Kevin M. Bronner, Ph.D.
4 Georgian Terrace
Loudonville, NY 12211
November 13, 2002
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington DC 20549-0609
Re: File No. S7-42-02
Dear Secretary Katz,
I wish to support the proposed rules regarding the disclosure of all off balance sheet financing arrangements in Management's Discussion and Analysis in all SEC filings and related annual reports presented by the respondents. This rule, which is directed under Section 13(j) of the Securities Exchange Act of 1934 and by Section 401 (a) of the Sarbanes-Oxley Act of 2002, is necessary to provide full disclosure to investors. I have five specific comments:
Comment #1: The Management Discussion and Analysis should provide a pro forma capital structure showing the full effects of all off balance sheet financing entities. The common stock equity of the company should be recast to show the pro forma level of common equity that exists once the debt related aspects of the special purpose entity are factored in. The effects of major special purpose entities should be shown separately and not netted together.
Comment #2: The Management Discussion and Analysis should also show the potential effects that imputed debt service from the special purpose entity may have on the covenants in the various financing agreements for the company. For instance, if interest is imputed from the special purpose entity into a pro forma interest coverage calculation, the full effects should be shown. Likewise, if the effects of an imputed special purpose entity trigger a debt default provision due to the failure to maintain a certain common equity ratio, this effect should be shown. The effects of major special purpose entities should be shown separately and not netted together.
Comment #3: Management must state in the Management Discussion and Analysis the full effects in any debt financing, preferred stock financing or any other financing agreements that may occur due to the imputation of financial effects from all special purpose entities. The effects of major special purpose entities should be shown separately and not netted together.
Comment #4: Management's Discussion and Analysis should clearly state that the effects on earnings per share from all special purpose entities are non-core earnings. Earnings per share should be shown on an actual basis, and then shown adjusted for the effects of the non-core earnings from the special purpose entities. If actual earnings are reduced from effects imputed from the special purpose entity they should be shown at the reduced level. If earnings per share are increased due to the special purpose entity, they should be shown at the increased level. The effects of major special purpose entities should be shown separately and not netted together.
Comment #5: Management's Discussion and Analysis should include a description of all interests or owners in the special purpose entities. A discussion of counter party credit risk for each of the major counter parties should be included.
Thank you for the opportunity to comment on these important rules.
Kevin M. Bronner, Ph.D.