Question
From:
Redacted
Sent:
Friday, July 09, 2010 2:39 PM
To:
Verne, B. Michael
Cc:
Redacted
Subject: Interpretationof 801.11(c)(2)
Mr. Verne,
We would like todiscuss with you the interpretation of the term "last regularly preparedbalance sheet" in 801.11(c)(2) as it relates to the facts below.
Company B isacquiring approximately 17% of the voting securities of Company A along with alicense from Company A to develop certain intellectual property owned byCompany A. Company A prepares audited annual financial reports (fiscal yearending 9/30) in which certain assets are valued according to GAAP. CompanyA also prepares non-audited quarterly balance sheets for internal use. Thesebalance sheets carry over the asset valuations from the last audited balancesheets (which typically are the annual audited financial statements). In May ofthe current fiscal year, Company A prepared a special GAAP balance sheet inconnection with the transaction with Company B. The preparation of this GAAPbalance sheet resulted in a re-valuation of certain of Company A's assets. Inpreparing its regular quarterly balance sheet for the period ending 6/30/2010,Company A intends to incorporate the asset valuations from the most recentGAAP balance sheet, which was prepared in May. This will likely result in theCompany A's assets falling below $12.7M, the current threshold under Section 7A(a)(2)(B)(iii) (size-of-person test).
Based on ourunderstanding of the interpretation of 801.11(c)(2), the 6/30/2010 quarterlybalance sheet would constitute the "last regularly prepared balancesheet" of Company A. This balance sheet is being prepared at the normaltime (quarterly) and according to the same accounting rules (GAAP). The primarydifference between the 6/30/2010 quarterly balance sheet and Company A'sprevious quarterly balance sheets is that the 6/30/2010 balance sheet will usethe asset valuations from the more recent May audited financial statements asopposed to the last annual audited financial statements. This does not changethe timing or method of preparation of the quarterly balance sheet, it justincorporates more recent asset valuation information than is typicallyavailable on a quarterly basis.
Please let me knowif you agree with this analysis, and if you disagree, please let me know whatfactors are relevant to your analysis. I am available to discuss further at yourconvenience.