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The terms of the Consolidation Note required that the outstanding
principal balance bear interest at a rate of 9.9 percent through
June 14, 1992, and 10.25 percent thereafter, that the interest on
the outstanding principal amount be calculated on the basis of a
360-day year, that payments of principal and accrued interest be
made monthly beginning on July 15, 1987, and that any remaining
balance of principal and accrued interest become due and payable
on December 15, 1996.
Also on or about June 23, 1987, PK Ventures agreed to
guarantee the loans between TBPC and Contel and between TPTC and
Contel (collectively, the Contel debt) and to pledge all of the
stock of TBPC, TPC, and TPTC to secure the Contel debt. In
addition, TBPC, TPC, and TPTC agreed to encumber all of their
assets to secure the Contel debt, and PK Ventures decided that
TBPC, TPC, and TPTC no longer had to guarantee or to secure the
first $1.3 million of outstanding principal on the $2.5 million
revolving line of credit or any other indebtedness owed by SLPC,
TBPC, TPC, or TPTC to Norstar. PK Ventures also decided that
SLPC no longer had to guarantee or to secure the first
$1.3 million of outstanding principal on the revolving line of
credit.
PK Ventures, SLPC, TBPC, TPC, and TPTC (jointly referred to
as petitioner PKV&S) filed consolidated Federal income tax
returns for 1987 through 1993. Prior to 1990, PK Ventures, SLPC,
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