Question
From:(redacted)
Sent:Tuesday, January 16, 2007 3:14 PM
To:Verne, B. Michael
Cc:(redacted)
Subject:follow up on 802.63
Mike,
Infollow up to our telephone discussion today where you agreed that the exemptionin Section 802.63 of the Rules would apply based on our analysis as outlinedbelow, I would appreciation your confirmation via return email.
Werepresent an SEC-registered investment adviser ("Purchaser") thatspecializes in alternative fixed income investment strategies. These strategiesinclude purchasing par loans, high-yield bonds and distressed debt. Purchasercurrently holds approximately $253 million face amount of subordinated debtsecurities ("Notes") in an OTC-listed Company. We believe that acontemplated conversion of the Notes to voting securities in a negotiatedexchange agreement between the Company and all Noteholders, includingPurchaser, would be exempt pursuant to the creditor exemption in Section 802.63of the rules.
In January 2005, Purchaser, along with certain of itsaffiliates, began acquiring non-voting subordinated debt securities in theCompany on the open market. Purchaser's last debt purchase was on September 21, 2006.Between January 2005 and September 21, 2006, the possibility of the Companyrestructuring its capital structure, including the possibility of equitizationof the Notes, was raised by the Company but no action was ever taken or agreedto. Various public sources, such as sell-side analyst reports and periodicals,discussed the potential for a restructure. During the same period, Purchaserchallenged the Company's prior dividend payment to its parent and sought tohave the money returned to the Company. To some extent because of this issue,the Company cited possible financial difficulties at the parent company levelin its public filings, although bankruptcy was never identified as a possibilityuntil the March 16, 2006 10-K filing. When the dividend was reversed, theCompany had enough liquidity for another year of operations, as stated in its May 10, 2006 8-Kfiling. Based on these public disclosures, Purchaser made its purchases with a realexpectation of repayment on its debt.
The debt-to-equityconversion that prompts this inquiry developed as follows. Subsequent toPurchaser's last trade (but still in September), the Company presented anon-binding proposal to the Purchaser and a small number of other Noteholdersregarding a debt to equity exchange. The Company's 10-Q for the period ending September 30, 2006(filed Nov. 9, 2006) disclosed the existence of these discussions. TheCompany and the Noteholders agreed to a non-binding proposal outlining theexchange in November 2006. In the event a definitive agreement is reached,Purchaser would convert its $253 million face amount of Notes intoapproximately 30% of the outstanding voting securities of the Company.