Question
From:
(REDACTED)
Sent:
Wednesday, January 07, 2009 3:26 PM
To:
Verne, B. Michael
Cc:
(REDACTED)
Subject:
Our calls of 12/31/08 and 01/07/09
Dear Mike,
This email is toconfirm the telephone conversation (REDACTED) and I had with you on December31, 2008 and our subsequent conversation on January 7, 2009. The companiesinvolved in the transaction we discussed are (REDACTED) and (REDACTED).(REDACTED) intends to acquire (REDACTED) through a Chapter 11 bankruptcyprocess, in which (REDACTED) would issue new (REDACTED) stock to(REDACTED) and existing (REDACTED) stock would be cancelled for noconsideration. (REDACTED) holds (REDACTED) first lien debt which it purchasedin June and July 2008. (REDACTED) had not publicly disclosed any considerationof filing for bankruptcy at that time. The first public mention of a potentialChapter 11 financial restructuring was by counsel for (REDACTED) in FederalCourt on September 26, 2008.
In the transactionas currently contemplated, (REDACTED), in a bona fide debt workout arrangement,will exchange the debt it holds for a portion of the newly issued votingsecurities of (REDACTED). Based on prior informal interpretations, we believethat this acquisition is exempt under Section 802.63 of the HSR Rules. It maybe that the debt exchange will result in (REDACTED) holding 50 percent orgreater of the (REDACTED) outstanding voting securities. If that occurs, webelieve there is no need to discuss the nature of the consideration for theremaining voting securities because of the exemption set out in Section7A(c)(3) of the HSR Act and the intra person rules. However, it is possible(REDACTED) will not acquire 50
percent of(REDACTED)'s newly issued voting securities in exchange for the debt. Thus webelieve we may need to consider whether the consideration exchanged for thebalance of the (REDACTED) securities exceeds the $50 million (as adjusted)minimum reporting threshold.
Before addressingthat issue, given that the (REDACTED) voting securities holders will receive nocompensation for the extinguishment of their shares and debt holders willreceive all consideration to be paid by (REDACTED), for HSR Act purposes thisis a transaction for $0.00. Thus the minimum HSR threshold is not exceeded.(See FTC Informal Interpretation: 0805010) That said, we address the additionalconsideration question below.
As noted in theattachment, consideration consists of two elements: 1) a cash payment of up to$18.4 million; and 2) contribution of certain (REDACTED) unsecured noteswhich are identical to (REDACTED) unsecured notes which are publicly traded andanother type of (REDACTED) unsecured notes, (so-called mirror notes), the termsof which are identical to the (REDACTED) unsecured notes which are publiclytraded except that they are contractually subordinated to (REDACTED)'s securedbank debt. The (REDACTED) notes that will be issued have a total face value of$54.7 million. However, the publicly traded notes currently trade for less than80 percent of their face value and the parties have agreed in connection withthis transaction that the notes will be valued at 80 percent of face value, ora total of $43.76 million. This $43.76 million value will be used to determinewhether a competing offer in the bankruptcy process is superior to the(REDACTED) offer, and was negotiated in good faith without regard to HSR Actconsiderations. The parties believe that the consideration for shares which arenot exempted by 16 CFR 802.63 is $62.16 million, below the HSR minimumreporting threshold. It is our understanding that you agree that in determiningthe acquisition price, it is appropriate to value the (REDACTED) notes at theircurrent trading value and not at face value. As a result, the acquisition of theadditional shares of (REDACTED) does not meet the HSR size of transactionthreshold.
Also we discussedthe fact that (REDACTED) provided (REDACTED) with a debtor in possessionloan ("DIP") in the amount of $10 million for working capital. TheDIP loan constitutes bona fide debt of (REDACTED) that will be givensuper-priority lien status pursuant to bankruptcy rules. Indebtedness under theDIP loan agreement matures on May 31, 2009 or earlier in certain circumstances,including the closing of the proposed acquisition. We understand you concurwith us that the $10 million DIP loan is not consideration for the shares to beacquired and should not be taken into account in determining whether the HSRsize of transaction threshold is exceeded.
Please confirm that you agree with the conclusionsset out above.