The SEC has adopted new rules requiring the disclosure of off-balance sheet transactions, arrangements, obligations (including contingent obligations) and other relationships of an issuer with unconsolidated entities or other persons.

The new disclosure must be located in the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section of SEC disclosure documents, in a separately captioned subsection of the MD&A. The rules do not change the current disclosure requirements of generally accepted accounting principles ("GAAP") or the disclosure requirements for financial statements and the related footnotes.

The off-balance sheet arrangement disclosure must be included in registration statements, annual reports and proxy or information statements that are required to include financial statements for fiscal years ending on or after June 15, 2003.

A. Scope of Arrangements Covered

The definition of off-balance sheet arrangement is designed to capture instances where a registrant must provide financial support designed to reduce risks to an unconsolidated entity or other third parties in order to facilitate a transfer of assets or otherwise finance the activities of the unconsolidated entity. The definition includes any contractual arrangement to which an unconsolidated entity is a party, under which the registrant has:

• any obligation under certain guarantee contracts;
• a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;
• any obligation, including a contingent obligation, under certain derivative instruments; or
• any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, the registrant, where the entity provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.

Contingent liabilities arising out of litigation, arbitration or regulatory actions (not otherwise related to off-balance sheet arrangements) are not considered off-balance sheet arrangements.

The rules include an instruction that no obligation to make disclosure regarding an off-balance sheet arrangement will arise until an unconditionally binding definitive agreement, subject only to customary closing conditions, exists or, if there is no such agreement, when settlement of the transaction occurs.

B. Mandated Disclosure

The rules require that every MD&A include, in a separately-captioned section, a discussion of the registrant's off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future material effect on the registrant.

The disclosure must include the following items to the extent necessary to an understanding of the off-balance sheet arrangements and their material effects on the registrant's financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures and capital resources:

• nature and business purpose of the arrangements;
• importance to registrant;
• magnitude of off-balance sheet arrangements;
• known causes of termination or reduction; and
• other information.

The disclosure regarding the nature and business purpose of the off-balance sheet arrangements must explain to investors why and how the registrant engages in off-balance sheet arrangements.

The disclosure must provide investors with an understanding of the importance of off-balance sheet arrangements to the registrant in respect of its liquidity, capital resources, market risk support, credit risk support or other benefits. Together with the other disclosure requirements, registrants should provide information sufficient for investors to assess the extent of the risks that have been transferred and retained as a result of the arrangements.

Registrants also must provide investors with insight into the overall magnitude of the registrant's off-balance sheet activities, the specific material impact of the arrangements on the registrant and the circumstances that could cause material contingent obligations or liabilities to come to fruition. Disclosure is required to the extent material and necessary to investors' understanding of: the amounts of revenues, expenses and cash flows arising from the arrangements; the nature and amounts of any interests retained, securities issued and other indebtedness incurred in connection with such arrangements; and the nature and amount of any other obligations or liabilities of the registrant arising from the arrangements that are, or are reasonably likely to become, material and the triggering events or circumstances that could cause them to arise.

The disclosure must also identify any known event, demand, commitment, trend or uncertainty that will, or is reasonably likely to, result in the termination, or material reduction in availability to the registrant, of its off-balance sheet arrangements that provide the registrant with material benefits.

In addition to the specifically enumerated disclosure, a registrant must also provide such other information as it believes necessary for an understanding of its off-balance sheet arrangements and the material effects of these arrangements on its financial condition.

C. Disclosure Threshold

The new rules require disclosure of off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on the registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. The disclosure threshold is consistent with the existing disclosure threshold for MD&A. Nevertheless, even if a material effect is not reasonably likely, disclosure may still be required in the footnotes to the registrant's financial statements.

No disclosure will be required until a binding definitive agreement, subject only to customary closing conditions, exists or if there is no such agreement, upon settlement.

D. Location and Format of Disclosure

The rules require registrants to present the proposed disclosure about off-balance sheet arrangements in a separate, designated subsection of MD&A. MD&A should be presented in language and a format that is clear, concise and understandable.

To eliminate unnecessary repetition, the rules allow a registrant to include within its MD&A section a cross-reference to information in the footnotes to the financial statements. The cross-reference must clearly identify specific information in the footnotes and must integrate the substance of the footnotes into the MD&A discussion in a manner designed to inform readers of the significance of the information that is not included within the body of the MD&A.

E. Safe Harbor for Forward-Looking Information

To encourage the type of information and analysis necessary for investors to understand the impact of off-balance sheet arrangements, the rules include a safe harbor for forward-looking information. The safe harbor explicitly applies the existing statutory safe harbor protections to forward-looking information that would be required to be disclosed by the new rules. The adopted safe harbor language specifies that, except for historical facts, all information called for regarding management's analysis of the material effects of off-balance sheet arrangements and the discussion of the effects of the termination or reduction of off-balance sheet arrangements would be deemed to be a "forward-looking statement" as that term is defined in the statutory safe harbors.

In addition, with respect to the MD&A discussion of off-balance sheet arrangements, the SEC is adopting a provision that the "meaningful cautionary statements" element of the statutory safe harbors will be satisfied if a registrant satisfies all of its off-balance sheet arrangements disclosure requirements.

Effective Date. The off-balance sheet arrangement disclosure must be included in registration statements, annual reports and proxy or information statements that are required to include financial statements for fiscal years ending on or after June 15, 2003.

The foregoing is meant to be a summary only. As with any discussion of the law, certain exceptions may apply to specific questions. Please call Ted Tashlik or Martin Goldwyn to discuss any specific matters.