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debenture notes was equal among the debenture holders, and none
of the debenture holders received a management position or an
increase in management responsibilities with petitioner as a
result of the debenture funds petitioner received.
The debenture notes were unsecured and subordinated to
claims of petitioner’s secured creditors, and, if not paid, the
debenture holders could enforce payment on the debenture notes
only if the holders of more than 50 percent of the value of all
the outstanding debenture notes joined in a proceeding against
petitioner to enforce payment. From August of 1993 through the
time of trial in 2002, petitioner made all scheduled payments of
principal and designated interest due on the debenture notes.
When petitioner began operations in August of 1993, the
above initial sources of funding (treating the debenture funds as
debt of petitioner and not as equity) resulted in a debt-to-
equity ratio for petitioner of approximately 26:1. In just over
3 years, petitioner’s debt-to-equity ratio (treating the
debenture funds as debt of petitioner and not as equity) was
reduced to approximately 4:1. The rapid decrease in petitioner’s
debt-to-equity ratio from 1993 to 1996 reflected petitioner’s
success in generating operating revenue.
Comparative 1993-1996 yearend financial information for
petitioner (treating the debenture funds as debt of petitioner
and not as equity) is set forth below:
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