Question
From: (redacted)
Sent: Wednesday,May 17, 2006 11:10 AM
To:Verne, B.Michael
Subject:Confirmation Email re Telephone Conversation of May 16, 2006
Mr. Verne
I amwriting to confirm the results of our conversation on May 16, 2006. Thetransaction and the inquiry that we discussed are set forth below.
Background
Agroup of five to eight investors will contribute approximately $8 milliondollars to a newly-formed limited liability company ("Holdings LLC")in exchange for 100% of the membership interests therein. No single investorwill be entitled to 50% or more of the profits of Holdings LLC or 50% or moreof the assets of Holdings LLC upon liquidation. Accordingly, none of theinvestors will "control" Holdings LLC.
HoldingsLLC is going to contribute the $8 million to a newly formed limited liabilitycompany ("Acquisition LLC") in exchange for all 100% of themembership interests therein. As the sole member of Acquisition LLC, HoldingsLLC will be the ultimate parent entity of Acquisition LLC. Acquisition LLC willacquire all of the assets of TargetCo for a purchase price in excess of $56.7million (but less than $226.8 million). TargetCo is a company with annual netsales in excess of $113.4 million. To acquire the subject assets, AcquisitionLLC will use the $8 million contributed by Holdings LLC and money borrowed froma financial institution for the purpose of making the acquisition. As newlyformed entities, neither Holdings LLC nor Acquisition LLC will have any assets,with the exception of the membership interests of Acquisition LLC in the caseof Holdings LLC and the contributed cash and borrowed money in the case ofAcquisition LLC. Furthermore, neither Holdings LLC nor Acquisition LLC willhave regularly prepared balance sheets.
Inquiry
Pursuantto CFR 801.11(e),if an entity does not have a regularly prepared balance sheet, such entity canexclude from its total assets all cash that is to be used in an acquisition ofassets, including borrowed cash. The examples relating to 801.11(e)specifically contemplate a scenario in which a newly formed entity A borrows$105 million to make a $100 million acquisition. In that example, A ispermitted to exclude the $100 million of borrowed cash that it will use for theacquisition in its determination of its total assets. The example provides thatA is its own UPE.
Inthe 801.11(e) example, the entity that is borrowing the cash is its own UPE. Inthe transaction described above, Acquisition LLC is the entity borrowing thecash and Holdings LLC is the UPE. On our call, I explained that it was myunderstanding that Holdings LLC, as the acquiring person, was entitled toexclude the cash that will be borrowed by Acquisition LLC from Holdings LLC'stotal assets for purposes of the size-of-person test. You indicated on the callthat my understanding was correct. Now that you have had the opportunity to reviewthe facts in writing, I respectfully request that you confirm that our analysisregarding the borrowed cash is correct.