Square D Company and Subsidiaries - Page 5




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          The 1991 Subordinated Loans, which totaled $328,272,605, had a              
          fixed maturity date of May 30, 2001, and provided for interest at           
          an annual rate of 10.7 percent, payable quarterly beginning                 
          September 30, 1991.                                                         
               Effective August 22, 1991, ACQ merged into petitioner, which           
          assumed ACQ’s obligations under the bank loans and the 1991                 
          Subordinated Loans.  After the merger, the Schneider Lenders                
          owned 100 percent of the stock of petitioner.                               
               On August 23, 1991, the Schneider Lenders transferred the              
          1991 Subordinated Loans to Merlin Gerin Services, S.N.C. (SNC), a           
          Belgian entity, in return for a 100-percent ownership interest in           
          SNC.  SNC was classified as a partnership for U.S. Federal income           
          tax purposes.  As a result of the transfer, the notes reflecting            
          the 1991 Subordinated Loans were replaced with new notes                    
          designating petitioner as the borrower and SNC as the lender.               
               A year later, on August 24, 1992, Schneider made a loan,               
          also subordinated to the bank loans, of $80 million to petitioner           
          (1992 Subordinated Loan).  The 1992 Subordinated Loan was                   
          evidenced by a promissory note, which had a fixed maturity date             
          of May 30, 2001, and provided for interest at an annual rate of             
          9.8 percent, payable quarterly beginning September 30, 1992.                
               Although the promissory notes for the 1991 and 1992                    
          Subordinated Loans made interest payable quarterly commencing               
          September 30, 1991 and 1992, respectively, the promissory notes             






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