- 99 -
When the Partnership Committee formally authorized the
purchase of the Citicorp Notes, Merrill informed Colgate that the
section 453 investment strategy would result in transaction costs
of between $2.3 and $3.1 million on a pretax present value basis,
of which $1.3 to $2.0 million would be incurred in the contingent
payment sale. The cash contributions that had to be "invested as
quickly as possible" in Citicorp Notes yielding 8.78 percent in
order for the partners to earn a reasonable return were already
earning 8.75 percent in an ABN deposit account before the notes
were acquired.
That Colgate's treasury department did not attach importance
to the relative costs of the section 453 investment strategy is
particularly significant because Colgate would bear both the
transaction and remarketing costs. Pepe testified concerning the
mutual understanding with respect to the five-eighths discount
incurred in connection with the contingent payment sale:
The transaction was performed and put
together, organized, on behalf of
Colgate-Palmolive; therefore, the partners
understood that the cost related to setting
the transaction up should be borne by
Colgate-Palmolive, whether that's through the
partnership or through one of its partners.
The allocation of these costs to Colgate was accomplished by
including them in the value at which the LIBOR Notes were carried
on the partnership books and in the partners' capital accounts.
When the BFCE Notes were distributed to Southampton, the other
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