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Subject:  Re: Additional Funding Requirements Date:  8/22/2002  10:26 AM
Author:  MHolt100 Number:  1687 of 10889

In your example, you state that if we "assume" that the 50% equity partner also has secured debt in the company, then the extent to which that 50% equity partner may benefit from converting debt into equity may exceed the extent to which that 50% equity partner would be harmed by a dilution of his equity interest.

First, can you confirm that Leon Black also has secured debt of Sirius? I know that he has a major equity stake in Sirius.

Second, even if Leon Black issued all of the debt owed by Sirius, you have correctly pointed out that an independent committee has been appointed to oversee the process through which additional shares may be issued to Apollo, which serves to safeguard existing shareholders against the potential valuation abuses and other improprieties with which you are concerned. Remember, too, that both stockholders and debtholders have a vested interest in the success of the company.

Third, I understand that issuing more shares will dilute my percentage interest in Sirius. The question is whether the additional shares will be offered at the existing share price, or whether the additional shares will be offered at a price reflecting a more fundamentally determined value for the company. If the company was valued at only its $300 million book value for example, i.e., 3 times the current stock price, I would come out ahead if the company received cash of $600 million, but my percentage interest in that extra cash of $600 million plus the company's existing book value of $300 million was now only 33%. In other words, the value of the shares held by existing shareholders would not be $900, but rather would be only $300, which is still quite a bit higher than the $100 million value that the market has currently assigned to the shares. Moreover, if the additional cash then ascertained the company's ability to continue carrying out its business plan until it achieves a level of operations resulting in self-sustaining profits, I would expect the market to assign a value to the company greater than simply the sum of its cash and the depreciated book value of tangible assets.

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