SEC Company Response from Thomas Equipment, Inc. (CIK 0001122380) — Dec 9, 2005
Thomas Equipment, Inc. (CIK 0001122380)
Date: Dec. 9, 2005 · CIK: 0001122380 · Accession: 0001144204-05-039301
AI Filing Summary & Sentiment
File numbers found in text: 333-124217
Referenced dates: December 1, 2005, December 1, 2005
Letter
Thomas Equipment, Inc.
Amendment # 5 to Registration Statement on Form S-1
File No. 333-124217
Additional Responses to SEC Comment Letter dated December 1,
In our initial response, filed December 2, 2005, to the Staff’s comment letter dated December 1, 2005, we indicated that we would provide separately an analysis related to Comment 1 in the Staff’s letter (which relates to accounting under EITF Issue 96-19 for the modification of our Laurus debt agreements).
This additional response is being filed to provide that analysis. In addition, we are also providing additional material responsive to the Staff’s Comment 5 (accounting for embedded derivatives related to put and call options) and Comment 9 (volatility used for Black-Scholes option valuation calculations).
The Staff’s Comments 1, 5 and 9, together with the additional responses, are included below.
General
1.
We note your response to prior comment 1. Please address the following:
•
In calculating the present value of the cash flows for purposes of applying the 10% test, tell us how you applied the following guidance provided in EITF 96-19:
-
If either the new debt instrument or the original debt instrument is callable or puttable, then separate cash flow analyses are to be performed assuming exercise and non-exercise of the call or put. The cash flows assumptions that generate the smaller change would be the basis for determining whether the 10 percent threshold is met.
-
If the debt instruments contain contingent payment terms or unusual interest rate terms, judgment should be used to determine the appropriate cash flows.
•
Likewise, please explain why it is reasonable to assume the maximum amount of registration penalties for purposes of the cash flow analysis.
•
Confirm to us that you treated the $600,000 penalty as part of the cash flows related to the old debt or explain why it is appropriate to treat the payment as part of the new debt.
Response
As stated in our previous response, we have prepared an analysis related to the application of EITF Issue 96-19, which is summarized below. We have the following comments related to the analysis and to the Staff’s comments above.
1.
Both the ‘old’ debt instruments and the ‘new’ debt instruments contain identical call and put options, except that the new debt instruments do not give Laurus the ability to put the debt back to us for failure to have an effective registration statement. In all other respects, their ability to put the debt back to us (and our ability to call it) are unchanged. Because there was no change in these features, we do not believe that the analysis should include the effect of the call and put options because there was no change in them that would affect the underlying cash flows. The removal of Laurus’ put option related to the registration rights (and the associated penalties) is considered in our basic cash flow analysis under EITF 96-19, rather than being considered as a change in Laurus’ put option. Laurus still has an identical put option - there is simply one less circumstance in which it can be exercised. We believe that the language in EITF 96-19 referenced in the Staff’s comments (“If either the new debt instrument or the original debt instrument is callable or puttable”) is referencing a situation where either the old or new debt included a put or call and the other did not or where the call or put options are different between the old and new debt. In our case, they are not different.
As regards our call option, because that call option is exercisable at any time (i.e., we can repay the debt with a 5% premium), an analysis that includes exercise of the call option would assume immediate exercise of it in both cases. In that scenario, there would be no discounting of the future cash flows (because of “immediate” exercise) and the only difference in the cash flows would be the fee of $600,000 paid to Laurus. We do not believe that such a comparison is meaningful because it does not represent a scenario that could be expected to occur - immediate exercise of the call option would, de facto, extinguish the debt, thus negating the need for any analysis under EITF 96-19.
2.
The analysis that follows looks at the discounted cash flows related to the old debt and the new debt. It includes significant assumptions, including the discount rate used and the timing of the effectiveness of our registration statement.
EITF 96-19 requires that the discount rate to be used is “the effective interest rate, for accounting purposes, of the original debt instrument.” Because the initial carrying amount of the debt (and hence its effective interest rate) is significantly affected by the valuation of the freestanding and embedded derivative instruments, until the appropriate accounting for those instruments and our Laurus debt instruments is resolved (which is significantly affected by the Staff’s Comments 5 and 9 below), we cannot determine the actual discount rate that should be used in the cash flow calculations. However, based on our review to date and the accounting model and assumptions that we propose to follow (see Comments 5 and 9 below), the initial carrying amount of the Laurus debt will be small relative to its face amount, resulting in a high effective interest rate. In the accompanying analysis, an estimated rate of 220% has been used. This rate is an estimate of the blended effective rate on the debt, based on using our historical volatility factors in calculating the value of the derivative instruments associated with the debt (the amount of which affects the initial carrying amount of the debt host). When the volatility factor we use is amended (see response to Comment 9 below), the effective interest rate will be lower; the second analysis reflects this by reducing the effective interest (by a factor of about 30%) to 155%. Once the accounting for the Laurus debt is resolved, this rate will be adjusted to the actual effective rate and the analysis will be updated.
The analysis is also affected by the assumption made as to the timing of effectiveness of the registration statement. We note the Staff’s comment above as to the reasonableness of assuming the maximum amount of registration penalties for purposes of the cash flow analysis. For the ‘old’ debt, registration rights penalties continue for as long as the registration statement is not effective. The analysis below includes differing assumptions as to the timing of effectiveness, to determine the affect of that timing on whether or not the discounted cash flows vary by more or less than the 10% threshold under EITF 96-19.
The analysis also includes an assumption of the extent to which the interest rate would be reduced under the “old” debt terms, once the registration statement is effective. Under the old terms, the rate reduction was re-determined each month, and the rate reduced by 200 basis points for each 25% by which the market price exceeded the strike price. For the purposes of this analysis, a reduction of 4% in the monthly rate has been used.
Immediately prior to filing our Form 10-Q for the quarter ending December 31, 2005 (due February 14, 2006), we will update the model based on the facts and circumstances as they exist at that point and make a final determination of the accounting to be followed.
EITF 96-19 – discounted cash flow analysis related to Laurus debt:
Effective interest rate: 220%; Registration penalties: $440,000 per month; Waiver fee: $600,000
Effective 1-31-2006
Effective 2-28-2006
Effective 3-31-2006
Effective 4-30-2006
Old
New
Old
New
Old
New
Old
New
Term note $6m
Principal
1,121,315
1,121,315
1,121,315
1,121,315
1,121,315
1,121,315
1,121,315
1,121,315
Interest
143,447
181,547
150,862
181,547
156,841
181,547
161,650
181,547
Term note $1.9m
355,083
355,083
355,083
355,083
355,083
355,083
355,083
355,083
Principal
45,425
57,490
47,773
57,490
49,666
57,490
51,189
57,490
Interest
Revolver $20m
Principal
385,889
385,889
385,889
385,889
385,889
385,889
385,889
385,889
Interest
681,793
910,435
713,835
910,435
740,960
910,435
763,927
910,435
Registration penalties
952,921
1,178,210
1,368,918
1,530.400
Waiver fee
600,000
600,000
600,000
600,000
Total present value
3,685,873
3,611,759
3,952,967
3,611,759
4,178,672
3,611,759
4,369,453
3,611,759
Change in present value
74,114
341,208
566,913
757,694
Change %
2.01%
8.63%
13.57%
17.34%
EITF 96-19 – discounted cash flow analysis related to Laurus debt:
Effective interest rate: 155%;: Registration penalties: $440,000 per month; Waiver fee: $600,000
Effective 1-31-2006
Effective 2-28-2006
Effective 3-31-2006
Effective 4-30-2006
Old
New
Old
New
Old
New
Old
New
Term note $6m
Principal
1,530,862
1,530,862
1,530,862
1,530,862
1,530,862
1,530,862
1,530,862
1,530,862
Interest
173,218
225,908
182,153
225,908
189,696
225,908
196,051
225,908
Term note $1.9m
484,772
484,772
484,772
484,772
484,772
484,772
484,772
484,772
Principal
54,852
71,538
57,682
71,538
60,070
71,538
62,083
71,538
Interest
Revolver $20m
Principal
1,148,881
1,148,881
1,148,881
1,148,881
1,148,881
1,148,881
1,148,881
1,148,881
Interest
856,366
1,180,424
894,974
1,180,424
929,198
1,180,424
959,549
1,180,424
Registration penalties
1,041,367
1312,817
1,553,445
1,766,840
Waiver fee
600,000
600,000
600,000
600,000
Total present value
5,290,318
5,242,385
5,612,141
5,242,385
5,896,924
5,242,385
Show Raw Text
CORRESP
1
filename1.htm
Thomas
Equipment, Inc.
Amendment
# 5 to Registration Statement on Form S-1
File
No. 333-124217
Additional
Responses to SEC Comment Letter dated December 1,
2005
In
our
initial response, filed December 2, 2005, to the Staff’s comment letter dated
December 1, 2005, we indicated that we would provide separately an analysis
related to Comment 1 in the Staff’s letter (which relates to accounting under
EITF Issue 96-19 for the modification of our Laurus debt
agreements).
This
additional response is being filed to provide that analysis. In addition,
we are
also providing additional material responsive to the Staff’s Comment 5
(accounting for embedded derivatives related to put and call options) and
Comment 9 (volatility used for Black-Scholes option valuation
calculations).
The
Staff’s Comments 1, 5 and 9, together with the additional responses, are
included below.
General
1.
We
note your response to prior comment 1. Please address the
following:
•
In
calculating the present value of the cash flows for purposes of
applying
the 10% test, tell us how you applied the following guidance provided
in
EITF 96-19:
-
If
either the new debt instrument or the original debt instrument
is
callable
or puttable, then separate cash flow analyses are to be performed
assuming
exercise and non-exercise of the call or put. The cash flows assumptions
that generate the smaller change would be the basis for determining
whether the 10 percent threshold is
met.
-
If
the debt instruments contain contingent payment terms or unusual
interest
rate terms, judgment should be used to determine the appropriate
cash
flows.
•
Likewise,
please explain why it is reasonable to assume the maximum amount
of
registration penalties for purposes of the cash flow
analysis.
•
Confirm
to us that you treated the $600,000 penalty as part of the cash
flows
related to the old debt or explain why it is appropriate to treat
the
payment as part of the new debt.
Response
As
stated in our previous response, we have prepared an analysis related to
the
application of EITF Issue 96-19, which is summarized below. We have the
following comments related to the analysis and to the Staff’s comments
above.
1.
Both
the ‘old’ debt instruments and the ‘new’ debt instruments contain
identical call and put options, except that the new debt instruments
do
not give Laurus the ability to put the debt back to us for failure
to have
an effective registration statement. In all other respects, their
ability
to put the debt back to us (and our ability to call it) are unchanged.
Because there was no change in these features, we do not believe
that the
analysis should include the effect of the call and put options
because
there was no change in them that would affect the underlying cash
flows.
The removal of Laurus’ put option related to the registration rights (and
the associated penalties) is considered in our basic cash flow
analysis
under EITF 96-19, rather than being considered as a change in Laurus’ put
option. Laurus still has an identical put option - there is simply
one
less circumstance in which it can be exercised. We believe that
the
language in EITF 96-19 referenced in the Staff’s comments (“If either
the
new debt instrument or the original debt instrument is callable
or puttable”) is referencing a situation where either the old or new debt
included a put or call and the other did not or where the call
or put
options are different between the old and new debt. In our case,
they are
not different.
As
regards our call option, because that call option is exercisable at any time
(i.e., we can repay the debt with a 5% premium), an analysis that includes
exercise of the call option would assume immediate exercise of it in both
cases.
In that scenario, there would be no discounting of the future cash flows
(because of “immediate” exercise) and the only difference in the cash flows
would be the fee of $600,000 paid to Laurus. We do not believe that such
a
comparison is meaningful because it does not represent a scenario that could
be
expected to occur - immediate exercise of the call option would, de facto,
extinguish the debt, thus negating the need for any analysis under EITF
96-19.
2.
The
analysis that follows looks at the discounted cash flows related
to the
old debt and the new debt. It includes significant assumptions,
including
the discount rate used and the timing of the effectiveness of our
registration statement.
EITF
96-19 requires that the discount rate to be used is “the effective
interest rate, for accounting purposes, of the original debt instrument.”
Because the initial carrying amount of the debt (and hence its
effective
interest rate) is significantly affected by the valuation of the
freestanding and embedded derivative instruments, until the appropriate
accounting for those instruments and our Laurus debt instruments
is
resolved (which is significantly affected by the Staff’s Comments 5 and 9
below), we cannot determine the actual discount rate that should
be used
in the cash flow calculations. However, based on our review to
date and
the accounting model and assumptions that we propose to follow
(see
Comments 5 and 9 below), the initial carrying amount of the Laurus
debt
will be small relative to its face amount, resulting in a high
effective
interest rate. In the accompanying analysis, an estimated rate
of 220% has
been used. This rate is an estimate of the blended effective rate
on the
debt, based on using our historical volatility factors in calculating
the
value of the derivative instruments associated with the debt (the
amount
of which affects the initial carrying amount of the debt host).
When the
volatility factor we use is amended (see response to Comment 9
below), the
effective interest rate will be lower; the second analysis reflects
this
by reducing the effective interest (by a factor of about 30%) to
155%.
Once the accounting for the Laurus debt is resolved, this rate
will be
adjusted to the actual effective rate and the analysis will be
updated.
The
analysis is also affected by the assumption made as to the timing of
effectiveness of the registration statement. We note the Staff’s comment above
as to the reasonableness of assuming the maximum amount of
registration penalties for purposes of the cash flow analysis. For
the ‘old’ debt, registration rights penalties continue for as long as the
registration statement is not effective. The analysis below includes differing
assumptions as to the timing of effectiveness, to determine the affect of
that
timing on whether or not the discounted cash flows vary by more or less than
the
10% threshold under EITF 96-19.
The
analysis also includes an assumption of the extent to which the interest
rate
would be reduced under the “old” debt terms, once the registration statement is
effective. Under the old terms, the rate reduction was re-determined each
month,
and the rate reduced by 200 basis points for each 25% by which the market
price
exceeded the strike price. For the purposes of this analysis, a reduction
of 4%
in the monthly rate has been used.
Immediately
prior to filing our Form 10-Q for the quarter ending December 31, 2005
(due
February 14, 2006), we will update the model based on the facts and
circumstances as they exist at that point and make a final determination
of the
accounting to be followed.
EITF
96-19 – discounted cash flow analysis related to Laurus
debt:
Effective
interest rate: 220%; Registration penalties: $440,000 per month;
Waiver
fee: $600,000
Effective
1-31-2006
Effective
2-28-2006
Effective
3-31-2006
Effective
4-30-2006
Old
New
Old
New
Old
New
Old
New
Term
note $6m
Principal
1,121,315
1,121,315
1,121,315
1,121,315
1,121,315
1,121,315
1,121,315
1,121,315
Interest
143,447
181,547
150,862
181,547
156,841
181,547
161,650
181,547
Term
note $1.9m
355,083
355,083
355,083
355,083
355,083
355,083
355,083
355,083
Principal
45,425
57,490
47,773
57,490
49,666
57,490
51,189
57,490
Interest
Revolver
$20m
Principal
385,889
385,889
385,889
385,889
385,889
385,889
385,889
385,889
Interest
681,793
910,435
713,835
910,435
740,960
910,435
763,927
910,435
Registration
penalties
952,921
1,178,210
1,368,918
1,530.400
Waiver
fee
600,000
600,000
600,000
600,000
Total
present value
3,685,873
3,611,759
3,952,967
3,611,759
4,178,672
3,611,759
4,369,453
3,611,759
Change
in present value
74,114
341,208
566,913
757,694
Change
%
2.01%
8.63%
13.57%
17.34%
EITF
96-19 – discounted cash flow analysis related to Laurus
debt:
Effective
interest rate: 155%;: Registration penalties: $440,000 per month;
Waiver
fee: $600,000
Effective
1-31-2006
Effective
2-28-2006
Effective
3-31-2006
Effective
4-30-2006
Old
New
Old
New
Old
New
Old
New
Term
note $6m
Principal
1,530,862
1,530,862
1,530,862
1,530,862
1,530,862
1,530,862
1,530,862
1,530,862
Interest
173,218
225,908
182,153
225,908
189,696
225,908
196,051
225,908
Term
note $1.9m
484,772
484,772
484,772
484,772
484,772
484,772
484,772
484,772
Principal
54,852
71,538
57,682
71,538
60,070
71,538
62,083
71,538
Interest
Revolver
$20m
Principal
1,148,881
1,148,881
1,148,881
1,148,881
1,148,881
1,148,881
1,148,881
1,148,881
Interest
856,366
1,180,424
894,974
1,180,424
929,198
1,180,424
959,549
1,180,424
Registration
penalties
1,041,367
1312,817
1,553,445
1,766,840
Waiver
fee
600,000
600,000
600,000
600,000
Total
present value
5,290,318
5,242,385
5,612,141
5,242,385
5,896,924
5,242,385