Question
July 2, 2003
Ms. Nancy Ovuka
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
Room 303, 6"" Street and
Pennsylvania Ave. N.W.
Washington, DC 20580
Re: Hart-Scott-RodinoCompliance Inquiry
Dear Ms. Ovuka:
This lettersummarizes our telephone conversations of June 30 and Jul 1, 2003.1It recapitulates the a various considerations resulting in the conclusion that(redacted) and (redacted) are not require to file Notifications and ReportForms pursuant to the Hart-Scott-Rodino improvements Act of 1976, asamended (the "Act"), and accordingly are not subject to the waitingperiod provided for by 16 C.F.R. 803.10 in connection with thetransaction described below. For the sake of narrative clarity, this fetteralso includes as background some additional facts related to our conversations.
A. TransactionSummary.
On June 24 2003, (redacted) apublicly traded (redacted) announced the acquisition of (redacted) and(redacted)(collectively, the Parent Companies) for $112.5 million. Thisacquisition is pursuant to that certain Stock Purchase Agreement by and among(redacted), the trust), the (redacted).
(Redacted)owns fifty percent (50%) or more of the voting securities of each of the ParentCompanies therefore would be the acquired person for purposes of the Act iffilings were required. The Parent Companies would be the acquired entities iffilings were required.
The $112.5 million of consideration being paid by(redacted) pursuant to the Agreement can be divided into four categories: (1)about $76.5 million being paid to the Equity Sellers as consideration for theissued and outstanding equity securities of the Parent Companies; (2) about$6.9 million being paid to the Parent Companies fund the repurchase of certainrestricted voting securities of the Parent Companies held by (redacted): (3)about $2.5 million being paid to the Equity Sellers to compensate them foradditional that they likely will pay as a result of an election pursuant to 338(h)(10) of the Internal Revenue Code of 1986, as amended (the"Code"), whereby (redacted) acquisition of the voting and non-votingsecurities of Parent Companies will be treated set acquisition for Federal taxpurposes (the "338(h)(10) Payment"); and (4) about $26.6 million beingpaid to the Parent Companies to fund the repurchase of certain issued andoutstanding warrants and options for the equity securities of the ParentCompanies. Furthermore, after closing, the purchase price will be adjustedupward or downward. Each of the four categories of consideration and thepurchase price adjustment are discussed in greater detail below.
B. Issuedand Outstanding Equity Securities of the Parent Companies.
(Redacted)will acquire at closing from the Equity Sellers all of the issued andoutstanding equity securities yes of the Parent Companies for approximately$76.5 million. The equity securities of each of the Parent Companies includetwo classes of common stock: Class A common stock with voting rights("Class A") and Class B common stock without voting rights("Class B"). The Agreement attributes equal value to the Class A andClass B shares being acquired from each of the Parent Companies. Therefore,pursuant to the Agreement, (redacted) is paying about $38.4 million for theClass A shares and about $38.1 million for the Class shares. Accordingly, ofthe $76.5 million being paid to the Equity Sellers for the equity securities ofthe Parent Companies, (redacted) will pay the Equity Sellers only about $38.4million for the voting securities of the Parent Companies for the purposes ofthe Act.
C. Restricted Voting Securities.
(Redacted) will pay at closing tothe Parent Companies about $6.9 million to fund the repurchase the ParentCompanies s of restricted voting securities of the Parent Companies currentlyheld by (redacted). (Redacted) will make this payment in the following manner.Prior to closing, the various Parent Companies will issue promissory notes to(redacted) in exchange for his restricted voting securities. After the exchange(including at closing), to restricted voting securities of the Parent Companieswill be issued and outstanding. At closing, (redacted) will pay the ParentCompanies about $6.9 million, which the Parent Companies then will afterclosing to pay (redacted) the face value of the promissory notes previouslyissued to him. You confirmed that amount is treated as part of the acquisitionprice paid for voting securities pursuant to 16 C.F.R. 801.10(c)(2) andaccordingly counts as consideration paid for voting securities for the purposesof the Act.
D. 338(h)(10)Payment.
Afterclosing, (redacted) will pay to the Equity Sellers the $2.5 million 338(h)(10)Payment as defined above. You confirmed that this amount, to the extent that itis paid by (redacted) to the Equity Sellers for increased taxes payable as aresult of the Equity Seller's ownership of voting securities of the ParentCompanies, is treated as part of the acquisition price paid for votingsecurities pursuant to 16 C.F.R. 801.10(c)(2) and accordingly counts asconsideration paid for voting securities for the purposes of the Act. At thistime, it is difficult to predict with accuracy how much of the 338(h)(10)Payment will be paid to the Equity Sellers in consideration for votingsecurities of the Parent Companies.
E. Warrantsand Options.
(Redacted)will pay at closing to the Parent Companies about $26.6 million to fund therepurchase of various issued and outstanding warrants and options for theequity securities of the Parent Companies. Prior to closing, the ParentCompanies will issue promissory notes to the Warrant Sellers and the OptionSellers in exchange for their warrants and options for the equity securities ofthe Parent Companies. After the exchange (including at closing), no warrants oroptions for the equity securities of the Parent Companies will be issued andoutstanding. At closing, (redacted) will pay the Parent Companies $26.6million, which the Parent Companies then will use after closing to pay theWarrant Sellers and the Option Sellers the face value of the promissory notespreviously issued to them.
All ofthe warrants and options are either currently convertible into equitysecurities or would be convertible as of closing if they were still issued andoutstanding. However, none of the warrants or options has been converted intoequity securities at any time or will be converted into equity securities atany time pursuant to the contemplated transaction. Accordingly, you confirmed thatthe $26.6 million of consideration that (redacted) is paying the ParentCompanies to fund the repurchase of the warrants and options is exempt from therequirements of the Act pursuant to 16 C.F.R. 802.31, which exempts theacquisition of convertible securities from the Act.
F. Purchase Price Adjustment.
Afterclosing, the consideration paid by (redacted) will be subject to an upward ordownward purchase price adjustment equal to the amount by which the current assetsof the Parent Companies are greater or less than the liabilities of the ParentCompanies on the closing balance sheets. The amount of any upward purchaseprice adjustment payable by (redacted) to the Equity Sellers should not exceed$1million and probably will be significantly less.
G. Conclusion.
Themaximum amount that (redacted) will pay for the voting securities of the ParentCompanies pursuant to the contemplated transaction action is about $48.8million, making the conservative assumptions both (1) that (redacted) pays theEquity Sellers the full, anticipated $2.5 million amount of the 338(h)(10)Payment n consideration only for voting securities and (2) that
(redacted) pays to the EquitySellers a $1 million upward purchase price adjustment and that the ire value ofsuch purchase price adjustment is attributable to (redacted) acquisition ofvoting securities of the Parent Companies. The approximately $48.8 millionincludes (a) the
approximately $38.4 million that(redacted) will pay to the Equity Sellers for the issued and out riding votingsecurities of the Parent Companies; (b) the approximately $6.9 million that(redacted) will pay to fund the Parent Companies' repurchase of shares of(redacted) the restricted acted voting securities of the Parent Companies; (c)the entire amount of the $2.5 million
for the 338(h)(10) Payment (whichassumes that the entire amount is paid for voting securities) and (d) theentire amount of an assumed $1 million upward purchase price adjustment (whichassumes that the entire amount is paid to holders with respect to votingsecurities).
Basedfacts discussed in our conversations and set forth in this letter, youconfirmed that (redacted) and (redacted) accordingly are not required to fileNotification and Report Forms pursuant o hit or contemplated transaction anaccordingly not subject to the waiting period provided for by 16 C.F.R. 803.10 because will not acquire voting securities of the acquired person andacquired entities in excess of $50 million.
Iunderstand that the Premerger Notification Office does not confirm informaladvice in writing. However, if this letter misconstrues or misrepresents ourconversations in any way, I would appreciate it if you would call me at thenumber provided above as soon as reasonably possible and inform me of any suchinaccuracies. Thank you again for your assistance.