Office of the Chief Accountant Staff Position; Release No. 12-OCA-2 [42 Pa.B. 1023]
[Saturday, February 18, 2012]Date of Release
January 25, 2012Commission Guidelines Regarding the Use of Parent Company Financial Statements that is the Sole Guarantor of its Wholly-owned Finance Subsidiary's Securities and to which Staff must Apply Analysis and Review Pursuant to § 609(c) of the 1972 Act for Registration Statements Filed under § 205 and § 206 of the 1972 Act.
Background
The Pennsylvania Securities Commission fosters legitimate capital formation through adequate review of registration and exempt offering material filed with the Division of Corporation Finance and the Office of the Chief Accountant, and requires the offering material to include financial statements of the issuer of the securities. Some parent companies in the past have attempted to raise capital through offerings of securities by a subsidiary that are guaranteed by the parent company. In such situations, because guarantees are securities themselves for purposes of the 1972 Act, offering material must include financial information of both the parent and subsidiary companies. However, the Commission on a case-by-case basis has allowed financial subsidiaries issuing securities guaranteed by the parent to include only financial information of the parent company, consistent with SEC Regulation S-X Rule 3-10(b). The purpose of this guideline is to apply this position generally.
Staff Position
Financial statements of a parent company that is the sole guarantor of its wholly-owned finance subsidiary's securities under sections 205 or 206.
(1) Finance subsidiary issuer of securities guaranteed by its parent company. When a finance subsidiary issues securities and its parent company guarantees those securities, the registration statement, parent company annual report, or parent company quarterly report need not include financial statements of the issuer if:
(i) The issuer is 100% owned by the parent company guarantor;
(ii) The guarantee is full and unconditional;
(iii) No other subsidiary of the parent company guarantees the securities;
(iv) The parent company's financial statements are filed for the periods specified by Commission Regulation § 609.034 and include a footnote stating that the issuer is a 100%-owned finance subsidiary of the parent company and the parent company has fully and unconditionally guaranteed the securities. The footnote also must include the narrative disclosures specified in sections (2) and (3) of this position;
(v) The parent company must demonstrate that it can meet the obligations of the full and unconditional guarantee. In the case the parent company does not have independent assets or operations, it will not be considered able to demonstrate an ability to meet the obligations of the full and unconditional guarantee; and
(vi) The finance subsidiary must include summary unaudited condensed financial statements (balance sheet and income statement) within the prospectus or offering circular in the form called for and for the periods suggested under the Prospectus Guidelines section 6. There also must be a schedule disclosing amounts and identifying information of the entities and persons to whom they have obligations.
(2) Disclose any significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan.
(3) Provide the following disclosures prescribed with respect to the subsidiary issuers and parent company guarantors:
(i) The disclosures in paragraphs (3)(i) 1. and 2. in this position shall be provided when the restricted net assets of consolidated and unconsolidated subsidiaries and the parent's equity in the undistributed earnings of 50 percent or less owned persons accounted for by the equity method together exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of subsidiaries shall mean that amount of the issuer's proportionate share of net assets (after intercompany eliminations) reflected in the balance sheets of its consolidated and unconsolidated subsidiaries as of the end of the most recent fiscal year which may not be transferred to the parent company in the form of loans, advances or cash dividends by the subsidiaries without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.). Not all limitations on transferability of assets are considered to be restrictions for purposes of this test, which considers only specific third party restrictions on the ability of subsidiaries to transfer funds outside of the entity. For example, the presence of subsidiary debt which is secured by certain of the subsidiary's assets does not constitute a restriction under this position. However, if there are any loan provisions prohibiting dividend payments, loans or advances to the parent by a subsidiary, these are considered restrictions for purposes of computing restricted net assets. When a loan agreement requires that a subsidiary maintain certain working capital, net tangible asset, or net asset levels, or where formal compensating arrangements exist, there is considered to be a restriction under the position because the lender's intent is normally to preclude the transfer by dividend or otherwise of funds to the parent company. Similarly, a provision which requires that a subsidiary reinvest all of its earnings is a restriction, since this precludes loans, advances or dividends in the amount of such undistributed earnings by the entity. Where restrictions on the amount of funds which may be loaned or advanced differ from the amount restricted as to transfer in the form of cash dividends, the amount least restrictive to the subsidiary shall be used. Redeemable preferred stocks and minority interests and noncontrolling interests shall be deducted in computing net assets for purposes of this test.
1. Describe the nature of any restrictions on the ability of consolidated subsidiaries and unconsolidated subsidiaries to transfer funds to the parent company guarantor in the form of cash dividends, loans or advances (i.e., borrowing arrangements, regulatory restraints, etc.).
2. Disclose separately the amounts of such restricted net assets for unconsolidated subsidiaries and consolidated subsidiaries as of the end of the most recently completed fiscal year.
(4) Definitions for the purposes of this position:
(i) A subsidiary is 100% owned if all of its outstanding voting shares are owned, either directly or indirectly, by its parent company. A subsidiary not in corporate form is 100% owned if the sum of all interests are owned, either directly or indirectly, by its parent company other than:
1. Securities that are guaranteed by its parent and, if applicable, other wholly-owned subsidiaries of its parent; and
2. Securities that guarantee securities issued by its parent and, if applicable, other wholly-owned subsidiaries of its parent.
(ii) A guarantee is full and unconditional, if, when an issuer of a guaranteed security has failed to make a scheduled payment, the guarantor is obligated to make the scheduled payment immediately and, if it does not, any holder of the guaranteed security may immediately bring suit directly against the guarantor for payment of all amounts due and payable.
(iii) A parent company has no independent assets or operations if each of its total assets, revenues, income from continuing operations before income taxes, and cash flows from operating activities (excluding amounts related to its investment in its consolidated subsidiaries) is less than 3% of the corresponding consolidated amount.
(iv) A subsidiary is a finance subsidiary if it has no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company.
(v) A subsidiary is an operating subsidiary if it is not a finance subsidiary.
Note to position:
This position is available if a subsidiary issuer satisfies the requirements of this paragraph but for the fact that, instead of the parent company guaranteeing the security, the subsidiary issuer co-issued the security, jointly and severally, with the parent company. In this situation, the narrative information required by paragraph (1)(iv) must be modified accordingly.
JEANNE S. PARSONS,
Secretary[Pa.B. Doc. No. 12-324. Filed for public inspection February 17, 2012, 9:00 a.m.]
