by Citibank’s counsel; 1

(iv) approximately $720,850 currently held in escrow by the court in the Citibank Action 2

to be released at Closing; (v) insurance proceeds of $500,000 to be released at Closing; 3

and (vi) commencing as of the date of the Citibank Settlement, ongoing monthly 4

payments of the greater of a) the amount set forth in the March 27, 2012 Joint Stipulation 5

and Order (i.e., 60% of BT net cash flow) or b) $50,000 per month from BT net revenues 6

up $250,000.1 7

8

At the closing of the bridge financing and payment of the balance of the settlement 9

payment, the Citibank Action will be dismissed with prejudice and Citibank and 10

Burlington are to exchange mutual general releases. 11

12

The Citibank Settlement also contemplates an eventual sale of the system to a private 13

entity. At the time of the sale, Burlington will share 50% of Burlington’s share of the net 14

proceeds of the sale with Citibank. Upon payment or conveyance by Burlington of that 15

50% share to Citibank, all of Burlington’s obligations to Citibank shall be deemed 16

complete and final. 17

18

Q8. Please explain item (vi), above – the monthly payments to Citibank. 19

A8. These represent payment for BT’s ongoing use of the Citibank leased equipment, title to 20

which is held by Citibank. These payments to Citibank will terminate at the “Closing” of 21

1 In addition to the settlement payment, Burlington will continue to make monthly payments to Citibank in the amount of 60% of BT net cash flow after payment of the $250,000 in (vi) until the Closing.



the financing, which is, under Section 7 of the Settlement, required to occur not less than 1

five (5) business days after the Public Service Board’s approval of the Petition. 2

3

Q9. Please explain BT’s potential $1.3 million participation in the Bridge Lease Financing. 4

A9. The Citibank Settlement provides that Burlington may participate up to $1.3 million in 5

the financing to increase the financing amount to $7.3 million. To the extent Burlington 6

does not participate in the financing, it will pay Citibank $1.3 million at the Closing. 7

8

In my discussions with potential special situation lenders/bridge financers prior to the 9

Citibank Settlement, I had been told by lenders that they would not increase the bridge 10

financing above $6 million. These lenders would allow Burlington to purchase a “last-11

out participation” in the bridge facility. This structure is often utilized to allow a junior 12

creditor to obtain the benefit of a senior lender’s position or collateral. 13

14

It has not yet been determined whether the $1.3 million will be in the form of a 15

participation or whether it will be a direct payment from Burlington. I will supplement 16

my testimony once that decision is made. 17

18

Q10. Does the Citibank Settlement give Citibank the right to approve the terms of the Bridge 19

Lease Financing or the planned sale of BT? 20

A10. No. Citibank also does not have the ability under the settlement to direct the sale of BT. 21

22



3. The Bridge Lease Financing 1

Q11. What is the basic structure of the Bridge Lease Financing? 2

A11. The Bridge Lease Financing is a sale-leaseback transaction for a term of five (5) years 3

whereby all components of the BT system (other than the land and building located at 4

200 Church Street) will be sold and conveyed by the City and Citibank to a special 5

purpose entity (“SPE”) formed and owned by Raymond C. Pecor, III. The SPE/Pecor 6

will simultaneously advance the City $6 million for funding the Citibank Settlement and 7

lease the BT system back to the City. 8

9

The SPE will obtain financing from Merchants Bank that will involve conveyance of a 10

security interest in certain BT assets owned by the SPE/Pecor under the Bridge Lease 11

Financing. BT will continue to operate BT during the 5 year term of the Bridge Lease 12

Financing. During that time, it is expected that D&F will continue to provide services as 13

general manager and financial advisor of BT, unless otherwise agreed by Lessor and the 14

City. 15

16

The principal terms are as follows: 17

• Burlington and Citibank, both of which have interests in the BT equipment, will 18

convey the system assets to Pecor at the Closing. Included in the system assets 19

will be billing records, inventory, accounts receivable and contract rights, to the 20

extent assignable. 21



• A special purpose entity will be established and Raymond C. Pecor, III as the 1

managing member, will provide a $6 million bridge loan to the City, which, with 2

other funds described in A7, will be used to make the $9,031,085 settlement 3

payment to Citibank at the Closing. 4

• Pecor will obtain financing for the funding of the $6 million bridge transaction 5

from Merchants Bank (the “bank financing”). 6

• The interest rate will be 7% per year. 7

• The Lease will have a maximum five (5) year term, with equal monthly Lease 8

payments (principal and interest) of $46,544.33, based upon a twenty-year 9

amortization. Lease payments during each year of the term will be subject to 10

annual appropriation by the City, and Lease payments will be due and payable 11

monthly on or before the 15th day of each month. Lease payments shall be made 12

solely from BT revenues, the Lease obligations shall not constitute an 13

indebtedness of the City, and the City will not be required to use any general fund 14

monies or tax revenues to make any such payments. 15

• The City will continue to manage and operate BT. 16

• At the time of Closing, two BT accounts will be established at Merchants Bank. 17

The first account is a lock box and trust account (the “Trust Account”). All 18

revenues from the City’s operations of BT during the 5 year lease will be directly 19

deposited in the Trust Account. The second account is a segregated BT operating 20

account (the “Operating Account”). At the time of Closing, $500,000 from BT’s 21

prior operations will be deposited in the Operating Account. 22


March 28, 2014 Page 10 of 14

• Each month, the City will submit BT’s prior period income statement to the 1

Lessor who will direct Merchants Bank to transfer the operating expenses, 2

including capital expenditures in the ordinary course, to the Operating Account. 3

All operating expenses will be paid directly from the Operating Account. As 4

discussed in Mr. Rusten’s testimony, this is a change from the current way in 5

which the City pays BT’s operating expenses. 6

• As a fundamental term in the Bridge Lease Financing, Burlington has agreed to 7

sell BT during the four years following the closing of the Citibank settlement. It 8

is our current view that BT will require at least 30 months of further operations to 9

optimally position the enterprise for sale. 10

11

Q12. What are the Pecor Lease requirements concerning the eventual sale of the BT system? 12

A12. As discussed above, Burlington has four years from the commencement of the Bridge 13

Lease Financing to direct a sale of BT to a purchaser of the City’s choosing, subject to 14

Pecor’s consent. In the event the City has not entered into an agreement for the sale of 15

BT within that time, Pecor has the right to direct a sale of BT. The bridge financing 16

envisions that the parties will cooperate in conducting any such sale of the system and, if 17

applicable, the sale or lease of 200 Church Street. 18

19

Q13. What would happen if the City chose to not appropriate funds to make the Lease 20

payment? 21


March 28, 2014 Page 11 of 14

A13. Under the terms of the Lease, failure to make an annual appropriation will be considered 1

an event of default. Upon any event of default, Pecor has the right to (a) terminate the 2

Lease; (b) use and operate BT; (c) purchase 200 Church Street for $100; (d) direct a sale 3

of BT; and (d) upon sale, retain all Net Sale Proceeds, except for 10% payable to D&F. 4

5

Q14. Will BT need to use Burlington funds to make the monthly payments under the 6

financing? 7

A14. No. The terms of the financing are such that monthly payments are to be made solely 8

from BT revenues. The financial projections prepared by Mr. Barraclough, 9

CONFIDENTIAL Exhibit Petitioner SB-5, establish that BT will be in a position to meet 10

its payment obligations and maintain a positive cash flow position. 11

12

4. Planned Sale of Burlington Telecom 13

Q15. Please explain the term in the Citibank settlement that contemplates a future sale of BT. 14

A15. The settlement agreement is based on the assumption that the financing from Pecor is a 15

bridge to an arm’s-length sale of BT to a private entity. 16

17

Q16. What are the terms of the sale Burlington is required to pursue under the settlement and 18

lease financing? 19

A16. The terms of a future sale to a third party are not yet defined. The financing entered into 20

here provides Burlington an opportunity to find the best entity that will allow BT to 21

operate in the future, although under different ownership. There are, however, some 22


March 28, 2014 Page 12 of 14

provisions in the financing agreement that pertain to the future sale. In particular, if 1

Burlington sells the system within the three years from the commencement of the lease 2

term, Burlington will receive 50% of the net proceeds. If Burlington takes longer to sell 3

the system, Burlington receives a smaller percentage of the net sale proceeds. 4

5

Q17. What percentage of Burlington’s net sale proceeds is Burlington required to pay to 6

Citibank? 7

A17. Burlington must pay Citibank 50% of its share of the net sale proceeds. 8

9

Q18. How is net sale proceeds defined by the financing? 10

A18. The net proceeds include all amounts held in the Trust Account and in any BT operating, 11

capital, reserve or other deposit accounts, plus the gross proceeds of a sale, less (i) any 12

remaining unpaid balance of the financing principal amount; (ii) accrued and unpaid 13

interest; (iii) accrued and unpaid fees of D&F (together with an interest at the rate of 7% 14

per annum); (iv) any transfer taxes; (v) any expenses reasonably incurred by Pecor or the 15

City in connection with the sale; and (vi) the $500,000 closing working capital deposit 16

(which will be returned to the City of Burlington before the excess proceeds calculation). 17

18

Q19. Can you explain the $500,000 closing working capital deposit? 19

A19. The terms of the bridge financing require a segregated BT operating account (defined 20

above as the “Operating Account”) to be funded at Closing with prior BT retained 21

earnings in order to pay operating expenses that are due in the days and weeks following 22


March 28, 2014 Page 13 of 14

the Closing, but before the next month’s receipts are collected. This requirement was 1

essential to obtaining a bridge financing and was a condition of both commitment letters, 2

as well as other terms and conditions offered by other financing sources. 3

4

Q20. If BT is sold before the end of the five-year term of the lease, how is the remaining 5

unpaid principal balance accounted for in the net proceeds? 6

A20. As discussed above, the lease contemplates that Burlington’s share from the sale of BT 7

(net proceeds) will be less any remaining unpaid balance of the financing lease principal 8

amount. 9

10

Q21. What is the expected recovery to the City on a sale of the BT System? 11

A21. That is difficult to estimate. It is the goal of Burlington to find the right entity to acquire 12

the system, to continue to provide service to the City and its residents, to continue 13

partnering with US Ignite as an economic development tool, and to provide an 14

opportunity of a return of Burlington’s investment in BT upon a sale. The Lessor too has 15

a strong economic interest in realizing the highest value of BT. Upon closing of the 16

financing, D&F will continue to work to increase the value of BT as a going concern, by 17

increasing revenue growth, and to increase subscriber counts. To the extent that BT is 18

sold at a level above the outstanding amount of the financing and related expenses, 19

Burlington will share in that. 20

21

Q22. What would be the expected recovery to the City if the CPG were revoked? 22


March 28, 2014 Page 14 of 14

A22. First, there would be no settlement with Citibank, and the risk of litigation liability would 1

remain. But, second, in my estimation, a sale of assets that is not part of a going concern 2

would be significantly less than for an operating enterprise. If the Certificate of Public 3

Good were revoked such that subscribers were then forced to move to other service 4

providers, the ability to sell the assets would be difficult and the sales proceeds likely to 5

be significantly less than a sale of a going concern. 6

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Testimony - Terry Dorman