If we purchased the switch from an outside party and then leased it to USTeleNet under a capital lease, the asset would still be booked on UST's books at its FMV.  There would be no associated gain as the asset was never theirs (the third party would get the gain on sale).  Bullets 3 and 4 would be basically the same, except for the cash going to a third party.

Todd Rimmer
Director - EWS Transaction Support
Phone - 713-345-2803
Fax - 713-646-3347
Cell - 713-560-6493


 -----Original Message-----
From: 	Raab, Eric  
Sent:	Tuesday, October 23, 2001 3:02 PM
To:	Rimmer, Todd
Cc:	Mann, Kay
Subject:	RE: USTeleNet Transaction

What if we purchase the switch from a 3rd party, i.e. CES?  How would that affect your 1st 2 bullets?

 -----Original Message-----
From: 	Rimmer, Todd  
Sent:	Tuesday, October 23, 2001 2:59 PM
To:	Mann, Kay; Raab, Eric
Subject:	USTeleNet Transaction

Just to follow-up on our discussion yesterday regarding the accounting treatment assuming that USTeleNet owns the switch and that we purchase the switch and lease it back to them under a "capital" lease, the following would occur:

The asset would stay on their books (however it would be "marked-up" to FMV as evidenced by the purchase price)
They would defer the gain, if any, over the asset's life.
They would record a payable on their balance sheet and recognize interest expense in their P&L as payments are made
We would record the payment of cash to them and book a receivable and deferred interest income (to be recognized over the lease term)

Essentially we are lending them money equal to the FMV of their asset and receiving interest payments in return (i.e. direct financing lease)

I would be happy to go into more detail at your request.  Please let me know as issues develop and I will assist as necessary.

Regards, 

Todd Rimmer
Director - EWS Transaction Support
Phone - 713-345-2803
Fax - 713-646-3347
Cell - 713-560-6493