RADIN, GLASS & CO.
Certified Public Accountants
360 Lexington Avenue
New York, NY 10017
August 23, 2002
Mr. Jonathon G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
File No. S7-22-02
Use of Form 8-K as opposed to 10-Q or 10-K
I am the managing partner of a small accounting firm which audits registrants who have little or no SEC reporting expertise within their companies. Therefore these registrants depend heavily on their outside advisors, both their auditors and their counsel. These outside advisors work with the registrants at the time of the quarterly filings. Therefore, I believe from a cost point of view, it is much more efficient to require disclosure at that time, when management is already meeting with its outside advisors. A special meeting to discuss a specific item is always more expensive in terms of both the cost of the services of the outside advisors and management's own time. Accordingly, I have suggested throughout my response that the inclusion of information in the quarterly filings is better, although less timely, than a specific Form 8-K filing.
Further, the events described in proposed rules Items 1.01, 1.02, 1.03, 2.05, and 2.06 are events that do not necessarily happen at a point in time. For example, the impairment of an asset is questioned, discussed, evaluated over a period of time. The culmination of the evaluation process has frequently occurred on the date required for a quarterly filing and, frequently, for a year end Form 10-K. All of these events would be better disclosed in the quarterly 10-Q reports.
I have not responded to the quantitative materiality standards in the discussion of the individual Items. We are all aware that any bright line high materiality standard results in the required disclosure of the irrelevant. Conversely, a low materiality standard may permit a significant item from being disclosed. I believe that a subjective standard, however defined, is better than the quantitative standards listed in the questions for proposed Items 1.03, 2.01, 2.03, 2.04, 2.06, and 3.03. Strict definitions do not necessarily help: for example, the objective standards for the determination of when financial statements of an acquisition are required has a thirty year history; of course, there are still questions.
Small vs large companies
At various places in the description of the proposed rule, respondents are requested to indicate whether there should be higher materiality limits for small business filers. For discussion, I wish to divide the small business filers into two categories: those traded on the NASDAQ national exchanges and the very large number of very small companies traded on the "Bulletin Board." Assuming the previous paragraph is not adopted, for small business filers traded on the NASDAQ a somewhat higher materiality limit would be appropriate. For the very smallest registrants, the compliance burden is already a major cost factor in their operations. Adding to it does not seem appropriate, especially in view of the small investor following these companies have. These companies do not have in house professionals to evaluate corporate actions to determine on a timely basis whether or not a filing is appropriate. It should be appreciated that most of the events described in the new rules could be disclosed in the quarterly filings. It would appear that an 8-K filing for items 2.01, 2.02, 3.02, 4.01 4.02, 5.01 and 5.03 disclosure in a Form 8-K filing is appropriate with the remainder if the Items left for the quarterly filings.
I disagree with the hours indicated under III Paperwork Reduction Act - Form 8-K second paragraph. I estimate that both the company time and outside counsel time should be doubled for a non-complex filing. Our hours must include periodic discussions about whether a Form 8-K should be filed, which often may not to be required.
A conclusion many have made from the recent sad history of financial reporting is that many in the financial community do not read the disclosures already being made. A Form 8-K filing adds timeliness, but takes the item out of its normal placement in the disclosures of a registrant. It is therefore less likely to receive considerable focus, especially if there becomes a very large number of Form 8-K filings, which effect I anticipate from the draft rules. It appears that many of the items now being requested for disclosure are far more appropriately includable in the quarterly filings. I would be interested in a survey of investors and investment analysts indicating the extent that information contained in the proposed rules is actually used on a timely basis. American industry has started to use the term "TMI", meaning Too Much Information. This term covers the now very common situation where an individual is overloaded with unusable information, the receipt of which inhibits decision making. I believe that some of the increase in the required filing creates TMI.
Generally, I have not repeated these comments under General in each of the items discussed below.
A. Proposed Form 8-K Changes
1. Discussion of proposed revisions to Form 8-K disclosure items
1.01 Entry into a material agreement
It is not clear as to what an "agreement that is material and that is not made in the ordinary course of business" comprises. The existing Form 8-K rules for business combinations appear to be working effectively. Therefore, the issue is other agreements. Without a definition, it is not clear as to what agreements would be covered by this item.
1.02 Termination of a material agreement
No comments other than those indicated in the General above.
1.03 Termination or Reduction of a Business Relationship with a Customer
This is a very interesting suggestion as the loss of a major customer is clearly a material event. However, because of business realities I respectfully believe that the Item should be dropped. Customers generally do not suddenly disappear. As a relationship deteriorates, the level of business decreases over time, i.e. the customer uses two suppliers where previously there was one and so on. It is difficult under the proposed Item 1.03 to determine when the Form 8-K should be filed. I am of course very sensitive to the ability of someone with hindsight to determine that the customer relationship was reduced or terminated while management was diligently trying to retain it. I do not believe that the information under Instruction alleviates my concerns. I believe that the proposed Item 1.03 will cause more confusion than useful investor information.
2.01 Completion of Acquisition or Disposition of Assets
I believe that this rule should be retained. I agree with the Commission's comment that "We propose to retain the existing test for determining whether an acquisition or disposition involves a "significant amount of assets" because of companies' familiarity with this test."
2.02 Bankruptcy or Receivership
I agree that the present rule should remain. I am not commenting on the "streamlining amendments."
2.03 Creation of a Direct or Contingent Financial Obligation that is Material to the
It would appear that this proposed ruling is too broad. As drafted, assuming no change in the definition of material, it would require filings for normal purchase orders, leases, bank borrowings, receipts of merchandise, employment contracts, union agreements, guarantees of subsidiary obligations, contracts for plant construction, repurchase agreements, normal inventory purchase arrangements, etc. It is not clear to me as to what particular disclosures the Commission wishes to have made. The only definition is "keepwell agreement"; it is doubtful that any of our clients have such an agreement. However, they would all be required to make disclosures of the items in the second sentence.
It would appear that the Commission is looking for disclosure of unusual or unexpected events that could or would have an effect on the registrant beyond those in the normal course of business. I believe that the addition of such or similar words would eliminate a large amount of disclosure that is not useful to an investor.
2.04 Events Triggering a Direct or Contingent Financial Obligation That is Material to the Registrant
I believe that this proposed Item contains the same weakness that I discussed in 2.03. The required reporting should exclude items occurring in the normal course of business. For example, as drafted this item would require a Form 8-K filing for the fulfillment of a purchase order, construction of a building, etc. The approach should be changed to be "not in the normal course of business."
To the extent that the proposed Item covers debt defaults, a contingent debt becoming a direct obligation such as a guarantee becoming payable, a commitment under an SPV which was not expected to be a direct liability becoming payable, a judgment in a lawsuit, etc., I concur with the proposed Item. I appreciate that there will be judgment calls as to whether a contingent liability has matured sufficiently to require the filing of a Form 8-K. However, this type of judgment the professional advisors to the registrant are frequently called upon to this type of judgment make and should not create any special level of difficulty.
2.05 Exit Activities Including Material Write-offs and Restructuring Charges
I believe that the triggering event is sufficiently clear and the extent of the events covered and information requested is appropriate. However, the decision to exit or restructure will most likely be made significantly in advance of a firm knowledge of the amounts involved. Therefore I believe that the Item should include a procedure for updating the estimate of the loss in future quarterly filings.
2.06 Material Impairments
I believe that the event that should trigger a Form 8-K filing is the determination of the charge which would be simultaneous with the Registrant's recording of the charge. For example, it may be necessary to obtain an appraisal of the intangible. The receipt and acceptance of such an appraisal is the proper time for recording and therefore disclosing the impairment charge. Prior to that time, the amount, and possibly the event, has not yet reached the level where disclosure is appropriate.
Generally these decisions are made by management, and then discussed and approved, or disapproved, by the Board of Directors or an appropriate committee. It would appear appropriate to require disclosure of the level of approval. Such disclosure would result in all Form 8-K's relating to this Item being filed two days after a Board meeting. I do not believe that this result is inappropriate.
3.01 Rating Agency Decisions
Our clients do not have this issue so I am not responding.
3.02 Notice of Delisting or Failure to Satisfy Listing Standards; Transfer of Listing
I believe that the proposed rule is appropriate. I believe that both the receipt of the notice and the ultimate delisting are sufficiently significant to investors to require a filing.
3.03 Unregistered sales of Equity Securities
I do not see this issue as of sufficient importance to require an immediate filing. The filing of such information in quarterly filings is adequate. I respectfully submit this view as an investor, as it is not an accounting issue.
3.04 Material Modifications to Rights of Security Holders
I believe that this information should remain in the quarterly filings.
4.01 Changes in Registrant's Certifying Accountant
I agree that the current rule is working effectively and that no change is required. I recommend that the term "Certifying Accountant" be replaced with "independent auditor" as the term used in the proposed rule as it is misleading. The independent auditor does not "certify" to anything. He or she issues an opinion on the financial statements. Further, the term "certifying accountant" is not used or defined in our auditing literature
I do not believe that investors should be notified as to a change in the auditors of employee benefit plans as such changes are usually of a routine nature caused by cost or other factors not relevant to the shareholders.
4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report
I agree in general with this proposed rule, other than our disagreement with Item 4.02 (a)(4) as discussed below. Clearly, the investing public should be informed immediately if the independent auditor informs the registrant that the report on the financial statements should no longer be relied upon. Further, I agree that the auditor should be given the opportunity, but not requirement, to respond.
As to management's plans to alleviate the issue, there is not enough time between the receipt of the notice and the filing of the Form 8-K for management to reasonably be able to formulate plans. While I appreciate that such an event will normally not be a surprise to management, as the build up to it will have occurred over a period of time, when this type of event happens management has generally been working to avoid the notice from the auditor and has not, therefore, had an opportunity to consider plans to alleviate the situation. In view of the effect of such a notice, I believe that management will be attempting to alleviate the issue. I believe that management's plans to alleviate the issue should be removed from Item 4.02.
5.01 Changes in Control of the Registrant
I agree with the proposed change. I believe that the registrant should be able to incorporate prior filings.
5.02 Departure of Directors or Principal Officers; election of Directors; Appointment of Principal Officers
I disagree with the change of responsibility from the director to "...a disagreement known to an executive officer of the registrant..." I have found these matters not to be clear among the principals; accordingly, I believe that the responsibility should remain with the former director. I believe that the present rule should remain in effect, placing the responsibility entirely on the former director. Should a former director send a letter to the registrant, the registrant should be required to file it in a Form 8-K filing.
I do not believe that the information requested in proposed Item 5.02 (b) (c) and (d) are useful disclosures. The annual disclosure of such information in the Form 10-K or Proxy Statement appears to be sufficient for these purposes.
5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
I am not commenting on the Item covering amendments to the articles of incorporation or bylaws. As the change in fiscal year approximates the current rule which I believe has been effective, I agree with the proposed rule.
5.04 Material Events Regarding the Registrant's Employee Benefit, Retirement and Stock Ownership Plans
I believe that this Item should not be adopted as it is irrelevant to parties other than the participants, who are better informed by other means.
2. Boilerplate explanations
I do not know how to reduce the quantity of boilerplate language. Proposed Items 1.02, 1.03, 2.03 and 2.04 appear to be potential generators of boilerplate language. One wonders, if the proposed rule produces primarily boilerplate language, whether the proposed rule should be scrapped.
3. Request for comments regarding proposed disclosure items
I believe that I have responded to these questions as to proposed changes under Item 1 above. I do not believe that it would be productive to adopt broad principles as managements do need guidance as to what disclosures should be made. Further, the lack of a filing would indicate that certain events did not happen. I do not believe that broad principles would suffice. Further, I have no additional disclosure items to propose.
Questions regarding waivers of corporate codes of conduct
In view of Section 406 (b) of the Sarbanes Oxley Act I believe that any waiver of a corporate code of conduct by a senior financial official should be disclosed in a Form 8-K filing. I also believe that the disclosure should apply to any executive officer of the registrant.
Questions regarding critical accounting policies
I do not believe that the inclusion of an Item with respect to critical accounting policies would be useful. Such changes would normally occur at the time of a quarterly or annual filing and would be included therein.
B. Shortened Filing Deadline for Form 8-K
The request for comments on the appropriateness of a two business day reporting requirement points out beautifully the conflict: the needs of the market for instantaneous information vs. the need for management to "get it right." I believe that the solution to the conflict is to require the filing in two days of the event with a later filing, as much as a month later, of the detailed information. This procedure is not dissimilar with that now used for acquisitions: an immediate disclosure of the acquisition with the filing of the audited financial statement 60 days later. I believe that this type of two step disclosure should be considered for proposed Items 1.01, 1.02, 1.03, 2.01, 2.03, 2.04, 2.05, 2.06, 5.02 and 5.04.
C. Reorganization of Form 8-K items
I agree with the reorganization.
D. Liability issues and the proposed safe harbors
I have not commented on this issue.
E. Amendments to Rule 12b-35 and Form 12b-25 regarding late filing
I believe that greater flexibility is necessary in view of the complexity of the matters being proposed. My suggestion is that a Form 12b-25 be required to be filed the day of the due date with a general description of the item. An investor is then aware of the matter and can adjust his investment strategy appropriately. I then recommend a longer time period, such as fourteen calendar days to permit the registrant to appropriately gather the information.
F. Conforming amendments
As indicated above I believe these deletions should not be made with the information indicated left in the quarterly filings.
G. General request for comment
I have no further comments.
If you have any questions on this submission, please contact me at 212-557-7505. Thank you for the opportunity to reply to your proposal.
Arthur J. Radin
Certified Public Accountant