supr^, ^ cour°^ u^ ^w°^4' clerk of ^ourt original in the supreme court state of ohio appeal...

ORIGINAL

IN THE SUPREME COURT

STATE OF OHIO

APPEAL FROM THE BOARD OF TAX APPEALS

BOARD OF EDUCATION OF THESOUTH-WESTERN CITY SCHOOLS,

SUPREME COURT CASENUMBER: 2012-1016

Appellee,

V.

FRANKLIN COUNTY BOARD OFREVISION, FRANKLIN COUNTYAUDITOR, AND TAX COMMISSIONEROF THE STATE OF OHIO,

BOARD OF TAX APPEALSCASE NOS. 2009-A-1070

2009-A-1071

Appellees,

and

U-STORE-IT, LP,

Appellant

BRIEF Or APPLLLANT

William Stehle (0077613)COUNSEL OF RECORDAssistant Prosecuting Attorney373 South High Street, 14f" FloorColumbus, OH 44113

P: (614) 525-3500F: (614) 525-2530

ATTORNEY FOR APPELLEES^ - ^JNTY BOARD OF

¶2OUNTY AUDITOR

NOV 16^.W`E6

CLERK OF ^OURTSUPR^, ^ couR°^ U^ ^w°^4'

MID^^^ 10 ^^^^

CLERK4F COURTSUPREME COURT OF OHIO

Todd W. Sleggs (0040921)COUNSEL OF RECORDSteven R. Gill (0055812)SLEGGS, DANZINGER & GILL, CO., LPA820 W. Superior Avenue - Seventh FloorCleveland, OH 44113P: (216) 771-8990F: (216) 771-8992

ATTORNEY FOR APPELLANTU-STORE, IT, LP

Mike DeWineOhio Attorney GeneralState Office Tower, 17th Floor30 East Broad StreetColumbus, OH 43215-3428P: (614) 462-7519F: (614) 466-8226

ATTORNEY FOR APPELLEETAX COMMISSIONER OF THESTATE OF OHIO

MARK H. GILLIS (0066908)COUNSEL OF RECORDRICH & GILLIS LAW GROUP, LLC6400 Riverside Drive, Suite DDublin, OH 43017P: (614) 228-5822F: (614) 540-7476

ATTORNEY FOR APPELLEE BOARDOF EDUCATION OF THE SOUTH-WESTERN CITY SCHOOLS

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .......................................................................................................... ii

................................................................................................................................... iiiAPPENDIX ^ ^ ^

STATEMENT OF THE CASE ........................................................................................................1

LAW AND ARGUMENT ...............................................................................................................2

PROPOSITION OF LAW NO. I

ALL ELEMENTS OF AN ARM'S LENGTH SALE MUST BE PRESENT FORA SALE TO BE USED FOR ASSESSMENT PURPOSES . ..................................2

PROPOSITION OF LAW NO. II

THE BOARD OF TAX APPEALS MAKES NO INQUIRY AS TO THIS BASISFOR THE ALLOCATION OF THE PURCHASE PRICE AND IS THEREFOREUNREASONABLE AND UNLAWUL ...................................................................5

CONCLUSION ................................................................................................................................7

CERTIFICATE OF SERVICE ...... ..................................................................................................8

1

TABLE OF AUTHORITIES

Page

CASES

ConsolidatedAluminum Corp. v. Bd ofRevision ( 1981), 66 Ohio St.2d 410 ........................7

Walters v. Board ofRevision, (1989), 47 Ohio St.3d 23 .................................................6

STATUTES

Revised Code Section 5713.03 ..............................................................................6

ACCOUNTING STANDARDS

Statement of Financial Accounting Standards (FASB) No. 57 ...... ....................................5

About the AICPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

SEC Form 10-K, General Instructions ......................................................................4

About the SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Accounting and Auditing for Related Party Transactions ................................................5

ii

APPENDIX

Page

Notice of Appeal from the Ohio Board of Tax Appeals to Ohio Supreme Court ............................1

Ohio Board of Tax Appeals Decision and Order ...........................................................................19

Franklin County Board of Revision Decisions ..............................................................................31

Statement of Financial Accounting Standards (FASB) No. 57 .................. ............... ........35

About the AICPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 46

SEC Form 10-K, General Instructions .....................................................................47

About the SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 59

Accounting and Auditing for Related Party Transactions .............................................79

iii

STATEMENT OF THE CASE

The instant appeal involves two self-storage facilities located in Franklin County, Ohio.

The Appellee Board of Education of the South-Western City Schools (hereinafter Appellee

and/or Board of Education) filed complaints for tax year 2006 seeking to have the true value of

the properties increased to the sales prices based upon a transfer that occurred in late July and

August of 2006. See Supplement to the Briefs (hereinafter Supp.) at pages l and 2. In support of

such sales, the Appellee presented the conveyance fee statement and the deed for each sale.

The Franklin County Board of Revision held a consolidated hearing on November 26,

2007 on several complaints filed by the Appellee for two sales of each of the properties (and

additional properties not part of this appeal), occurring on April 18, 2005 (the "2005 Sale") and

late July and August of 2006 (the "2006 Sale"). See Board of Revision Digital Hearing Record

("Dig. H.R.") in the Transcript of Appeal filed by the Franklin County Board of Revision,

Exhibit 12; see also Supp. at pages 188 and 189. Appellant U-Store-It, L.P. appeared with

counsel and presented documentation and testimony regarding the 2005 Sale and the 2006 Sale.

Appellant contended that the 2006 Sale from entities owned and controlled by Jernigan

Property Group was not an arm's-length sale as it was between related parties as disclosed on

Form l0-Q filed by the Appellant with the SEC. Supp. at page 15. Mr. Kathleen Weigand,

General Counsel of U-Store-It, explained that Dean Jernigan, who currently serves as President

and CFO of U-Store-It, was a principal in Jernigan Property Group. U-Store-It presented the

Form 10-Q of U-Store-It which was submitted to the United States Securities and Exchange

Commission on March 31, 2007. Ms. Weigand objected to the 2006 Sale as representing true

value because Mr. Jernigan and Jernigan Property Group were required to execute a non-compete

covenant in connection with his employment as President and CFO of Appellant, and that Mr.

Jernigan agreed that he would not expand his beneficial interest in the facilities being purchased.

Based upon the evidence and testimony submitted at the Board of Revision hearing (the parties

waived a hearing at the Board of Tax Appeals) the Board of Revision expressly found that the

2005 sales were arm's length sales and increased the true value of the properties to the 2005 sale

prices. The Board of Revision expressly found that the 2006 sales were not arm's length. Supp.

at pages 188 and 189. The Appellee appealed the 2006-2008 tax year Board of Revision

decisions to the Board of Tax Appeals.

On appeal, the Ohio Board of Tax Appeals utilized the 2006 related party sales as

evidence of value and increased the 2006-2008 tax year true values of both properties (as well as

others not part of this appeal) to the August 2006 transfer prices.

LAW AND ARGUMENT

PROPOSITION OF LAW NO. I

ALL ELEMENTS OF AN ARM'S LENGTH SALE MUST BE PRESENT FOR A

SALE TO BE USED FOR ASSESSMENT PURPOSES.

This proposition of law addresses the following assignments of error:

ASSIGNMENT OF ERROR NO. 1

The Board of Tax Appeals finding that a sale reported to the Securities and ExchangeCommission as a related party transfer could be used to determine the value of the real estate isunreasonable and unlawful.

2


The Board of Tax Appeals decision to use a sale that was not arm's length to determine valuewhen the evidence showed that the transaction was not an arm's length transaction isunreasonable and unlawful.


The Board of Tax Appeals decision and order ignoring evidence of a prior arm's length sale ofthe property is unreasonable and unlawful.


The Board of Tax Appeals decision and order rejecting the unrebutted evidence of the Appellantis unreasonable and unlawful.


The Board of Tax Appeals' decision and order overturning the Board of Revision's decision in

unreasonable and unlawful.

The United States Security and Exchange Commission ("SEC") was created by the

Securities Act of 1933, together with the Securities Exchange Act of 1934. The SEC was

"designed to restore investor confidence in our capital markets by providing investors and the

markets with more reliable information and clear rules of honest dealing. The main purposes of

these laws can be reduced to two common sense notions":

Companies publicly offering securities for investment dollars must tell the public

the truth about their businesses, the securities they are selling, and the risks involved in

investing.

People who sell and trade securities - brokers, dealers and exchanges - must treat

investors fairly and honestly, putting investors' interests first.'

1 www.sec.gov. "Creation of the SEC".

3

The Division of Corporate Finance of the SEC assists the Commission in executing its

responsibility to oversee corporate disclosure of important inforniation to the investing public.

Corporations are required to comply with regulations pertaining to disclosures that must be made

when stock is initially sold and then on a continuing and periodic basis. The Division of

Corporate Finance reviews documents that publicly-held companies are required to file with the

Commission. The documents include:

• Annual and quarterly filings (Forms 10-K and 10-Q) (list edited).2

The Ohio Board of Tax Appeals has ignored the basic principle that a transaction reported

as a "related party transaction" is by its very definition not arm's length. The sale of the subject

properties in late July and August of 2006 was reported on the United States Securities and

Exchange Commission Form 10-Q. The transfer was reported under the heading "Related Party

Transactions". Supp. at page 15. This same information and testimony was presented to the

Franklin County Board of Revision who disregarded the 2006 sale, ostensibly deeming it non-

arm's length, and instead relied on the earlier (2005) sale to determine value.

Clearly, the term "related party transaction" by its definition cannot be arm's length. The

SEC Form 10-K itself requires disclosure under Item 13 of the instructions - "Certain

Relationships and Related Transactions, and Director Independence". See Blank Form 10-K and

instructions, page 10 of Form 10-Q; Appendix at page 56 (item 13).

The accounting profession is guided by The American Institute of Certified Pubiic

Accountants (AICPA). The AICPA sets ethical standards for the profession and U. S. standards

zwww.sec.gov. "Divisions".

4

for audits of private companies, non-profit organizations, federal, state and local governments.

In December of 2001, the AICPA issued "Accounting and Auditing for Related Parties and

Related Party Transactions - A Toolkit for Accountants and Auditors". The toolkit references

FASB3, Statement No. 57, Related Party Disclosures, which provides guidance on the disclosure

of transactions with related parties. In Statement No. 57, "Standards of Finance Accounting and

Reporting: Disclosures (3) the FASB states:

Transactions involving related parties cannot be presumed to be carried out on anarm's-length basis, as the requisite conditions of competitive, free-marketdealings may not exist. Representations about transactions with related parties, ifmade, shall not imply that the related party transactions were consummated onterms equivalent to those that prevail in arm's-length transactions unless such

representations can be substantiated.

The 10-Q report clearly identifies the late July and August of 2006 sale as a related party

transaction. The Buyer/Appellant was governed by FASB 57 and Generally Accepted

Accounting Principles (GAAP) to disclose the relationship between the Buyer and Seller to the

public. It is both unreasonable and unlawful for the Ohio Board of Tax Appeals to ignore the

fact that this transfer was disclosed as a "related party transaction" and deem it arm's length. The

law and facts in this appeal do not support the Board of Tax Appeals iinding that the 2006 sale

was arm's length.

3 Since 1973, the Financial Accounting Standards Board (FASB) has been the designated organization in the privatesector for establishing standards of fmancial accounting that governs the preparation of financial reports bynongovernmental entities. Those standards are officially recognized as authoritative by the Securities and ExchangeCommission (SEC) (Financial Reporting Release No. 1, Section 101, and reaffirmed in its Apri12003 PolicyStatement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, asamended May 1973 and May 1979). Such standards are important to the efficient functioning of the economybecause decisions about the allocation of resources rely heavily on credible, concise and understandable fmancialinformation. The SEC has statutory authority to establish fmancial accounting and reporting standards for publiclyheld companies under the Securities Exchange Act of 1934. Throughout its history, however, the Commission'spolicy has been to rely on the private sector for this function to the extent that the private sector demonstrates ability

to fulfill the responsibility in the public interest.5

For a sale or transfer to be utilized as evidence of value, it must be deemed arm's length.

R.C. 5713.03 provides:

"In determining the true value of any tract, lot, or parcel of real estate under thissection, if such tract, lot, or parcel has been the subject of an arm's length salebetween a willing seller and a willing buyer within a reasonable length of time,either before or after the tax lien date, the auditor shall consider the sale price ofsuch tract, lot or parcel to be the true value for taxation purposes."

Since the sale was reported as being between related parties, Jernigan Property Group, as

seller, and U-Store-It Trust (President and Chief Executive Officer Dean Jernigan), as buyer, the

sale is not arm's length. It is unreasonable and unlawful for the Ohio Board of Tax Appeals to

use a related party transaction as an arm's length sale under the statute. The guidance mandated

by the SEC cannot be ignored by the Oho Board of Tax Appeals, and clearly identifies the

transaction as being between related parties. See also, Walters v. Board ofRevision, (1989), 47

Ohio St.3d 23. It was unnecessary for the Ohio Board of Tax Appeals to review the sale once it

was deemed to be between related parties. The review of the 2006 transfer should have ended

after the fact that the parties were related was discovered.

PROPOSITION OF LAW NO. II

THE BOARD OF TAX APPEALS MAKES NO INQUIRY AS TO THIS BASIS

FOR THE ALLOCATION OF THE PURCHASE PRICE AND IS THEREFORE

UNREASONABLE AND UNLAWUL.

The Board of Tax Appeals acknowledges in its decision and order that the 2006 sale

involved "nine properties purchased in a bulk sale with allocations of the overall price made

within the purchase agreement". Board of Tax Appeals decision and order at page 5. The Board

of Tax Appeals inquiry regarding the allocation ends there. The Board of Tax Appeals makes no

6

finding as required by Consolidated Aluminum Corp. v. Bd. ofRevision (1981), 66 Ohio St.2d

410, that the allocated sale price does or does not reflect true value. As a result, the Board of Tax

Appeals decision and order is unreasonable and unlawful.

CONCLUSION

For the foregoing reasons, the Appellant U-Store-It, LP respectfully requests that this

Court reverse the decision and order of the Ohio Board of Tax Appeals and remand the case to

the Ohio Board of Tax Appeals with instructions to find the fair market value or true value in

money of the real property to be the 2005 sale prices contained in the Board of Revision

decisions.

Respectfully submitted,

Todd W. Sleggs (0040921)COUNSEL OF RECORDSteven R. Gill (0055812)SLEGGS, DANZINGER & GILL CO., LPA820 W. Superior Avenue, Seventh FloorCleveland, OH 44113P: (216) 771-8990F: (216) 771-8992

ATTORNEYS FOR APPELLANTU-STORE, IT, LP

7

CERTIFICATE OF SERVICE

A copy of the foregoing Brief of Appellant U-Store-It, LP was mailed via regular U.S.

^mail postage prepaid, this / l^ day of November, 2012 to the following: William Stehle,

Assistant Prosecuting Attorney, 373 South High Street, 14th Floor, Columbus, OH 43215,

Attorney for Appellees Franklin County Board of Revision and Franklin County Auditor; Mark

H. Gillis, Esq., Rich & Gillis Law Group, LLC, 6400 Riverside Drive, Suite D, Dublin, OH

43017, Attorneys for Appellee Board of Education of the South-Western City Schools; and Mike

DeWine, Ohio Attorney General, State Office Tower, 17th Floor, 30 East Broad Street,

Columbus, Ohio 43215-3428, Attorney for Appellee Tax Commissioner of the State of Ohio.

Steven R. Gill

T3018-06S:\WPDocs\SCT\3018BRIEF.doc

8

/


STATE OF OHIO

APPEAL FROM THE BOARD OF TAX APPEALS I10' 16


Appellee,

V.


Appellees,

and

U-STORE-IT, LP,

Appellant.

NOTICE OF APPEAL

Bill Stehle (0077613)COUNSEL OF RECORDAssistant Prosecuting Attorney373 South High Street, 14"' FloorColumbus, OH 44113P: (614) 525-3500F: (614) 525-2530

SUPREME COURT CASENUMBER:


2009-A-1071

1UrJUN 14 20112

CLERK OF COURTSUPREME COURT OF OHIO

Todd W. Sleggs (0040921)COUNSEL OF RECORDSLEGGS, DANZINGER & GILL, CO., LPA820 W. Superior Avenue - Seventh FloorCleveland, OH 44113P: (216) 771-8990F: (216) 771-8992

ATTORNEY FOR APPELLEES ATTORNEY FOR APPELLANTFRANKLIN COUNTY BOARD OF U-STORE, IT, LPREVISION AND COUNTY AUDITOR

-1-

Mike DeWineOhio Attorney GeneralState Office Tower, 17th Floor30 East Broad StreetColumbus, OH 43215-3428P: (614) 462-7519F: (614) 466-8226

ATTORNEY FOR APPELLEETAX COMMISSIONER OF THESTATE OF OHIO

Kelley A. Gorry (0079210)COUNSEL OF RECORDRICH & GILLIS LAW GROUP, LLC6400 Riverside Drive, Suite DDublin, OH 43017P: (614) 228-5822F: (614) 540-7476

ATTORNEY FOR APPELLEE BOARDOF EDUCATION OF THE SOUTH-WESTERN CITY SCHOOLS

-2-


STATE OF OHIO

V.

APPEAL FROM THE BOARD OF TAX APPEALS


Appellee,


and

U-STORE-IT, LP,

Appellees,

Appellant.

SUPREME COURT CASENUMBER:


2009-A-1071

NOTICE OF APPEAL TO THESUPREME COURT OF OHIOPURSUANT TO SECTION5717.04 REVISED CODE

The Appellant, U-Store-It, LP, by and through counsel, hereby gives notice of its

appeal to the Supreme Court of The State of Ohio, from a Decision and Order of the Ohio

Board of Tax Appeals, rendered on the 15`" day of May, 2012, a copy of which is attached

hereto as "Exh; bit A" and ;^^hich is incorporated herein as though fullv rewritten in this

-3-

Notice of Appeal. The Errors complained of are attached hereto as "Exhibit B", which is

incorporated herein by reference.

Respectfully submitted,

SLE DANZINGER & GILL, CO., LPA

- - -,

Todd W. Sleggs, Esq. (0040921)COUNSEL OF RECORD820 W. Superior Avenue, Seventh FloorCleveland, OH 44113P: (216) 771-8990F: (216) 771-8992

ATTORNEYS FOR APPELLANTU-STORE-IT, LP

-4-

OHIO BOARD OF TAX APPEALS

Board of Education of the South-Western City Schools,

(REAL PROPERTY TAX)vs.

Franklin County Board of Revision,Franlclin County Auditor, and U-Store-It, LP,

APPEARANCES:

Appellant,

Appellees

For the Appellant -Bd. of Edn.

For the CountyAppellees

CASE NOS. 2009-A-1070,2009-A-1071

DECISION AND ORDER

MAY172012

Rich & Gillis Law Group, LLCKelley A. Gorry6400 Riverside Drive, Suite'DDublin, Ohio 43017

- Ron O'BrienFranklin County Prosecuting AttorneyPaul M. StickelAssistant Prosecuting Attorney373 South High Street, 14"' FloorColumbus, Ohio 43215

For the Appellee - Sleggs, Danzinger & Gill Co., LPAProperty Owner Todd W. Sleggs

820 West Superior Ave., 7`h FloorCleveland, Ohio 44113

Entered MAY 15 2012Ms. Margulies, Mr. Johrendt, and Mr. Williamson concur.

This cause and matter came on to be considered by the Board of Tax

Appeals upon two notices of appeal filed herein by the above-named appellant from

two decisions of the Franklin County Board of Revision. In said decisions, the board

of revision determined the taxable value of the subject properties for tax years 2006,

2007, and 2008.

EXH IBIT k^^^ ^^ 5Jt

The matter was submitted to the Board of Tax Appeals upon the notices

of appeal, the statutory transcriptst certified to this board by the county board of

revision, and the briefs filed by counsel to the appellant and the appellee property

owner. No hearing was held before this board, as all parties hereto waived their right

to appear.

The subject real property, specifically two parcels, #040-009319 and

#570-243347, located in Franklin County, Ohio and the city of Grove City/South-

Western City School District and the city'of Columbus/South-Western City School

District taxing districts, were sold as part of a bulk transaction. Parcel #040-009319

consists of approximately 8.557 acres, and parcel #570-243347 consists of

approximately 5.748 acres; located on each parcel are self-storage facilities. The value

of parcel #040-009319 was increased from that which the auditor previously

determined and the value of parcel #570-243347 was decreased from that which the

auditor previously determined.

The appellant board of education contends that the board of revision has

undervalued the parcels in question by not relying upon the sale of the subject

properties, as recorded in August 2006, from JPG 3300 Southwest, LLC to U-STORE-

IT, L-P fnr $6,2005000 (parcel #040-009319) and JPG 5411 West Broad, LLC to U-

STORE-IT, LP for $4,350,000 (parcel #570-243347), as an indicator of the parcels'

values.

1 We acknowledge that the digital hearing recording from the BOR proceedings in BTA No. 2009-A-1161 has also been reviewed herein, pursuant to the property owner's request at the BOR to so includesuch record; we find such additional record relevant to the instant matter as it relates to anotherproperty within the bulk sale transaction under consideration.

2 -6-

Since the hearing before this board was waived, it is necessary to review

the record established before the board of revision to assist in our determination of

value for the subject property. See Black v. Bd. of Revision (1985), 16 Ohio St.3d 11;

Columbus Bd of Edn. v. Franklin Cty. Bd of Revision, 76 Ohio St.3d 13. The Board

of Education of the South-Western City Schools filed original complaints against the

valuation of the subject properties with the Franlclin County Board of Revision seeking

to increase the subjects' values to reflect the sale prices for each, recorded in August

2006. The property owner filed countercomplaints, seeking to maintain the auditor's

values for the subject parcels. The BOR increased the value of parcel #040-009319

and decreased the value of parcel #570-243347, and the board of education,

dissatisfied with such..decisions, appealed the determinations to this board.

In Cleveland Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision (1994), 68

Ohio St.3d 336, 337, and SpYingfi'eld Local Bd. ofEdn. v. Summit Cty. Bd. of Revision

(1994), 68 Ohio St.3d 493, 495, the Supreme Court held that an appealing party has

the burden of coming forward with evidence in support of the value which it has

claimed. Once competent and probative evidence of true value has been presented, the

opposing parties then have a corresponding burden of providing evidence which rebuts

appPllanfi's evidence of value. Id.; Mentor Exempted Village Bd. of Edn. v. Lake Cty.

Bd. ofRevision (1988), 37 Ohio St.3d 318, 319.

R.C. 5713.03 provides, in pertinent part, that:

"In determining the true value of any tract, lot, or parcel ofreal estate under this section, if such tract, lot, or parcelhas been the subject of an arm's length sale between awilling seller and a willing buyer within a reasonable

3 -7-

length of time, either before or after the tax lien date, theauditor shall consider the sale price *** to be the truevalue for taxation purposes."

The Ohio Supreme Court has consistently held that the best evidence of

true value of real property is an actual, recent, arm's-length sale. Specifically, in

Berea City School Dist. Bd of Edn. v. Cuyahoga Cty. Bd of Revision, 106 Ohio St.3d

269, 2005-Ohio-4979, the Supreme Court held "that when the property has been the

subject of a recent arm's-length sale between a willing seller and a willing buyer, the

sale price of the property shall be `the true value for taxation purposes.' R.C. 5713.03."

Berea, at 5. See, also, Zazworsky v. Licking Cty. Bd. ofRevision (1991), 61 Ohio St.3d

604; Hilliard City School Bd. of Edn. v. Franklin Cty. Bd of Revision (1990), 53 Ohio

St.3 d 57; State ex Yel. Park Investment Co. v. Bd. of Tax Appeals (1964), 175 Ohio St.

410. An arm's-length sale is characterized by these elements: it is voluntary, i.e.,

without compulsion or duress; it generally takes place in an open market; and the

parties act in their own self-interest." Walters v. Knox County Bd of Revision (1988),

47 Ohio St.3d 23.

It is also well established that when a sale occurs, there is a rebuttable

presumption the sale price reflects the 'true value of the property in question.

Consequently, a rebuttabie presumption extends to all of the requirernents whALh

characterize true value. It is then the burden of the party who claims that a sale is

other than arm's length to counter such presumption. However, the burden of

persuasion does not change, as it is still on the appealing party to establish, through the

presentation of competent and probative evidence, a different value than that found by

4-8-

the board of revision. See Cincinnati Bd of Edn. v. Hamilton Cty. Bd of Revision

(1997), 78 Ohio St.3d 325; Bd of Edn. of the Columbus City School Dist. v. Franklin

Cty. Bd ofRevision (Nov. 28, 1997), BTA No. 1996-S-93, unreported.

At the outset, we acknowledge that there were two sales of the subject

property, both occurring within one year of the 2006 tax lien date, i.e., April 2005 and

August 2006. When considering multiple sales of the same property, generally, the

sale occurring closest to tax lien date is considered the most reflective of its value. See

HIN, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 124 Ohio St.3d 481, 2010-Ohio-687.

While there is nothing in the record to confirm the date on which the sale closed in

April 2005, appellant's counsel represents that it occurred 258 days before the 2006

tax lien date, while the August 2006 sale occurred 212 days after the 2006 tax lien

date. Regardless, the 2006 sale occurred closest to the 2007 and 2008 tax lien dates,

and, as the sale dates as represented by the BOE have not been disputed, we will

consider the August 2006 sale closest to the 2006 tax lien date as well. .

We have reviewed the evidence of the 2006 sale of the subject

properties, including the deeds and conveyance fee statements, the purchase agreement

and amendments thereto, the Securities and Exchange Commission Form 10-Q, the

nurchaser's statement, the settlement statement and the contract. S.T.s, Ex.7; Exs. A-1 '

G. Based upon our review of such documents, it appears that nine properties were

purchased in a bulk sale, with allocations of the overall purchase price made within the

purchase agreement. Ex. B. The allocated prices, as listed in the agreement, are

5 -9-

reflected in the respective conveyance fee statements relating to the sales of the subject

properties.

It is the property owner's contention that the bulk sale allocated purchase

prices of the subject properties are not reflective of the properties' market values, and,

as such, cannot be utilized as the properties' true values for tax year 2006.

Specifically, in information provided to the BOR, the property owner contends that the

sale in question does not qualify as an arm's-length transaction because it was a bulk

sale with allocated prices among znany properties between related parties and the sale

included items other than real property.

The Supreme Court has recently considered the use of an allocated bulk

sale price valuing property for real property tax purposes. In FirstCal Industrial 2

Acquisitions, LLC v. Franklin Cty. Bd of Revision, 125 Ohio St.3d 485, 2010-Ohio-

1921, the court held:

"We have held that the `initial burden on a partypresenting evidence of a sale is not a heavy one, where thesale on its face appears to be recent and at arm's length.'Cummins Property Servs., 117 Ohio St.3d 516, 2008 Ohio1473 ***. Indeed, our cases acknowledge that the schoolboard, as the proponent of using a sale price to value realproperty, typically makes a prima facie case when itpresents a recent conveyance-fee statement along witha deed to evidence the sale and the price. Olentangy LocalSchools Bd. of Edn. v. Delaware Cty. Bd. of Revision, 125-Ohio St.3d 103, 2010 Ohio 1040, 926 N.E.2d 302, P 14,citing Worthington City Schools Bd. of Edn. v. FranklinCty. Bd. of Revision, 124 Ohio St.3d 27, 2009 Ohio 5932

"Moreover, the basic documentation of a sale i_nvokes a`rebuttable presumption' that `the sale has met all therequirements that characterize true value.' Cincinnati

6 -10-

School Dist. Bd. of Edn. v. Hamilton Cty. Bd. of Revision(1997), 78 Ohio St.3d 325, 327, 1997 Ohio 212 ***.

"Accordingly, the burden lay on FirstCal in this case, asthe opponent of using the reported sale price, todemonstrate why it did not properly reflect the aggregatetrue value of the parcels. FirstCal, as purchaser of theproperty, performed the allocation to Franklin County inthe first instance, and FirstCal possesses the informationnecessary to demonstrate its proper relationship to thevalue of the Franklin County parcels.

cc* **

"*** But must the school boards in the present caselikewise demonstrate the propriety of 'the allocationthat was made on the conveyance-fee statement itself? Weanswer the question in the negative because the allocationof the sale price on the Franklin County, conveyance-feestatement was performed by the opponent of using theallocated sale price, FirstCal, as purchaser of the parcelswithin the county.

«* **

"We have stated that an important purpose of the statutoryscheme is `to provide the auditor the necessaryinformation to determine the true value of property basedon a property sale in accordance with R.C. 5713.03.' IITN,

L.L.C., 124 Ohio St.3d 481, 2010 Ohio 687 ***. If theallocation that FirstCal itself reported does not properlyreflect the aggregate value of the parcels, it is FirstCal'sburden to show that it does not. Indeed, FirstCal is in theunique position of knowing how the allocation was madeand is best able to access the pertinent documentation." Id.at ¶14-¶28.

See, also, Realty Income Corp., a Maryland Corp. as of 1/1/05 Madison (Ridge) LLP,

a Georgia LLP, et al and Rite Aid of Ohio, Inc. v. Lake Cty. Bd. of Revision (Mar. 18,

2008), BTA No. 2006-M-786, 787, unreported, remanded on appeal to implement

settlement, 10/14/08 Case Announcements, Sup. Ct. No. 2008-709.

7 -11-

Just as in Realty Income Corp., supra, our conclusion here is the same:

"Given this evidence, and given the law regarding the application of Berea to bulk

sales, this board concludes that the sale price is competent and probative evidence of

value." Id. at 11. The property owner has provided no evidence or testimony with

regard to the subject sale to demonstrate why the sale prices, as allocated to each

property and set forth on the subject conveyance fee statements, are not reflective of

the subjects' true values.

The property owner also disputes the arm's-length nature of the subject

sale, claiming that the buyer and seller were related. Specifically, in U-STORE-IT

Trust's United States Securities and Exchange Commission Form 10-Q, filed for the

quarterly period ended March 31, 2007, U-STORE-It's purchase is described, as

follows:

"The Company, in accordance with a contract signed onApril 3, 2006, acquired nine self-storage facilities fromJernigan Property Group on July 27, 2006 forconsideration of approximately $45.3 million. OurPresident and Chief Executive Officer, Dean Jemigan,serves as President of Jernigan Property Group and has a20% beneficial interest in one self-storage facility partiallyowned by Jernigan Property Group and related companiesand partnerships. Mr. Jernigan has agreed that he will notexpand his interest, ownership or activity in the selfstoragP business. G;vPn Mr. Jernigan's appointment as aTrustee and the President and Chief Executive Officer ofthe Company on April 24, 2006, this transaction wassubject to review and final approval by a majority of theindependent members of the Company's Board ofTrustees. Mr. Jemigan has discontinued all involvementin the day-to-day management or operation of the JerniganProperty Group." Ex. A at 12.

8 ^ -12-

Based upon the foregoing, this board finds that JV1x. Jernigan's

relationship to the seller was limited in scope, constituting a minimal interest in one of

the nine storage facilities purchased. Further, the sales contract in question was

entered into on April 3, 2006, prior to Mx. Jernigan beginning his tenure with the buyer

on April 24, 2006. Additionally, the sale transaction was reviewed and approved by a

majority of the independent members of the buyer's board of trustees.

It is the burden of the party claiming that the sale of the subject

properties was other than arm's length to demonstrate how the sale does not qualify as

an arm's-length transaction. No evidence or testimony was presented before this

board; our review of the record before the board of revision provides little support for

the property owner's position that ]V1r. Jernigan's relationship to both the buyer and

seller in the transaction is of such a nature as to render the transaction non arm's

length. At best, the record is unclear as to the circumstances of the sale in question

and 7vlr. Jernigan's role in that transaction; limited testimony from the buyer's

representative did little to establish Mx. Jernigan's role, both before, during -and after

the transaction. Thus, although Mr. Jernigan had some relationship to both the buyer

and seller, based upon the record before us, we do not find such relationship

compromised irie arrn's-length nature of the sale transaction under consideration.

Finally, the property owner contends that the sale prices are not

reflective of the value of the subject real property because such prices also included the

value of non-realty items, including personal property and a non-compete clause.

Although U-Store It's representative confirmed that personal property was included in

9-13-

the sale, she also confirmed that there was no indication of its value on the conveyance

fee statement filed with the county. S.T., Digital Hearing Recording. When an amount

attributable to personal property has not been listed on the conveyance fee statement,

the courts have held that "the value of property should not be adjusted when, inter alia,

`the taxpayer's conveyance fee statement to the auditor denied that the price included

payment for any tangible or intangible personal property' and `[t]here was no evidence

from which any reasonable person could value the alleged non-realty aspects of the

sales transaction."' Little Silver, L.L.C. v.. Rhodes, Hamilton App. Nos. C-070715, et

al., 2008-Ohio-3325, at ¶25 quoting Harvard Refuse, Inc. v. Cuyahoga Cty. Bd of

Revision (Feb. 5, 1987), Cuyahoga App. Nos. 51634 through 51677, unreported. See,

also, W. Chester Pointe Properties, L.L.C. v. Butler Cty. Bd of Revision, Butler App.

No. CA2009-04-100, 2009-Ohio-5809 (referring to St. Bernard Self-Stonage LLC v.

Hamilton Cty. Bd of Revision,115 Ohio St.3d 365, 2007-Ohio-5249, and Buck

Storage, Inc. v. Clark Cty. Bd of Revision,172 Ohio App.3d 250, 2007-Ohio-2964,

and concluding evidence was insufficient to demonstrate transfer of personalty in sale,

therefore requiring reliance upon the sale price to establish the value of the realty); Bd

of Edn. of the Northridge Local Schools v. Montgomery Cty. Bd. of Revision(Oct. 26,

2010), BTA No. 2008-:n.-2000, unreporLed. See, also,^.^IilliaYd Ci.t," Schools Bd. ofEdn.

v. Franklin Cty. Bd. of Revision, 128 Ohio St.3d 565, 2011-Ohio-2258; Olentangy

Local Schools Bd of Edn. v. Delaware Cty. Bd of Revision, 125 Ohio St.3 d 103, 20 10-

Ohio-1040.

10-14-

Without anything in the record to indicate that the allocated bulk sale

price was not indicative of market value, we find that the price paid by the property

owner for the subject properties represents the true value of the properties for tax year

2006. Further, we find the 2006 sale of the subject properties to be sufficiently recent2

to constitute the best evidence of the subject properties' values for 2007 and 2008.

Accordingly, the values3 of the subject properties for tax years 2006-2008 shall be

based upon the listed sale prices of the real estate, specifically:

#040-009319TRUE VALUE TAXABLE VALUE

Land $ 1,054,000 $ 368,900Bldg 5,146,000 1,801,100Total $ 6,200,000 $ 2,170,000


Land $ 1,000,500 $ 350,170Bldg 3,349,500 1,172,330Total $ 4,350,0.00 $ 1,522,500

2 We acknowledge that whether a sale is sufficiently "recent" to or too "remote" from tax lien date toqualify as the "best evidence" of value is not decided exclusively upon temporal proximity.Worthington City Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision, 124 Ohio St.3d 27,2009-Ohio-

5932, at 132. However, it remains the burden of a party contesting the utility of a sale to rebut thepresumptions to be accorded it. See, e.g., Cincinnati Bd. of Edn. v. Hamilton Cty. Bd. of Revision

(1997), 78 OhioSt.3d 325; South Euclid-Lyndhurst City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd.

of Revision(Nlay 13, 2005), BTA No. 2UV^3- 7-1^4i, uiuepor^°d, at 9. Fyirl^+nf from numerous

Supreme Court decisions, the mere passage of some months between sale and tax lien dates is not

sufficient cause to disregard a sale. See, e.g., HK New Plan Exchange Property Owner II, L.L.C. v.

Hamilton Cty. Bd. ofRevision, 122 Ohio St.3d 438, 2009-Ohio-3546 (value based upon sale occurring

twenty-four months prior to tax lien date); Lakota Local School Dist. Bd of Edn. v. Butler Cty. Bd. of

Revision, 108 Ohio St.3d 310, 2006-Ohio-1059 (reversing this board's decision and ordering that theproperty's taxable value as of January 1, 2002 be based upon its sale which occurred in October 2003,

twenty-two months after tax lien date).3 The values for the subjects' land and building have been adjusted to reflect the same ratiospreviously adopted by the county auditor. Further, pursuant to Board of Tax Appeals' practice, whennecessary, the values for each of the parcels were rounded to the nearest ten dollar value.

11 -15-

I .. . ,.

Thus, it is the decision and order of the Board of Tax Appeals that the

Franklin County Auditor shall list and assess the subject properties in conformity with

this decision.

I hereby certify the foregoing to be a true andcomplete copy of the action taken by theBoard of Tax Appeals of the State of Ohio andentered upon its journal this day, with respectto the captioned matter.

eC^^/ y <

Sally F. Van Meter, Board Secretary

12 -16-

EXHIBIT "B"

ASSIGNMENT OF ERRORS


The Board of Tax Appeals finding that a sale reported to the Securities and ExchangeCommission as a related party transfer could be used to determine the value of the real estate

is unreasonable and unlawful.


The Board of Tax Appeals decision to use a sale that was not arm's length to determine valuewhen the evidence showed that the transaction was not an arm's length transaction is

unreasonable and unlawful.


The Board of Tax Appeals decision and order ignoring evidence of a prior arm's length saleof the property is unreasonable and unlawful.


The Board of Tax Appeals decision and order rejecting the unrebutted evidence of the

Appellant is unreasonable and unlawful.


The Board of Tax Appeals' decision and order overturning the Board of Revision's decision

in unreasonable and unlawful.


The Board of Tax Appeals decision and order fails to examine whether an allocation of valueto real estate can be made using the sale and as a result it is unreasonable and unlawful.

-17-

CERTIFICATE OF SERVICE

This is to certify that a copy of the foregoing NOTICE OF APPEAL was mailed via

Certified United States Mail, postage prepaid, to Bill Stehle, Assistant Prosecuting Attorney,

373 South High Street, 14' Floor, Columbus, OH 43215, attorney for Appellees, Franklin

County Board of Revision and County Auditor; Kelley A. Gorry, Rich & Gillis Law Group,

LLC, 6400 Riverside Drive, Suite D, Dublin, OH 43017, Attorney for Appellee Board of

Education of the South-Western City. Schools; and Mike DeWine, Ohio Attorney General,

State Office Tower, 17th Floor, 30 East Broad Street, Columbus, Ohio 43215-3428, Attorney

for Appellee Tax Commissioner of the State of Ohio on this day of June, 2012.

Todd W. Sleggs

T3018-06S:\W PDocs\SCT\30 L 8APP.doc

-18-

. ^I

OHIO BOARD OF TAX APPEALS

Board of Education of the South-Western City Schools,

vs.

Appellant,

Franklin County Board of Revision,Franlclin County Auditor, and U-Store-It, LP,

APPEARANCES:Appellees

For the Appellant, -Bd. of Edn.

For the CountyAppellees

CASE NOS. 2009-A-1070,2009-A-1071

(REAL PROPERTY TAX)

DECISION AND ORDER

MAy 17 2012

Rich & Gillis Law Group, LLCKelley A. Gorry6400 Riverside Drive, Suite'DDublin, Ohio 43017

- Ron O'BrienFranklin County Prosecuting AttorneyPaul`M. StickelAssistant Prosecuting Attorney373 South High Street, 14°i FloorColumbus, Ohio 43215

For the Appellee - Sleggs, Danzinger & Gill Co., LPA

Property Owner Todd W. Sleggs820 West Superior Ave., 7"' FloorCleveland, Ohio 44113

Entered MAY 15 2012,

Ms. Margulies, Mr. Johrendt, and Mr. Williamson concur.

This cause and matter came on to be considered by the Board of Tax

Appeals upon two notices of appeal filed herein by the above-named appellant from

two decisions of the Franlclin County Board of Revision. In said decisions, the board

of revision determined the taxable value of the subject properties for tax years 2006,

2007, and 2008.

19- I

^:.

The matter was submitted to the Board of Tax Appeals upon the notices

of appeal, the statutory transcriptsl certified to this board by the county board of

revision, and the briefs filed by counsel to the appellant and the appellee property

owner. No hearing was held before this board, as all parties hereto waived their right

to appear.

The subject real property, specifically two parcels, #040-009319 and

#570-243347, located in Franklin County„ Ohio and the city of Grove City/South-

Western City School District and the city of Columbus/South-Western City School

District taxing districts, were sold as part of a bulk transaction. Parcel #040-009319

consists of approximately 8.557 acres, and parcel #570-243347 consists of

approximately 5.748 acres; located on each parcel are self-storage facilities. The value

of parcel #040-009319 was increased from that which the auditor previously

determined and the value of parcel #570-243347 was decreased from that which the

auditor previously determined.

The appellant board of education contends that the board of revision has

undervalued the parcels in question by not relying upon the sale of the subject

properties, as recorded in August 2006, from JPG 3300 Southwest, LLC to U-STORE-

IT, LP for $6,200,000 (parcel #040-0093 i.9) and ^PG 54i i West Broad, LLC to ^T=

STORE-IT, LP for $4,350,000 (parcel #570-243347), as an indicator of the parcels'

values.

1 We acknowledge that the digital hearing recording from the BOR proceedings in BTA No. 2009-A-1161 has also been reviewed herein, pursuant to the property owner's request at the BOR to so includesuch record; we find such additional record relevant to the instant matter as it relates to anotherproperty within the bulk sale transaction under consideration.

-20-2

(

Since the hearing before this board was waived, it is necessary to review

the record established before the board of revision to assist in our determination of

value for the subject property. See Black v. Bd. of Revision (1985), 16 Ohio St.3d 11;

Columbus Bd of Edn. v. Franklin Cty. Bd of Revision, 76 Ohio St.3d 13. The Board

of Education of the South-Western City Schools filed original coinplaints against the

valuation of the subject properties with the Franlclin County Board of Revision seeking

to increase the subjects' values to reflect the sale prices for each, recorded in August

2006. The property owner filed countercomplaints, seeking to maintain the auditor's

values for the subject parcels. The BOR increased the value of parcel #040-009319

and decreased the value of parcel #570-243347, and the board of education,

dissatisfied with such decisions, appealed the determinations to this board.

In Cleveland Bd of Edn. v. Cuyahoga Cty. Bd of Revision (1994), 68

Ohio St.3d 336, 337, and Springfield Local Bd of Edn. v. Summit Cty. Bd of Revision

(1994), 68 Ohio St.3d 493, 495, the Supreme Court held that an appealing party has

the burden of coming forward with evidence in support of the value which it has

claimed. Once competent and probative evidence of true value has been presented, the

opposing parties then have a corresponding burden of providing evidence which rebuts

appel l ant's evidence of value. Id.; Mentor Exempted Village Bd. of Edn. v. Lake Cty.

Bd of Revision (1988), 37 Ohio St.3d 318, 319.

R.C. 5713.03 provides, in pertinent part, that:

"In determining the true value of any tract, lot, or parcel ofreal estate under this section, if such tract, lot, or parcelhas been the subject of an arm's length sale between awilling seller and a willing buyer within a reasonable

3 -21-

length of time, either before or after the tax lien date, theauditor shall consider the sale price *** to be the truevalue for taxation purposes."

The Ohio Supreme Court has consistently held that the best evidence of

true value of real property is an actual, recent, arm's-length sale. Specifically, in

Berea City School Dist. Bd of Edn. v. Cuyahoga Cty. Bd of Revision, 106 Ohio St.3d

269, 2005-Ohio-4979, the Supreme Court held "that when the property has been the

subject of a recent arm's-length sale between a willing seller and a willing buyer, the

sale price of the property shall be `the true value for taxation purposes.' R.C. 5713.03."

Berea, at 5. See, also, Zazworsky v. Licking Cty. Bd of Revision (1991), 61 Ohio St.3d

604; Hilliard City School Bd. of Edn. v. Franklin Cty. Bd of Revision (1990), 53 Ohio

St.3d 57; State ex rel. Park Investment Co. v. Bd of Tax Appeals (1964), 175 Ohio St.

410. An arm's-length sale is characterized by these elements: it is voluntary, i.e.,

without compulsion or duress; it generally takes place in an open market; and the

parties act in their own self-interest." Walters v. Knox County Bd of Revision (1988),

47 Ohio St.3d 23.

It is also well established that when a sale occurs, there is a rebuttable

presumption the sale price reflects the true value of the property in question.

tiy, a rebu^abie presurx'xpt;on extend5 to all of the requirements whichConsequen

characterize true value. It is then the burden of the party who claims that a sale is

other than arm's length to counter such presumption. However, the burden of

persuasion does not change, as it is still on the appealing party to establish, through the

presentation of competent and probative evidence, a different value than that found by

° -22-4

( f

the board of revision. See Cincinnati Bd. of Edn. v. Hamilton Cty. Bd of Revision

(1997), 78 Ohio St.3d 325; Bd. of Edn. of the Columbus City School Dist. v. Franklin

Cty. Bd of Revision (Nov. 28, 1997), BTA No. 1996-S-93, unreported.

At the outset, we acknowledge that there were two sales of the subject

property, both occurring within one year of the 2006 tax lien date, i.e., April 2005 and

August 2006. When considering multiple sales of the same property, generally, the

sale occurring closest to tax lien date is considered the most reflective of its value. See

HIN, L.L.C. v. Cuyahoga Cty. Bd of Revision, 124 Ohio St.3d 481, 2010-Ohio-687.

While there is nothing in the record to confirm the date on which the sale closed in

April 2005, appellant's counsel represents that it occurred 258 days before the 2006

tax lien date, while the August 2006 sale occurred 212 days after the 2006 tax lien

date. Regardless, the 2006 sale occurred closest to the 2007 and 2008 tax lien dates,

and, as the sale dates as represented by the BOE have not been disputed, we will

consider the August 2006 sale closest to the 2006 tax lien date as well.

We have reviewed the evidence of the 2006 sale of the subject

properties, including the deeds and conveyance fee statements, the purchase agreement

and amendments thereto, the Securities and Exchange Commission Form 10-Q, the

purchaser's statement, the settlement statement and the contract. S.T.s, Ex.7; Exs. A-

G. Based upon our review of such documents, it appears that nine properties were

purchased in a bulk sale, with allocations of the overall purchase price made within the

purchase agreement. Ex. B. The allocated prices, as listed in the -agreement, are

5 -23-

reflected in the respective conveyance fee statements relating to the sales of the subject

properties.

It is the property owner's contention that the bulk sale allocated purchase

prices of the subject properties are not reflective of the properties' market values, and,

as such, cannot be utilized as the properties' true values for tax year 2006.

Specifically, in information provided to the BOR, the property owner contends that the

sale in question does not qualify as an arm's-length transaction because it was a bulk

sale. with allocated prices among many properties between related parties and the sale

included items other than real property.

The Supreme Court has recently considered the use of an allocated bulk

sale price valuing property for real property tax purposes. In FirstCal Industrial 2

Acquisitions, LLC v. Franklin Cty. Bd of Revision, 125 Ohio St.3d 485, 2010-Ohio-

1921, the court held:

"We have held that the `initial burden on a partypresenting evidence of a sale is not a heavy one, where thesale on its face appears to be recent and at arm's length.'

Cummins Property Servs., 117 Ohio St.3d 516, 2008 Ohio1473 ***. Indeed, our cases acknowledge that the schoolboard, as the proponent of using a sale price to value realproperty, typically makes a prima facie case when itpresents a recent conveyance-fee statement along witha deed to evidence the saie and t he price. I.S.1lentangy Local

Schools Bd. of Edn. v. Delaware Cty. Bd. of Revision, 125

Ohio St.3d 103, 2010 Ohio 1040, 926 N.E.2d 302, P 14,

citing Worthington City Schools Bd. of Edn. v. Franklin

Cty. Bd. of Revision, 124 Ohio St.3d 27, 2009 Ohio 5932

"Moreover, the basic documentation of a sale invokes a`rebuttable presumption' that `the sale has met all therequirements that characterize true value.' Cincinnati

-24-6

School Dist. Bd. of Edn. v. Hamilton Cty. Bd. of Revision(1997), 78 Ohio St.3d 325, 327, 1997 Ohio 212 ***.

"Accordingly, the burden lay on FirstCal in this case, asthe opponent of using the reported sale price, todemonstrate why it did not properly reflect the aggregatetrue value of the parcels. FirstCal, as purchaser of theproperty, performed the allocation to Franklin County inthe first instance, and FirstCal possesses the informationnecessary to demonstrate its proper relationship to thevalue of the Franklin County parcels.

<G* * *

But must the school boards in the present caselikewise demonstrate the propriety of the allocationthat was made on the conveyance-fee statement itself? Weanswer the question in the negative because the allocationof the sale price on the Franklin County conveyance-feestatement was performed by the opponent of using theallocated sale price, FirstCal, as purchaser of the parcelswithin the county.

GC***

"We have stated that an important purpose of the statutoryscheme is `to provide the auditor the necessaryinformation to determine the true value of property basedon a property sale in accordance with R.C. 5713.03.' HIIV,L.L.C., 124 Ohio St.3d 481, 2010 Ohio 687 ***. If theallocation that FirstCal itself reported does not properlyreflect the aggregate value of the parcels, it is FirstCal'sburden to show that it does not. Indeed, FirstCal is in theunique position of knowing how the allocation was madeand is hest able to access the pertinent docume.;ntation." Td,at ¶14-¶28.

See, also, Realty Income Corp., a Maryland Corp. as of 1/1/05 Madison (Ridge) LLP,

a Georgia LLP, et al and Rite Aid of Ohio, Inc. v. Lake Cty. Bd. of Revision (Mar. 18,

2008), BTA No. 2006-M-786, 787, unreported, remanded on appeal to implement

settlement, 10/14/08 Case Announcements, Sup. Ct. No. 2008-709.

7 -25-

Just as in Realty Income Corp., supra, our conclusion here is the same:

"Given this evidence, and given the law regarding the application of Berea to bulk

sales, this board concludes that the sale price is competent and probative evidence of

value." Id. at 11. The property owner has provided no evidence or testimony with

regard to the subject sale to demonstrate why the sale prices, as allocated to each

property and set forth on the subject conveyance fee statements, are not reflective of

the subjects' true values.

The property owner also disputes the arm's-length nature of.the subject

sale, claiming that the buyer and seller were related. Specifically, in U-STORE-IT

Trust's United States Securities and Exchange Commission Form 10-Q, filed for the

quarterly period ended March 31, 2007, U-STORE-It's purchase is described, as

follows:

"The Company, in accordance with a contract signed onApril 3, 2006, acquired nine self-storage facilities fromJernigan Property Group on July 27, 2006 forco_n_side_ration of approximatel.y $45.3 mi-lli-on. OurPresident and Chief Executive Officer, Dean Jemigan,serves as President of Jemigan Property Group and has a20% beneficial interest in one self-storage facility partiallyowned by Jemigan Property Group and related companiesand partnerships. Mr. Jernigan has agreed that he will notexpand his interest, ownership or activity in the self-storage business. Given Mr. Jernigan's appointment as aTrustee and the President and Chief Executive Officer ofthe Company on April 24, 2006, this transaction wassubject to review and final approval by a majority of theindependent members of the Company's Board ofTrustees. Mr. Jernigan has discontinued all involvementin the day-to-day management or operation of the JerniganProperty Group." Ex. A at 12.

-26-8

. f

Based upon the foregoing, this board finds that W. Jernigan's

relationship to the seller was limited in scope, constituting a minimal interest in one of

the nine storage facilities purchased. Further, the sales contract in question was

entered into on April 3, 2006, prior to Mr. Jernigan beginning his tenure with the buyer

on April 24, 2006. Additionally, the sale transaction was reviewed and approved by a

majority of the independent members of the buyer's board of trustees.

It is the burden of the party claiming that the sale of the subject

properties was other than arm's length to demonstrate how the sale does not qualify as

an arm's-length transaction. No evidence or testimony was presented before this

board; our review of the record before the board of revision provides little support for

the property owner's position that Mr. Jernigan's relationship to both the buyer and

seller in the transaction is of such a nature as to render the transaction non arm's

length. At best, the record is unclear as to the circumstances of the sale in question

and Mr. Jernigan's role in that transaction; limited testimony from the buyer's

representative did little to establish Mr. Jemigan's role, both before, during and after

the transaction. Thus, although Mr. Jernigan had some relationship to both the buyer

and seller, based upon the record before us, we do not find such relationship

' ^, ^ , ,t ^.^ ^+L ,rt + . + a ,^ +:,,^•iou^.pro^r^lsîU L^ê CArr^l .J-len^Lll 11GI.LUIe ol L11G JQ1G L1Cl11salîLlo11 1.ir1U^"ir lo11s1UelaL1VA1.

Finally, the property owner contends that the sale prices are not

reflective of the value of the subject real property because such prices also included the

value of non-realty items, including personal property and a non-compete clause.

Although U-Store It's representative confirmed that personal property was included in

9 -27-

the sale, she also confirmed that there was no indication of its value on the conveyance

fee statement filed with the county. S.T., Digital Hearing Recording. When an amount

attributable to personal property has not been listed on the conveyance fee statement,

the courts have held that "the value of property should not be adjusted when, inter alia,

`the taxpayer's conveyance fee statement to the auditor denied that the price included

payment for any tangible or intangible personal property' and `[t]here was no evidence

from which any reasonable person could value the alleged non-realty aspects of the

sales transaction."' Little Silver, L.L.C. v. Rhodes, Hamilton App. Nos. C-070715, et

al., 2008-Ohio-3325, at ¶25 quoting Harvard Refuse, Inc. v. Cuyahoga Cty. Bd. of

Revision (Feb. 5, 1987), Cuyahoga App. Nos. 51634 through 51677, unreported. See,

also, W. Chester Pointe Properties, L.L.C. v. Butler Cty. Bd. of Revision, Butler App.

No. CA2009-04-100, 2009-Ohio-5809 (referring to St. Bernard Self-Storage LLC v.

Hamilton Cty. Bd. of Revision, 115 Ohio St.3d 365, 2007-Ohio-5249, and Buck

Storage, Inc. v. Clark Cty. Bd. of Revision, 172 Ohio App.3d 250, 2007-Ohio-2964,

and concluding evidence was insufficient to demonstrate transfer of personalty in sale,

therefore requiring reliance upon the sale price to establish the value of the realty); Bd

of Edn. of the Northridge Local Schools v. Montgomery Cty. Bd. of Revision (Oct. 26,

2010), BTA No. 2008-K-2000, unreported. See, also, Hilliard City Schools Bd of Bdn.

v. Franklin Cty. Bd. of Revision, 128 Ohio St.3d 565, 2011-Ohio-2258; Olentangy

Local Schools Bd of Edn. v. Delaware Cty. Bd of Revision, 125 Ohio St.3d 103, 2010-

Ohio-1040.

-28-10

Without anything in the record to indicate that the allocated bulk sale

price was not indicative of market value, we find that the price paid by the property

owner for the subject properties represents the true value of the properties for tax year

2006. Further, we find the 2006 sale of the subject properties to be sufficiently recent2

to constitute the best evidence of the subject properties' values for 2007 and 2008.

Accordingly, the values3 of the subject properties for tax years 2006-2008 shall be

based upon the listed sale prices of the real estate, specifically:


Land $ 1,054,000 $ 368,900Bldg 5,146,000 1,801,100Total $ 6,200,000 $ 2,170,000


Land $ 1,000,500 $ 350,170Bldg 3,349,500 1,172,330Total $ 4,350,0.00 $ 1,522,500

2 We acknowledge that whether a sale is sufficiently "recent" to or too "remote" from tax lien date toqualify as the "best evidence" of value is not decided exclusively upon temporal proximity.Worthington City Schools Bd of Edn. v. Franklin Cty. Bd. of Revision, 124 Ohio St.3d 27,2009-Ohio-

5932, at ¶32. However, it remains the burden of a party contesting the utility of a sale to rebut thepresumptions to be accorded it. See, e.g., Cincinnati Bd. of Edn. v. Hamilton Cty. Bd. of Revision

(1997), 78 OhioSt.3d 325; South Euclid-Lyndhurst City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd.

of Revision (May 13, 2005), BTA No. 2003-G-1041, unreported, at 9. Evident from numerousSupreme Court decisions, the mere passage of some months between sale and tax lien dates is notsufficient cause to disregard a sale. See, e.g., HK New Plan Exchange Property Owner II, L.L.C. v.

Hamilton Cty. Bd. of Revision, 122 Ohio St.3d 438, 2009-Ohio-3546 (value based upon sale occurring

twenty-four months prior to tax lien date); Lakota Local School Dist. Bd. of Edn. v. Butler Cty. Bd of

Revision, 108 Ohio St.3d 310, 2006-Ohio-1059 (reversing this board's decision and ordering that theproperty's taxable value as of January 1, 2002 be based,upon its sale which occurred in October 2003,

twenty-two months after tax lien date).3 The values for the subjects' land and building have been adjusted to reflect the same ratiospreviously adopted by the county auditor. Further, pursuani to Board of Tax Appeals' practice, whennecessary, the values for each of the parcels were rounded to the nearest ten dollar value.

11 -29-

Thus, it is the decision and order of the Board of Tax Appeals that the

Franklin County Auditor shall list and assess the subject properties in conformity with

this decision.

I hereby certify the foregoing to be a true andcomplete copy of the action taken by theBoard of Tax Appeals of the State of Ohio andentered upon its journal this day, with respectto the captioned matter.

Sally F. Van Meter, Board Secretary

-30-12

Board of RevisionFranklin County. ® Ohio

JUNE 2, 2009

U-STORE-IT j uK

C/O MICHAEL DONOHUEPROPERTY TAX ADVISORSP.O. BOX 19156ALEXANDRIA, VA 22320

Complaint No: BOR 06-900938 A&BParcel: 040-009319Hearing Date: NOVEMBER 26, 2007

Paula BrooksCommissioner

Edward J. LeonardTreasurer

Joseph W. TestaAuditor

Victoria K. AnthonyClerk

After Consideration of the above Complaint, it is the decision ofthe Board of Revision that a increase•of valuation in the amountof $983,500 is.warranted. This change is effective as of tax liendate JANUARY 1, 2006, 2007 and 2008.

The property's new fair market value is $4,483,500. The newtaxable value is 35% or $1,569,230.

You may appeal this decision by filing the proper notice ofappeal with either the Ohio Board of Tax Appeals, (O.R.C.5717.01), or with the Court of Common Pleas, (O.R.C. 5717.05).Such appeals must be filed within 30 days after the mailing of

this notice.

Please call (614) 462-3913 if we can be of further assistance.

Sincerely,

L /" ^-"'4^^• Y ./^"

Victoria K. Anthony, ClerkFranklin County Board of Revision

VKA/bnCC: JEFFREY A. RICH, ESQ

TODD SLEGk-7S, ESQ.

REFUND POLICYTo ensure the accuracy of all refunds, the Board of Revision REQUIRES acopy of the cancelled check(s) for each tax year collection period underproperty that transferred during or after the tax year under appeal.

.^^373 S. High Street • Columbus, Ohio 43215-6310 •(614) 462-3913 • FAX (614) 462-6252 ^^- 31

Board of RevisionFrankli^.1 County ® Ohio

JUNE 2, 2009

U-STORE-IT, LP JUN 0 .g 2009C/O'MICHAEL DONOHUEPROPERTY TAX ADVISORSP.O. BOX 19156ALEXANDRIA, VA 22320

Complaint No: BOR 06-900937 A&BParcel: 570-243347Hearing Date: NOVEMBER 26, 2007

Paula BrooksCommissioner



VicEoria K. AnthonyClerk

After Consideration of the above Complaint,.it is the decision ofthe.Board of Revision that a decrease of valuation in the amountof $44,500 is warranted. This change is effective as of tax lien

date JANUARY 1, 2006 and 2007.

The property's new fair market value is $2,715,500. The newtaxable value is 35% or $950,430.


this notice.

Please call (614) 462-3913 if.we can be of further assistance.

Sincerely,

^^^444 YYY


VKA/bnrr. TEFFRFV A. RTCTi ESQ .

TODD SLEGGS, ESQ.


^373 S. High Street • Columbus, Ohio 43215-6310 •(614) 462 -3913 • FAX (614) 462-6252 -32- /

Soard of RevisionFrariklin County ® Ohio

JUNE 2, 2009Paula BrooksCommissioner


U-STORE-IT, LPC/0 MICHAEL DONOHUEPROPERTY TAX ADVISORSP.O. BOX 19156ALEXANDRIA, VA 22320

Complaint No: BOR 06-900937Parcel: 570-243347Hearing Date: NOVEMBER 26,

A&B

2007


Victoria K. AnthonyClerk

After Consideration of the above Complaint, it is the decision ofthe Board'of Revision that a decrease of valuation in the amountof $182,500 is warranted. This change is effective as of tax liendate JANUARY 1, 2008.

The property's new fair market value is $2,715,500. The newtaxable value is 35% or $950,430.


this notice.

Please call (614) 462-3913 if we can be of further assistance.

Sincerely,

.^^^^^^^^3


VKA/bnCC: JEFFREY A. RICH, ESQ.

TODD SLEGGS, ESQ.


373 S. High Street • Columbus, Ohio 43215-6310 ^(614) 462-3913 - FAX (614) 462-6252 - 33 -

Casemaker

Ohio StatutesTitle 57. TAXATIONChapter 5713. ASSESSING REAL ESTATE

Includes a// legislation filed with the Secretary of State's Office through 7/2/2072

§ 5713.03. County auditor to determine taxable value of real property

Page 1 of 1

The county auditor, from the best sources of information available, shall determine, as nearly as practicable, the truevalue of the fee simple estate, as if unencumbered, of each separate tract, lot, or parcel of real property and ofbuildings, structures, and improvements located thereon and the current agricultural use value of land valued for taxpurposes in accordance with section 5713.31 of the Revised Code, in every district, according to the rules prescribed bythis chapter and section 5715.01 of the Revised Code, and in accordance with the uniform rules and methods of valuingand, assessing real property as adopted, prescribed, and promulgated by the tax commissioner. The auditor shalldetermine the taxable value of all real property by reducing its true or'current agricultural use value by the percentageordered by the commissioner. In determining the true value of any tract, lot, or parcel of real estate under this section, ifsuch tract, lot, or parcel has been the subject of an arm's length sale between a willing seller and a willing buyer within areasonable length of time, either before or after the tax lien date, the auditor may consider the sale price of such tract,lot, or parcel to be the true value for taxation purposes. However, the sale price in an arm's length transaction between awilling seller and a willing buyer shall not be considered the true value of the property sold if subsequent to the sale:

(A) The tract, lot, or parcel of real estate loses value due to some casualty;

(B) An improvement is added to the property. Nothing in this section or section 5713.01 of the Revised Code and no ruleadopted under section 5715.01 of the Revised Code shall require the county auditor to change the true value in moneyof any property in any year except a.year in which the tax commissioner is required to determine under section 5715.24of the Revised Code whether the property has been assessed as required by law.

The county auditor shall adopt and use a real property record approved by the commissioner for each tract, lot, or parcelof real property, setting forth the true and taxable value of land and, in the case of land valued in accordance withsection 5713.31 of the Revised Code, its current agricultural use value, the number of acres of arable land, permanentpasture land, woodland, and wasteland in each tract, lot, or parcel. The auditor shall record pertinent information andthe true and taxable value of each building, structure, or improvement to land, which value shall be included as aseparate part of the total value of each tract, lot, or parcel of real property.

Cite as R.C. § 5713.03

History. Amended by 129th General Assembly File No. 127, HB 487, §101.01, eff. 9/10/2012.

Effective Date: 09-27-1983

Related Legislative Provision: See 129th Genera/Assemb/yFi/e No. 127, HB 487, §757.51.

CASEAiAKER :-i 2012 Lawr7ter, LLC. All Rights Reserved. ; P: ivacv ;>=_t;inns : Contact Us ; 1-377-659-0801

-34-

1,++,•.•//[xnxr[xr naaamaliar nc/I[T1nrVia[x^ acr[v^ctalar r1=nT^ Prnnrlr^car-S71 1 11 iR/QPQQ9flYlVY-711 1 1 /1 d1')(11')

Statement ofFinancial Accounting

Standards No. 57

FAS57 Status PageFAS57 Summary

Related Party Disclosures

March 1982

L^

",^^'^-a- Financial Accounting Standards Board

of the Financial Accounting Foundation401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT 06856-5116

-35-

Copyright C 1982 by Financial Accounting Standards Board. All rights reserved. Nopart of this publication may be reproduced, stored in a retrieval system, or transmitted, inany form or by any means, electronic, mechanical, photocopying, recording, orotherwise, without the prior written permission of the Financial Accounting StandardsBoard.

Page 2

-36-

Statement of Financial Accounting Standards No. 57

Related Party Disclosures

March 1982

CONTENTS

Introduction ..................................................................................................Standards of Financial Accounting and Reporting:

Disclosures .............................................................................................Effective Date and Transition .................................................................

Appendix A: Background Information and Basis forConclusions ............................................................................................

Appendix B: Glossary .................................................................................

ParagraphNumbers

,......... I

,..... 2-4.......... 5

,... 6-23........ 24

Page 3

-37-

FAS 57: Related Party Disclosures

FAS 57 Summary

This Statement establishes requirements for related party disclosures. The requirementsof this-Statement are generally consistent with'those in Statement on Auditing Standards No. 6,Related Party Transactions, issued by the Auditing Standards Executive Committee of the

American Institute of Certified Public Accountants.

INTRODUCTION

1. The FASB has been asked to provide guidance on disclosures of transactions between

related parties.1 Examples of related party transactions include transactions between (a) aparent company and its subsidiaries; (b) subsidiaries of a common parent; (c) an enterprise andtrusts for the benefit of employees, such as pension and profit-sharing trusts that are managed byor under the trusteeship of the enterprise`s management; (d) an enterprise and its principal

owners, management, or members of their immediate families; and (e) affiliates. Transactionsbetween related parties commonly occur in the normal course of business. Some exan-ipies ofcommon types of transactions with related parties are: sales, purchases, and transfers of realtyand personal property; services received or furnished, for example, accounting, management,engineering, and legal services; use of property and equipment by lease or otherwise; borrowingsand lendings; guarantees; maintenance of bank balances as compensating balances for the benefitof another; intercompany billings based on allocations of common costs; and filings ofconsolidated tax returns. Transactions between related parties are considered to be related partytransactions even though they may not be given accounting recognition. For exampie, anenterprise may receive services from a related party without charge and not record receipt of the

services.

Copyright © 1982, Financial Accounting Standards Board Not for redistribution

Page 4

-38-

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

Disclosures

2. Financial statements shall include disclosures of material related party transactions, otherthan compensation arrangements, expense allowances, and other similar items in the ordinarycourse of business. However, disclosure of transactions that are eliminated in the preparation ofconsolidated or combined financial statements is not required in those statements.2 The

disclosures shall include:3

a. The nature of the relationship(s) involvedb. A description of the transactions, including transactions to which no amounts or nominal

amounts were ascribed, for each of the periods for which income statements are presented,and such other information deemed necessary to an understanding of the effects of thetransactions on the financial statements

c. The dollar amounts of transactions for each of the periods for which income statements arepresented and the effects of any change in the method of establishing the terms from thatused in the preceding period

d. Amounts due from or to related pa-ties as of the date of each balance sheet presented and, ifnot otherwise apparent, the terms and manner of settlement

3. Transactions involving related parties cannot be presumed to be carried out on anarm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist.Representations about transactions with related parties, if made, shall not imply that the relatedparty transactions were consummated on terms equivalent to those that prevail in arm's-iengthtransactions unless such representations can be substantiated.

4. If the reporting enterprise and one or more other enterprises are under common ownership

or management control and the existence of that control could result in operating results or

financial position of the reporting enterprise significantly different from those that would have

been obtained if the enterprises were autonomous, the nature of the control relationship shall be

disclosed even though there are no transactions between the enterprises.

Effective Date and Transition

5. This statement shall be effective for financial statements for fiscal years ending after June15, 1982. Earlier application is encouraged but is not required.


Page 5

-39-

The provisions of this Statement neednot be applied to immaterial items.

This Statement was adopted by the unanimous vote of the seven members of the FinancialAccounting Standards Board:

Donald J. Kirk, ChairmanFrank E. BlockJohn W. MarchRobert A. MorganDavid MossoRobert T. SprouseRalph E. Walters

Appendix A: BACKGROUND INFORMATION AND BASIS FORCONCLUSIONS

6. This appendix discusses the factors that the Board considered significant in reaching theconclusions in this Statement. Individual Board members gave greater weight to some factorsthan to others.

7. AICPA Statement on Auditing Standards No. 6, Related Party Transactions (SAS 6), andinterpretations of SAS 6 provide guidance on related party financial statement disclosures.However, authoritative auditing pronouncements are intended to direct the activities of auditors,not of reporting enterprises.

8. As part of Accounting Series Release No. 280, General Revisions of Regulation S-X, theSecurities and Exchange Commission integrated the disclosure requirements of SAS 6 pertainingto related party transactions into Regulation S-X. Regulation S-X, however, applies only toenterprises subject to the filing requirements of the SEC.

9. Because guidance for related party disclosures was not included in the authoritativeliterature on generally accepted accounting principles, the Accounting Standards Division of theAICPA asked the FASB to consider providing such guidance in a Statement of FinancialAccounting Standards.

10. As discussed in paragraphs 12-18, the Board beliebes that it is appropriate to establishstandards that apply to all enterprises for disclosure of information about related partytransactions and certain control relationships. The Board has not undertaken a comprehensivereconsideration of the accounting and reporting issues discussed in SAS 6 and related


Page 6

-40-

interpretations thereof. The related pai-ty disclosure requirements contained in those documentshave been extracted without significant change, except that this Statement does not address the

issues pertaining to economic dependency. Other FASB projects may address issues related tothose in this Statement, and the Board may reconsider the standards in this Statement when those

projects are completed.

11. An Exposure Draft of a proposed Statement, Related Party Disclosures, was issued onNovember 6, 1981. The Board received 66 comment letters in response to that Exposure Draft.Certain of the comments received and the Board's consideration of them are discussed inparagraphs 19-22 of this appendix.

Usefulness of Related Party Disclosures

12. FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information,

examines the characteristics of accounting information that make it useful. That Statementconcludes that for accounting information to be useful, it should be relevant (meaning that it haspredictive or feedback value) and reliable (meaning that it has representational faithfulness,

verifiability, and neutrality). That Statement further concludes that information about anenterprise increases in usefulness if it can be compared with similar information about other

enterprises and with similar information about the same enterprise for some other period or point

in time.

13. Accounting information is relevant if it is "capable of making a difference in a decision byhelping users to form predictions about the outcomes of past, present, and future events or to

confirm or correct expectations."=t Relationships between parties may enable one of the parties toexercise a degree of influence over the other such that the influenced party may be favored orcaused to subordinate its independent interests. Related party transactions may be controlledentirely by one of the parties so that those transactions may be affected significantly byconsiderations other than those in arm's-length transactions with unrelated parties. Some relatedpat-ty transactions may be the result of the related party relationship and without the relationshipmay not have occurred or may have occurred on different terms. For example, the terms underwhich a subsidiary leases equipment to another subsidiary of a common parent may be imposedby the common parent and might vary significantly from one lease to another because ofcircumstances entirely unrelated to market prices for similar leases.

14. Sometimes two or more enterprises are under common ownership or management controlbut do not transact business with each other. The common control, however, may result inoperating results or financial position significantly different from that which would have beenobtained if the enterprises were autonomous. For example, two or more enterprises in the sameline of business may be controlled by a party that has the ability to increase or decrease thevolume of business done by each. Disclosure of information about certain control relationshipsand transactions with related parties helps users of financial statements form predictions andanalyze the extent to which those statements may have been affected by that relationship.


Page 7

-41-

15. Reliability of financial information involves "assurance that accounting measuresrepresent what they purport to represent."' Without disclosure to the contrary, there is a generalpresumption that transactions reflected in financial statements have been consummated on anarm's-length basis between independent parties. However, that presumption is not justified whenrelated party transactions exist because the requisite conditions of competitive, free-marketdealings may not exist. Because it is possible for related party transactions to be arranged toobtain certain results desired by the related parties, the resulting accounting measures may notrepresent what they usually would be expected to represent. Reduced representationalfaithfulness and verifiability of amounts used to measure transactions with related partiesweaken the reliability of those amounts. That weakness cannot always be cured by reference tomarket measures because in many cases there may be no arm's-length market in the goods orservices that are the subject of the related party transactions.

16. The Board believes that an enterprise's financial statements may not be complete withoutadditional explanations of and information about related party transactions and thus may not bereliable. Completeness implies that "... nothing material is left out of the information that may

be necessary to insure that it validly represents the underlying events and conditions." 6

17. The Board also believes that relevant information is omitted if disclosures aboutsignificant related party transactions required by this Statement are not made. "Completeness ofinformation also affects its relevance. Relevance of information is adversely affected if a

relevant piece of information is omitted, even if the omission does not falsify what is shown." 7

18. Information about transactions with related pat-ties is useful to users of financialstatements in attempting to compare an enterprise's results of operations and financial positionwith those of prior periods and with those of other enterprises. It helps them to detect andexplain possible differences. Therefore, information about transactions with related parties thatwould make a difference in decision making should be disclosed so that users of the >l^nanciaistatements can evaluate their significance.

Consideration of Comments on Exposure Draft

19. Some respondents were troubled by the proposal in the Exposure Draft to requiredisclosure of only those transactions "that are necessary for users to understand the financialstatements." They generally expressed the view that it would be difficult to apply such acriterion and that it was unclear how that criterion interacted with materiality judgments. Inaddition, some respondents also interpreted that language combined with the Exposure Draft'somission of the specific exclusion provided in SAS 6 for disclosure of compensationarrangements, expense allowances, and other similar items in the ordinary course of business asa requirement that such items be disclosed. The Board does not intend to imply that disclosureof related party transactions and certain control relationships is a separate objective of financialreporting, nor does the Board intend to introduce a new concept of materiality. Rather,


Page 8

-42-

disclosure of related party transactions and certain control relationships is required solely for thepurpose of enhancing the understanding of the financial statements and the fact that such mattershave, or could have, an effect on the financial statements. Disclosure of compensationarrangements, expense allowances, and other similar items in the ordinary course of business isnot necessary for a user to understand the financial statements. The standard has been revisedaccordingly.

20. The Exposure Draft would have prohibited representations to the effect that related partytransactions were consummated on an arm's-length basis. While recognizing the difficulty inmany situations of determining the terms on which a transaction might have occurred if theparties were unrelated, many respondents pointed out that cerCain related party transactions occuron terms available to unrelated parties or on terms established by regulatory agencies. Theybelieve that representations as to the terms of a related party transaction should not be prohibitedif they can be substantiated. The Board agreed, and the requirement (paragraph 3) has beenmodified accordingly.

21. SAS 6 and interpretations thereof call for disclosure of the nature of common controlrelationships if the controlling party has the ability to affect the reporting enterprise in a mannerthat could lead to significantly different operating results or financial position than if theenterprises were autonomous. The Exposure Draft would have gone beyond those requirementsto require disclosure of all control relationships. Some respondents expressed doubt about theusefulness of some of the disclosures that would result. They indicated that the requirementwould be burdensome particularly for closely held enterprises that might have numerousrelationships with owners and their families, lenders, and possibly others that might be deemedto be "control." The Board agreed that requiring disclosure of all control relationships might beof limited usefulness. Accordingly, the requirement (paragraph 4) was revised to conform moreclosely to that discussed in SAS 6.

22. Several respondents asked the FASB to provide additional guidance on disclosures abouteconomic dependency but did not provide information to define the issues involved, nor did theyprovide evidence as to why additional guidance is needed. Therefore, the Board concluded thatissuance of this Statement should not be delayed to consider that issue.

23. The Board has concluded that it can reach an informed decision on the basis of existinginformation without a public hearing and that the effective date and transition specified inparagraph 5 are advisable in the circumstances.

Copyriglit ©1982, Financial Accounting Standards Board Not for redistribution

Page 9

-43-

Appendix B: GLOSSARY

24. For purposes of this Statement, certain terms are defined as follows:

a. Affiliate. A party that, directly or indirectly through one or more intermediaries, controls, iscontrolled by, or is under common control with an enterprise.

b. Control. The possession, direct or indirect, of the power to direct or cause the direction ofthe management and policies of an enterprise through ownership, by contract, or otherwise.

c. Immediate family. Family members whom a principal owner or a member of managementmight control or influence or.by whom they might be controlled or influenced because of thefamily relationship.

d. Management. Persons who are responsible for achieving the objectives of the enterpriseand who have the authority to establish policies and make decisions by which thoseobjectives are to be pursued. Management normally includes members of the board ofdirectors, the chief executive officer, chief operating officer, vice presidents in charge ofprincipal business functions (such as sales, administration, or finance), and other personswho perform similar policymaking functions. Persons without formal titles also may bemembers of management.

e. Principal owners. Owners of record or known beneficial owners of more than 10 percent

of the voting interests of the enterprise.

f. Related parties. Affiliates of the enterprise; entities for which investments are accountedfor by the equity method by the enterprise; trusts for the benefit of employees, such aspension and profit-sliaring trusts that are managed by or under the trusteeship ofmanagement; principal owners of the enterprise; its management; members of the immediatefamilies of principal owners of the enterprise and its management; and other parties withwhich the enterprise may deal if one pat-ty controls or can significantly influence themanagement or operating policies of the other to an extent that one of the transacting partiesmight be prevented from fully pursuing its own separate interests. Another party also is arelated party if it can significantly influence the management or operating policies of thetransacting pat-ties or if it has an ownership interest in one of the transacting parties and cansignificantly influence the other to an extent that one or more of the transacting partiesmight be prevented from fully pursuing its own separate interests.


Page 10

-44-

Footnotes

FAS57, Footnote 1--Terms defined in the glossary (Appendix B) are in boldface type the firsttime they appear in this Statement.

FAS57, Footnote 2--The requirements of this Statement are applicable to separate financialstatements of each or combined groups of each of the following: a parent company, a subsidiary,a corporate joint venture, or a 50-percent-or-less owned investee. However, it is not necessary toduplicate disclosures in a set of separate financial statements that is presented in the financialreport of another enterprise (the primary reporting enterprise) if those separate financialstatements also are consolidated or combined in a complete set of financial statements and bothsets of financial statements are presented in the same financial report.

FAS57, Footnote 3--In some cases, aggregation of similar transactions by type of related partymay be appropriate. Sometimes, the effect of the relationship between the parties may be sopervasive that disclosure of the relationship alone will be sufficient. If necessary to theunderstanding of the relationship, the name of the related party should be disclosed.

FAS57, Appendix A, Footnote 4--Concepts Statement 2, paragraph 47.

FAS57, Appendix A, Footnote 5--Ibid., paragraph 81.

FAS57, Appendix A, Footnote 6--Ibid., paragraph 79

FAS57, Appendix A, Footnote 7--Ibid., paragraph 80.


Page I 1

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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

OMB APPROVAL

OMB Number: 3235-0063Expires: April 30, 2015Estimated average burdenhours per response ... . 1 ,998.78

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

GENERAL INSTRUCTIONS

A. Rule as to Use of Form 10-K.

(1) This Fortn shall be used for annual reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (15U.S.C. 78m or 78o(d)) (the "Act") for which no other form is prescribed. This Form also shall be used for transitionreports filed pursuant to Section 13 or 15(d) of the Act.

(2) Annual reports on this Form shall be filed within the following period:

(a) 60 days afterthe end ofthe fiscal year covered by the report (75 days forfiscal years ending before December 15, 2006) forlargeaccelerated filers (as defined in 17 CFR240.12b-2):

(b) 75 days after the end of the fiscal year covered by the report for accelerated filers (as defined in 17 CFR 240.12b-2); and

(c) 90 days afterthe end ofthe fiscal year covered by the report for al l other registrants.

(3) Transition reports on this Form shall be filed in accordance with the requirements set forth in Rule 13a-10 (17 CFR240.13a-10) or Rule 15d-10 (17 CFR 240.15d-10) applicable when the registrant changes its fiscal year end.

(4) Notwithstanding paragraphs (2) and (3) ofthis General Instruction A., all schedules required by Article 12 of RegulationS-X (17 CFR 210.12-01 - 210.12-29) may, at the option of the registrant, be filed as an amendment to the report notlaterthan 30 days afterthe applicable due date ofthe report.

B. Application of Genei•al Rules and Regulations.

(1) The General Rules and Regulations under the Act (17 CFR 240) contain certain general requirements which areapplicable to reports on any form. These general requirements should be carefully read and observed in the preparationand filing of reports on this Form.

(2) Particular attention is directed to Regulation 12B which contains general requirements regarding matters such as thekind and size of paper to be used, the legibility of the report, the information to be given whenever the title of securitiesis required to be stated, and the filing of the report. The definitions contained in Rule 12b-2 should be especially noted.See also Regulations 13A and 15D.

C. Preparation of Report.

(1) This form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the report on papermeeting the requirements of Rule 12b-12. Except as provided in General Instruction G, the answers to the items shallbe prepared in the manner specified in Rule 12b-13.

(2) Exceptwhereinformationisrequiredtobegivenforthefiscalyearorasofaspecifieddate,itshallbegivenasofthelatestpracticabledate.

(3) Attention is directed to Rule 12b-20, which states: "In addition to the information expressly required to be included in

a statement or report, there shall be added such further material information, ifany, as may be necessary to make the required

Persons who respond to the collection of information containedin this form are not required to respond unless the form displays

SEC 1673 (01-12) a currently valid OMB control number.-47-

statemetlts, inthe light ofthe circumstances underwhichthey are made, not misleading."

D. Signature and Filing of Report.

(1) Three completecopies ofthe report, including financial statements, financial statement schedules, exhibits, and all otherpapers and documents filed as a part tliereof, and five additional copies which need not include exhibits, shall be filedwith the Commission. At least one complete copy of the report, including financial statements, financial statementschedules, exhibits, and all othet• papers and documents filed as a partthereof, shall be filed with each exchange on whichany class ofsecurities ofthe registrant is registered. At least one complete copy ofthe reportfiled with the Commissionand one such copy filed with each exchange shall be manually signed. Copies not manually signed shall bear typed or

printed signatures.

(2) (a) The report must be signed by the registrant, and on behalf of the registrant by its principal executive officer orofficers, its principal financial officer or officers, its controller or principal accounting officer, and by at least themajority of the board of directors or persons performing similar functions. Where the registrant is a limitedpartnership, the report must be signed by the majority ofthe board ofdirectors of any corporate general partner who

signs the report.

(b) The name of each person who signs the report shall be typed or printed beneath his signature. Any person whooccupies more than one ofthe specified positions shall indicate each capacity in which he signs the report. Attentionis directed to Rule 12b-11 (17 CFR 240.12b-11) concerning manual signatures and signatures pursuant to powers

of attorney.

(3) Registrants are requested to indicate in a transmittal letter with the Form 10-K whether the financial statements in thereport reflect a change from the preceding year in any accounting principles or practices, or in the method of applying

any such principles or practices.

E. Disclosure Witli Respect to Foreign Subsidiaries.

Information required by atiy item or other requirement of this form with respect to any foreign subsidiary may be omittedto the extent that the required disclosure would be detrimental to the registrant. However, financial statements and financialstatement schedules, otherwise required, shall not be omitted pursuant to this Instruction. Where information is omitted pursuantto this Instruction, a statement shall be made that such information has been omitted and the names ofthe subsidiaries involvedshall be separately furnished to the Commission. The Commission may, in its discretion, call for justification that the required

disclosure would be detrimental.

F. Information as to Employee Stoclc Purchase, Savings and Similar Plans.

Attention is directed to Rule 15d-21 which provides that separate amiual and other reports need not be filed pursuant to

Section 15(d) of the Act with respect to any employee stock purchase, savings or similar plan if the issuer of the stock or othersecurities offered to employees pursuant to the plan furnishes to the Commission the information and documents specified in

the Rule.

G. Information to be Incorporated by Reference.

(1) Attentio:i is directed to Pule 121°23 which p. .,•n..;ArS f^r the inrnrpnration by reference of information contained in..certain documents in answer or partial answer to any item of a report.

(2) The information called for by Parts I and II of this form (Items I through 9A or any portion there of) may, at theregistrant's option, be incorporated by reference from the registrant's annual report to security holders furnished to theCommission pursuant to Rule 14a-3(b) or Rule 14c-3(a) or from the registrant's annual report to security holders, evenif not furnished to the Commission pursuant to Rule 14a-3(b) or Rule 14c-3(a), provided such annual report contains

the information required by Rule 14a-3.Note 1. In order to fulfill the requirements of Part I of Form 10-K, the incorporated portion of the annual report tosecurity holders must contain the information required by Items 1-3 of Form 10-K; to the extent applicable.

Note 2. If atly information required by Part I or Part II is incorporated by reference into ati electronic format documentfrom the annual report to security holders as provided in General Instruction G, any portion of the annual report tosecurity holders incorporated by reference shall be filed as an exhibit in electronic format, as required by Item

601(b)(13) ofRegulation S-K. 2 -48-

(3) The information required by Part III (Items 10, 11, 12,13 and 14) may be incorporated by reference from the registrant'sdefinitive proxy statement (filed or required to be filed pursuant to Regulation 14A) or definitive information statement(filed or to be filed pursuant to Regulation 14C) which involves the election of directors, if such definitive proxystatement or information statement is filed with the Commission not later than 120 days after the end of the fiscal yearcovered by the Form 10-K. However, if such definitive proxy statement or information statement is not filed with theCommission in the 120-day period or is not required to be filed with the Commission by virtue of Rule 3a12 -33(b) underthe Exchange Act, the Items comprising the Part III information must be filed as part of the Form 10-K, or as anamendment to the Form 10-K, not later than the end of the 120-day period. It should be noted that the informationregarding executive officers required by Item 401 of Regulation S-K (§ 229.401 of this chapter) may be included inPart I of Form 10-K under an appropriate caption. See Instruction 3 to Item 401(b) of Regulation S-K (§ 229.401(b)of this chapter).

(4) No item numbers of captions of items need be contained in the material incorporated by reference into the report.However, the registrant's attention is directed to Rule 12b-23(e) (17 CFR 240.12b(e)) regardingthe specific disclosurerequired in the report concerning information incorporated by reference. When the registrant combines all of theinformation in Parts I and II ofthis Form (Items I through 9A) by incorporation by reference from the registrant's annualreport to security holders and all of the information in Part III of this Form (Items 10 through 14) by incorporating byreference from a definitive proxy statement or information statement involving the election of directors, then,notwithstanding General Instruction C(1), this Form shall consist of the facing or cover page, those sectionsincorporated from the annual report to security holders; the proxy or information statement, and the information, ifany,required by Part IV of this Form, signatures, and a cross-reference sheet setting forth the item numbers and captionsin Parts I, II and III of this Form and the page and/or pages in the referenced materials where the corresponding

information appears.

H. Integrated Reports to Security Holders.

Annual reports to security holders may be combined with the required information of Form 10-K and will be suitable forfiling with the Commission if the following conditions are satisfied:

(1) The combined report contains full and complete answers to all items required by Form 10-K. When responses to acertain item of required disclosure are separated within the combined report; an appropriate cross-reference should bemade. If the information required by Part III of Form 10-K is omitted by virtue of General Instruction G, a definitiveproxy or information statement shall be filed.

(2) The cover page and the required signatures are included. As appropriate, a cross-reference sheet should be filedindicating the location of information required by the items of the Form.

(3) Ifanelectronicfilerfilesanyportionofanannualreporttosecurity holders in combination with the required informationof Form 10-K, as provided in this instruction, only such portions filed in satisfaction of the Form 10-K requirements

shall be filed in electronic format.

1. Omission of Information by Certain Wliolly-Owned Subsidiaries.

If, on the date of the filing of its report on Form l 0-K, the registrant meets the conditions specified in paragraph (1) below,then such registrant may furnish the abbreviated narrative disclosure specified in paragraph (2) below.

(1) Conditions for availability of the relief specified in paragraph (2) below.

(a) All ofthe registrant's equity securities are owned, either directly or indirectly, by a single person which is areportingcompany under the Act and which has filed all the material required to be filed pursuant to section 13, 14, or 15(d)thereof, as applicable, and which is named in conjunction with the registrant's description of its business;

(b) During the preceding thirty-six calendar months and any subsequent period ofdays, there has not been any materialdefault in the payment of principal, interest, a sinking or purchase fund installment, or any other material defaultnot cured withinthirty days, with respect to any indebtedness ofthe registrant or its subsidiaries, and there has notbeen anymaterial default inthe paymentofrentals undermaterial long-term leases;

(c) There is prominently set forth, on the cover page of the Form 10-K, a statement that the registrant meets theconditions set forth in General Instruction (I)(1)(a) and (b) ofForm 10-K and is therefore filing this Form with the

-49-

reduced disclosure format; and

(d) The registrant is not an asset-backed issuer, as defined in Item 1101 of Regulation AB (17 CFR 229.1101).

(2) Registrants meeting the conditions specified in paragraph (1) above are entitled to the following relief:

(a) Such registrants may omit the information called for by Item 6, Selected Financial Data, and Item 7, Management'sDiscussion and Analysis ofFinancial Condition and Results of Operations provided that the registrant includes inthe Form 10-K a management's narrative analysis of the results of operations explaining the reasons for materialchanges in the amount of revenue and expense items between the most recent fiscal year presented and the fiscalyear immediately preceding it. Explanations of material changes should include, but not be limited to, changes inthe various elements which determine revenue and expense levels such as unit sales volume, prices charged andpaid, production levels, production cost variances, labor costs and discretionary spending programs. In addition,the analysis should include an explanation of the effect of any changes in accounting principles and practices ormethod of application that have a material effect on net income as reported

(b) Such registrants may omit the list ofsubsidiaries exhibit required by Item 601 of Regulation S-K (§ 229.601 ofthischapter).

(c) SuchregistrantsmayomittheinformationcalledforbythefollowingotherwiserequiredItems:Item4,Submissionof Matters to a Vote of Security Holders; Item 10, Directors and Executive Officers of the Registrant; Item 11,Executive Compensation; Item 12, Security Ownership ofCertain Beneficial Owners and Management; and Item13, Certain Relationships and Related Transactions.

(d) In response to Item 1, Business, such registrant only need furnish a brief description of the business done by theregistrant and its subsidiaries during the most recent fiscal year which will, in the opinion ofmanagement, indicatethe general nature and scope of the business of the registrant and its subsidiaries, and in response to Item 2,Properties, such registrant only need furnish a brief description of the material properties of the registrant and itssubsidiaries to the extent, in the opinion of the management, necessary to an understanding of the business doneby the registrant and its subsidiaries.

J. Use of this Form by Asset-Backed Issuers.

The following applies to registrants that are asset-backed issuers. Terms used in this General Instruction J. have the same meaning

as in Item 1101 ofRegulation AB (17 CFR229.1 10 1).

(1) Items that May be Omitted. Such registrants may omit the information called for by the following otherwise required Items:

(a) Item 1, Business;(b) Item 1 A. Risk Factors;(c) Item 2, Properties;(d) Item 3, Legal Proceedings;(e) Item 4, Submission of Matters to a Vote of Security Holders;(f) Item 5, Market for Registrant's Common Equity and Related Stockholder Matters;(g) Item 6, Selected Financial Data;(h) Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations;(i) Item 7A, Quantitative and Qualitative Disclosures About Market Risk;0) Item 8, Financial Statements and Supplementary Data;(k) Item 9, Changes in and Disagreements With Accountants on Accounting and Financial Disclosure;(I) Item 9A, Controls and Procedures;(in) If the issuing entity does not have any executive officers or directors, Item 10, Directors and Executive Officers of theRegistrant, Item 11, Executive Compensation, Item 12, Security Ownership of Certain Beneficial Owners and Management,and Item 13, Certain Relationships and Related Transactions; and(n) Item 14, Principal Accountant Fees and Services.

(2) Stibstitatte Information to be Inclarded. In addition to the Items that are otherwise required by this Form, the registrant must furnish

in the Form 10-K the following information:

-50-

(a) Immediately after the name of the issuing entity on the cover page of the Form 10-K, as separate line items, the exact nameof the depositor as specified in its charter and the exact name of the sponsor as specified in its charter.(b) Item 1112(b) of Regulation AB;(c) Items 11 14(b)(2) and 1115(b) of Regulation AB;(d) Item 1117 of Regulation AB;(e) Item 1119 of Regulation AB;(f) Item 1122 of Regulation AB; and(g) Item 1123 of Regulation AB.

(3) Signatures.

The Form 10-K must be signed either:

(a) On behalf of the depositor by the senior officer in charge of securitization of the depositor; or

(b) On behalf of the issuing entity by the senior officer in charge of the servicing function of the servicer. If multiple servicersare involved in servicing the pool assets, the senior officer in charge of the servicing function of the master servicer (or entityperforming the equivalent function) must sign if a representative of the servicer is to sign the report on behalf of the issuingentity.

-51-

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One) FORM 10-K

OMB APPROVAL

OMB Number: 3235-0063Expires: April 30, 2015Estimated average burdenhours per response . 1,998.78

[] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Forthefiscal yearor

[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934

For the transition period from

Commission file number

to

(Exact name of registrant as specified in its charter)

State or other jurisdiction ofincorporation or organization

(Address of principal executive offices)

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

(Zip Code)

Name of each exchange on which registered

Securities registered pursuant to section 12(g) of the Act:

(Title of class)

(Title ofclass)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.q Yes q No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.q Yes qNo

Note- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange

Act from their obligations under those Sections.

Persons who respond to the collection of information containedin tlris form are not required to respond unless the form displays

SEC1673(01-12) a currently valid OMB control number.

6

(I.R.S. EmployerIdentification No.)

-52-

Indicate by checkmarkwhethertheregistrant(1) hasfiled all reportsrequired to befiled by Section 13 or 15(d)ofthe Securities ExchangeAct of 1934 duringthe preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) hasbeensubjecttosuchfilingrequirementsforthepast90days. q Yes q No

Indicateby checkmarkwhetherthe registranthas submitted electronically and posted on its corporate Web site, ifany,every InteractiveDataFile required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 ofthis chapter) during the preced ing 12months (or for such shoi-ter period thatthe registrantwas required to submit and post such files).

q Yes qNo

Indicate by checkmarkifdisclosureofdelinquentfilers pursuantto Item 405 ofRegulation S-K (§ 229.405 ofthis chapter) is notcontainedherein, andwillnotbecontained,tothe bestofregistrant's knowledge, indefmitive proxyor infonnationstatements incorporated byreferenceinPartIllofthisForm 10-KoranyamendmenttothisFonn 10-K. q

Indicate by checkmarkwhetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, orasmallerreportingcompany. See the defmitions of"large accelerated filer," "accelerated filer" and "smallerreportingcoinpany" in Rule 12b-2 oftheExchange

Act.

Large accelerated filer q Accelerated filerD

Non-acceleratedfilerD (Do notcheck ifasmallerreporting company) Smallerreportingcompany q

Indicate by check mark whether the registrant is a shell coinpany (as defined in Rule 12b-2 of the Act). q Yes q No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference tothe price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the lastbusiness day of the registrant's most recently completed second fiscal quarter.

Note.-If a determination as to whether a particular person or entity is an affiliate cannot be made without involving

unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated onthe basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrarit has filed all documents and reports required to be filed by Section 12, 13 or

i 5(d) of the Securities Exchange Act of 1934 subsequent to the distributior, of securities under a plan confirmed by a court.q Yes q No

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable

date.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if iricorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.)into which the document is incorporated: (1) Any annual repoi-t to security holders; (2) Any proxy or information statement;and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should beclearly described for identification purposes (e.g., annual reportto security holders forfiscal yearended December 24,1980).

^ -53-

PART I

[See General Instruction G(2)]

Item 1. Business.

FurnishtheinformationrequiredbyItem 101 ofRegulationS-K(§229.101 ofthis chapter) exceptthatthediscussion ofthedevelopmentofthe registrant's business need only include developments sincethe beginningofthefiscalyearforwhichthis report isfiled.

Item 1A. RislcFactors.

Set forth, under the caption "Risk Factors," where appropriate, the risk factors described in Item 503(c) of Regulation S-K(§229.503(c) ofthis chapter) applicable to the registrant. Provide any discussion of risk factors in plain English in accordance withRule 421(d) ofthe Securities Act of 1933 (§230.421(d) of this chapter). Smaller reporting companies are not required to provide the

information required by this item.

Item 1B. Unresolved StaffComments.

Ifthe registrant is an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 ofthe Exchange Act (§240.12b-2 ofthis chapter), or is a well-known seasoned issuer as defined in Rule 405 of the Securities Act (§230.405 of this chapter) and has receivedwritten comments from the Commission staff regarding its periodic or current reports under the Act not less than 180 days before theend of its fiscal year to which the annual report relates, and such comments remain unresolved, disclose the substance of any suchunresolved comments that the registrant believes are material. Such disclosure may provide other information including the position of

the registrant with respect to any such comment.

Item 2. Properties.

FurnishtheinformationrequiredbyItem 102ofRegulationS-K(§ 229.102 ofthis chapter).

Item 3. Legal Proceedings.

(a) FurnishtheinformationrequiredbyItem 103 ofRegulation S-K(§ 229.103 ofthis chapter).

(b) Astoanyproceed-ingthatw2stenn-inatedduriaigthefourthqu-arterofthefascalyearcoveredbythisreport,furnishinformation

similarto thatrequired by Item 103 ofRegulation S-K (§ 229.103 ofthis chapter), includingthe date oftennaiationand adescription

ofthe disposition thereofwith respect to the registrant and its subsidiaries.

Item 4. Mine Safety Disclosures.

Ifapplicable, provide a statement that the information concerning mine safety violations or other regulatory mattersrequired by Section 1503 (a) ofthe Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 ofr, i^. ^_

11 S-Ir1l1

ii-tr> R^^^ t M1 ;^ ' l,,.ioa ;,, A..I,;h;+QS t^ thP anniâl rPnnrtjêguldl1V/ G.tv't) iJ iiiviuuvu aaavâiav.^..i r---•

-54-

PART II

[(See General Insttuction G(2)]

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities.

(a) FumishtheinformationrequiredbyItem201 ofRegulationS-K(17CFR229.201)andItem701 ofRegulationS-K(17CFR229.701)as to all equity securities ofthe registraut sold by the registrant during the period covered by the report that were not registeredunderthe SecuritiesAct. Iftheltem 701 nzfonnation previously has been included inaQuarterly ReportonFonn 10-Q or inaCurrentReportonFonn 8-K (17 CFR249.308), itneed not be fumished.

(b) Ifrequired pursuantto Ru1e463 (17 CFR230.463) ofthe SecuritiesActof 1933, funushtlie infonnation required by Item 701(f ) ofRegul ation S-K (§229.701(f) ofthis chapter).

(c) Furnish the information required by Item 703 of Regulation S-K (§229.703 of this chapter) for any repurchase madein a month within the fourth quarter of the fiscal year covered by the report. Provide disclosures covering repurchasesmade on a monthly basis. For example, ifthe fourth quarter began on January 16 and ended on April 15, the chart wouldshow repurchases for the months from January 16 through February 15, February 16 through iviarch 15, and iviarch 16

through April 15.

Item 6. Selected Financial Data.

Furnish the information required by Item 301 of Regulation S-K (§ 229.301 of this chapter).

Item 7.. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Furnish the information required by Item 303 of Regulation S-K (§ 229.303 of this chapter).

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Furnish the information req-uired by Item 305 of RegulationS-K (§ 229.305 of this chapter).

Item 8. Financial Statements and Supplementary Data.

(a) Fumishfinancial statemeiits meetiugtherequirementsofRegulationS-X(§210 ofthischapter), except§ 210.3-05 andArticle 11 thereof,andthesupplementaryfinaticial iliformation required by Item 302 ofRegulation S-K (§ 229.3 02 ofthis chapter). Financial statements oftheregistrantand itssubsidiaries consolidated (as required by Rule 14a-3(b)) shall be filed underthis item.Otherfinancial statements andschedulesrequiredunderRegulafionS-Xmaybeftledas"FinancialStatementSchedules"pursuanttoItem 15,Exhibits,FinancialStatement

Schedules, and Reports on Form 8-K, ofthis fotm.

(b) A smallerreportingcompany may providethe infortnationrequired byArticle 8 ofRegulationS-X in lieu ofanyfinancial statements

required by Item 8 ofthis Fonn.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Furnish the information required by Item 304(b) of Regulation S-K (§ 229.304(b) of this chapter).

Item 9A. Controls and Procedures.

9 -55-

Furnish the information required by Item 307 and 308 of Regulation S-K (§229.307 and §229.308 of this chapter).

Item 9A(T). Controls and Procedures.(a) If the registrant is neither a large accelerated filer nor an accelerated filer as those terms are defined in §240.12b-2 of this

chapter, furnish the information required by Items 307 and 308T of Regulation S-K (17 CFR229.307 and 229.308T) with respectto anannual report that the registrant is required to file for a fiscal year ending on or after December 15,2007 but before December 15, 2009.

(b) This temporary Item 9A(T) will expire on June 30,2010.

Item 9B. Other Inform ation.

The registrant must disclose under this item any information required to be disclosed in a report on Form 8-K during the fourth quarterof the year covered by this Form 10-K, but not reported, whether or not otherwise required by this Form 10-K. If disclosure of suchinformation is made under this item, it need not be repeated in a report on Form 8-K which would otherwise be required to be filed

with respect to such information or in a subsequent report on Form 10-K.

PART III

[See General Instruction G(3)]

Item 10. Directors, Executive Officers and Corporate Governance.

FurnishtheinformationrequiredbyItems401,405,406and 407(c)(3),(d)(4)and(d)(5)ofRegulationS-K(§229.401, §229.405, §229.406

and § 229.407(c)(3), (d)(4) and (d)(5) ofthis chapter).

InstructionCheckingthe boxprovided on the coverpage ofthisForin to indicatethat Item 405 disclosure ofdelinquentFonn 3,4, or 5 filers is notcontauied llerein is intended tofacilitateForm processingand review. Failureto providesuch nid icationwiIl notcreateliability forviolationofthefederal securities laws. The space should be checked only ifthere is no disclosure inthis Form ofreportingperson deliniquenciesinresponseto Item 405 and the registrant, atthetimeoffilingthe Fonn 10-K, has reviewed the itifonnationnecessaryto ascertain, andhas determined tlzat, Item 405 disclosure is notexpected to be contained inPartIII ofthe Form 10-K or incorporated by reference.

Item 11. Executive Compensation.

Furnishthe information required by Item 402 ofRegulation S-K(§ 229.402 ofthischapter) and paragraph (e)(4) and(e)(5) ofltem407 of

Regulation S-K(§ 229.407(e)(4) and(e)(5) ofthis chapter).

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockliolder

Matters.

...^..l ^.fRr^,laAnn.C-K(^_-..^^==-^g •^••^•• --.§ 7-7n403Fumishtheinformationrequiredbyltem201(ci)oticeguiarionS-K(§229.2

nv 'i^^xu^o.c=^«L',;.,^ ,,^^1.,,.at,^evan.lu.Tte = Al1Z

ofthis chapter).

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Fumishtheinformationrequiredbyltem 404ofRegulationS-K(§229.404ofthischapter)andItem407(a)ofRegulationS-K(§229.407(a)

ofthis chapter).

Item 14. Principal Accounting Fees and Services.

Furnish the information required by Item 9(e) of Schedule 14A (§240.14a-101 of this chapter).

(1) Disclose, under the caption Audit Fees, the aggregate fees billed for each of the last two fiscal years for professional

services rendered by the principal accountant for the audit of the registrant's annual financial' statements and review

offinancial statements included inthe registrant's Form 10-Q(17CFR249.308a)orservicesthatarenormallyprovidedbythe10 -56-

accountant in connection with statutory and regulatory filings or engagements forthose fiscal years.

(2) Disclose, underthe caption Audit-Related Fees, the aggregate fees billed in each ofthe lasttwo fiscal years for assuranceand related services by the principal accountantthatare reasonably related to the performance ofthe auditorreview oftheregistrant'sfinancial statements and are notreported underItem 9(e)(1) ofSchedule 14A. Registrants shall describe the nature of

the services comprisingthe fees disclosed underthis category.

(3) Disclose, under the caption Tax Fees, the aggregate fees billed in each of the last two fiscal years for professionalservices rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe

the nature of the services comprising the fees disclosed under this category.

(4) Disclose, under the caption All Other Fees, the aggregate fees billed in each ofthe lasttwo fiscal years for products andservices provided by the principal accountant, other than the services reported in Items 9(e)(1) through 9(e)(3) ofSchedule 14A. Registrants shall describe the nature of the services comprising the fees disclosed under this category.

(5) (i) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7)(i) of Rule 2-01

of Regulation S-X.

(ii) Disclose the percentage of services described in each of Items 9(e)(2) through 9(e)(4) of Schedule 14A that were ap

proved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rul.e 2-01 of Regulation S-X.

(6) Ifgreaterthan 50 percent, disclose the percentage of hours expended on the principal accountant's engagementto auditthe registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons

other than the principal accountant's full-time, permanent employees.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) List the following documents filed as a part of the report:

(1) All financial statements;

(2) ThosefinancialstatementschedulesrequiredtobefiledbyItem8ofthisform,andbyparagraph(b)below.

(3) Thoseexhibitsrequiredbyltem601 ofReguiationS-K(§ 229.601 ofthischapter)andbyparagraph(b)below. Identifyinthelist each management contractorcompensatory plan or arrangement requiredto be filed as an exhibitto this form pursuant

to Item 15(b) ofthis report.

(b) Registrants shall file, as exhibits to this form, the exhibits required by Item 601 of Regulation S-K (§ 229.601 of this

chapter).

(c) Registrants shall file, as financial stateinent schedules to this form, the financial statements required by Regulation S-X

(1? CFR 210) which are excluded from the annual report to shareholders by Rule 14a-3(b) including (1) separate

finatzcial statements ofsubsidiaries notconsolidated and fifty percentor less owned persons; (2) separate financial statements of

affiliates whose securities are pledged as collateral; and (3) schedules.

11 -57-

SIGNATURES

[See General InstructionD]

Pursuantto the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registranthas duly caused this repoitto

be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant)

By (Signature and Title)*

Pursuanttotherequirementsofthe SecuritiesExchangeActof 1934,this reporthas beensigned belowbythefollowingpetsonsonbehalf

ofthe registrant and in the capacities and on the dates indicated.

By (S ignature and Title) *

By (Signature and Title)*

Date

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by RegistrantsWhich Have Not Registered Securities Pursuant to Section 12 of the Act

(a) Except to the extent that the materials enumerated in (1) and/or (2) below are specifically incorporated into this Formby reference (in which case see Rule 12b-23(d)), every registrant which files an annual report on this Form pursuantto Section 15(d) of the Act shall furnish to the Commission for its information, at the time of filing its report on this

Form, four copies of the following:

(1) Any annual report to security holders covering the registrant's last fiscal year; and

(2) Every proxy statement, form of proxy or other proxy soliciting rnater iai sent to more than te-n of the regi-strant's

security holders with respect to any annual or other meeting of security holders.

(b) The foregoing material shall not be deemed to be "filed" with the Cominission or otherwise subject to the liabilities ofSection 18 ofthe Act, exceptto the extentthatthe registrantspecifically incorporates itnZ its annual report onthisFormbyreference.

(c) If no such annual report or proxy material has been sent to security holders, a statement to that effect shall be includedunder this caption. If such report or proxy material is to be furnished to security holders subsequent to the filing of the

ani•ual report of this Form , ... ..+tha raabictrant chall so state under this caption and shall furnish copies of such material to........... shall_

the Commission when it is sent to security holders.

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The Investor's Advocate:How the SEC Protects Investors, Maintains MarketIntegrity, and Facilitates Capital Formation

> Introduction> Creation of the SEC> Organization of the SEC> Laws That Govern the Industry

Introduction

The mission of the U.S. Securities and Exchange Commission is to protectinvestors, maintain fair, orderly, and efficient markets, and facilitatecapital formation.

As more and more first-time investors turn to the markets to help securetheir futures, pay for homes, and send children to college, our investorprotection mission is more compelling than ever.

As our nation's securities exchanges mature into global for-profitcompetitors, there is even greater need for sound market regulation.

And the common interest of all Americans in a growing economy thatproduces jobs, improves our standard of living, and protects the value ofour savings means that all of the SEC's actions must be taken with an eyetoward promoting the capital formation that is necessary to sustaineconomic growth.

contact The world of investing is fascinating and complex, and it can be veryfruitful. But unlike the banking world, where deposits are guaranteed bythe federal government, stocks, bonds and other securities can losevaiie. There are no guarantees. That's why investing is not a spectatorsport. By far the best way for investors to protect the money they putinto the securities markets is to do research and ask questions.

The laws and rules that govern the securities industry in the UnitedStates derive from a simple and straightforward concept: all investors,whether large institutions or private individuals, should have access tocertain basic facts about an investment prior to buying it, and so long asthey hold it. To achieve this, the SEC requires public companies todisclose meaningful financial and other information to the public. Thisprovides a common pool of knowledge for all investors to use to judge forthemselves whether to buy, sell, or hold a particular security. Onlythrough the steady flow of timely, comprehensive, and accurateinformation can people make sound investment decisions.

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The result of this information flow is a far more active, efficient, andtransparent capital market that facilitates the capital formation soimportant to our nation's economy. To insure that this objective is alwaysbeing met, the SEC continually works with all major market participants,including especially the investors in our securities markets, to listen totheir concerns and to learn from their experience.

The SEC oversees the key participants in the securities world, includingsecurities exchanges, securities brokers and dealers, investment advisors,and mutual funds. Here the SEC is concerned primarily with promotingthe disclosure of important market-related information, maintaining fairdealing, and protecting against fraud.

Crucial to the SEC's effectiveness in each of these areas is itsenforcement authority. Each year the SEC brings hundreds of civilenforcement actions against individuals and companies for violation of thesecurities laws. Typical infractions include insider trading, accountingfraud, and providing false or misleading information about securities andthe-companies that.issue them.

One of the major sources of information on which the SEC relies to bringenforcement action is investors themselves - another reason thateducated and careful investors are so critical to the functioning of efficientmarkets. To help support investor education, the SEC offers the public awealth of educational information on this Internet website, which alsoincludes the EDGAR database of disclosure documents that publiccompanies are required to file with the Commission.

Though it is the primary overseer and regulator of the U.S. securitiesmarkets, the SEC works closely with many other institutions, includingCongress, other federal departments and agencies, the self-regulatoryorganizations (e.g. the stock exchanges), state securities regulators, andvarious private sector organizations. In particular, the Chairman of theSEC, together with the Chairman of the Federal Reserve, the Secretary ofthe Treasury, and the Chairman of the Commodity Futures TradingCommission, serves as a member of the President's Working Group onFinancial Markets.

This article is an overview of the SEC's history, responsibilities, activities,organization, and operation. More detailed information about many ofthese topics is available throughout this website.

Creation of the SEC

The SEC's foundation was laid in an era that was ripe for reform. Beforethe Great Crash of 1929, there was little support for federal regulation ofthe securities markets. This was particularly true during the post-WorldWar I surge of securities activity. Proposals that the federal governmentrequire financial disclosure and prevent the fraudulent sale of stock werenever seriously pursued.

Tempted by promises of "rags to riches" transformations and easy credit,most investors gave little thought to the systemic risk that arose fromwidespread abuse of margin financing and unreliable information aboutthe securities in which they were investing. During the 1920s,

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approximately 20 million large and small shareholders took advantage ofpost-war prosperity and set out to make their fortunes in the stockmarket. It is estimated that of the $50 billion in new securities offeredduring this period, half became worthless.

When the stock market crashed in October1929, public confidence in the marketsplummeted. Investors large and small, as wellas the banks who had loaned to them, lostgreat sums of money in the ensuing GreatDepression. There was a consensus that for theeconomy to recover, the public's faith in thecapital markets needed to be restored.Congress held hearings to identify the problemsand search for solutions.

Based on the findings in these hearings,Congress - during the peak year of theDepression - passed the Securities Act of1933. This law, together with the SecuritiesExchange Act of 1934, which created the SEC,was designed to restore investor confidence inour capital markets by providing investors andthe markets with more reliable information andclear rules of honest dealing. The mainpurposes of these laws can be reduced to twocommon-sense notions:

o Companies publicly offering securities forinvestment dollars must tell the publicthe truth about their businesses, thesecurities they are selling, and the risksinvolved in investing.

m People who sell and trade securities - brokers, dealers, andexchanges - must treat investors fairly and honestly, puttinginvestors' interests first.

Monitoring the securities industry requires a highly coordinated effort.Congress established the Securities and Exchange Commission in 1934 toenforce the newly-passed securities laws, to promote stability in themarkets and, most importantly, to protect investors. President FranklinDelano Roosevelt appointed Joseph P. Kennedy, President John F.Kennedy's father, to serve as the first Chairman of the SEC.

Organization of the SEC

The SEC consists of five presidentially-appointed Commissioners, withstaggered five-year terms (see SEC Organization Chart; text version alsoavailable). One of them is designated by the President as Chairman of theCommission - the agency's chief executive. By law, no more than threeof the Commissioners may belong to the same political party, ensuringnon-partisanship. The agency's functional responsibilities are organizedinto five Divisions and 19 Offices, each of which is headquartered inWashington, DC. The Commission's approximately 3,500 staff are located

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in Washington and in 11 Regional Offices throughout the country.

It is the responsibility of the Commission to:

a interpret federal securities laws;

e issue new rules and amend existing rules;

• oversee the inspection of securities firms, brokers, investmentadvisers, and ratings agencies;

e oversee private regulatory organizations in the securities,accounting, and auditing fields; and

o coordinate U.S. securities regulation with federal, state, and foreignauthorities.

The Commission convenes regularly at meetings that are open to thepublic and the news media unless the discussion pertains to confidentialsubjects, such as whether to begin an enforcement investigation.

Divisions

Division of Corporation Finance

The Division of Corporation Finance assists the Commission in executingits responsibility to oversee corporate disclosure of important informationto the investing public. Corporations are required to comply withregulations pertaining to disclosure that must be made when stock isinitially sold and then on a continuing and periodic basis. The Division'sstaff routinely reviews the disclosure documents filed by companies. Thestaff also provides companies with assistance interpreting theCommission's rules and recommends to the Commission new rules foradoption.

The Division of Corporation Finance reviews documents that publicly-heidcompanies are required to file with the Commission. The documentsinclude:

o registration statements for newly-offered securities;

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e proxy materials sent to shareholders before an annual meeting;

o annual reports to shareholders;

o documents concerning tender offers (a tender offer is an offer tobuy a large number of shares of a corporation, usually at apremium above the current market price); and

o filings related to mergers and acquisitions.

These documents disclose information about the companies' financial-62-

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condition and business practices to help investors make informedinvestment decisions. Through the Division's review process, the staffchecks to see if publicly-held companies are meeting their disclosurerequirements and seeks to improve the quality of the disclosure. To meetthe SEC's requirements for disclosure, a company issuing securities orwhose securities are publicly traded must make available all information,whether it is positive or negative, that might be relevant to an investor'sdecision to buy, sell, or hold the security.

Corporation Finance provides administrative interpretations of theSecurities Act of 1933, the Securities Exchange Act of 1934, and the TrustIndenture Act of 1939, and recommends regulations to implement thesestatutes. Working closely with the Office of the Chief Accountant, theDivision monitors the activities of the accounting profession, particularlythe Financial Accounting Standards Board (FASB), that result in theformulation of generally accepted accounting principles (GAAP).Increasingly, the Division also monitors the use by U.S. registrants ofInternational Financial Reporting Standards (IFRS), promulgated by theInternational Accounting Standards Board.

The Division's staff provides guidance and counseling to registrants,prospective registrants, and the public to help them comply with the law.For example, a company might ask whether the offering of a particularsecurity requires registration with the SEC. Corporation Finance wouldshare its interpretation of the relevant securities regulations with thecompany and give it advice on compliance with the appropriate disclosure

requirement.

The Division uses no-action letters to issue guidance in a more formalmanner. A company seeks a no-action letter from the staff of the SECwhen it plans to enter uncharted legal territory in the securities industry.For example, if a company wants to try a new marketing or financialtechnique, it can ask the staff to write a letter indicating whether it wouldor would not recommend that the Commission take action against thecompany for engaging in its new practice.

How the SEC Rulemaking Process Works

Rulemaking is the process by which federal agencies implementlegislation passed by Congress and signed into law by the President.Major pieces of legislation, such as the Securities Act of 1933, theSecurities Exchange Act of 1934, the Investment Company Act of1940, and the Sarbanes-Oxley Act, provide the framework for theSEC's oversight of the securities markets. These statutes are broadlydrafted, establishing basic principles and objectives. To ensure thatthe intent of Congress is carried out in specific circumstances - andas the securities markets evolve technologically, expand in size, andoffer new products and services - the SEC engages in rulemaking.

Rulemaking can involve several steps: concept release, rule proposal,and rule adoption.

Concept Release: The rulemaking process usually begins with a rule

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proposal, but sometimes an issue is so unique and/or complicatedthat the Commission seeks out public input on which, if any,regulatory approach is appropriate. A concept release is issueddescribing the area of interest and the Commission's concerns andusually identifying different approaches to addressing the problem,followed by a series of questions that seek the views of the public onthe issue. The public's feedback is taken into consideration as theCommission decides which approach, if any, is appropriate.

Rule Proposal: The Commission publishes a detailed formal ruleproposal for public comment. Unlike a concept release, a rule proposaladvances specific objectives and methods for achieving them.Typically the Commission provides between 30 and 60 days for reviewand comment. Just as with a concept release, the public comment isconsidered vital to the formulation of a final rule.

Rule Adoption: Finally, the Commissioners consider what they havelearned from the public exposure of the proposed rule, and seek toagree on the specifics of a final rule. If a final measure is thenadopted by the Commission, it becomes part of the official rules thatgovern the securities industry.

Division of Trading and Markets

The Division of Trading and Markets assists the Commission in executingits responsibility for maintaining fair, orderly, and efficient markets. Thestaff of the Division provide day-to-day oversight of the major securitiesmarket participants: the securities exchanges;'securities firms; self-regulatory organizations (SROs) including the Financial IndustryRegulatory Authority (FInRA), the Municipal Securities Rulemaking Board(MSRB), clearing agencies that help facilitate trade settlement; transferagents (parties that maintain records of securities owners); securitiesinformation processors; and credit rating agencies.

The Division also oversees the Securities Investor Protectibn Corporation(SIPC), which is a private, non-profit corporation that insures thesecurities and cash in the customer accounts of member brokerage firmsagainst the failure of those firms. It is important to remember that SIPCinsurance does not cover investor losses arising from market declines or

fraud.

The Division's additional responsibilities include:

o carrying out the Commission's financial integrity program forbroker-dealers;

o reviewing (and in some cases approving, under authority delegatedfrom the Commission) proposed new rules and proposed changes toexisting rules filed by the SROs;

o assisting the Commission in establishing rules and issuinginterpretations on matters affecting the operation of the securitiesmarkets; and

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® surveilling the markets.

Division of Investment Management

The Division of Investment Management assists the Commission inexecuting its responsibility for investor protection and for promotingcapital formation through oversight and regulation of America's $26trillion investment management industry. This important part of the U.S.capital markets includes mutual funds and the professional fundmanagers who advise them; analysts who research individual assets andasset classes; and investment advisers to individual customers. Becauseof the high concentration of individual investors in the mutual funds,exchange-traded funds, and other investments that fall within theDivision's purview, the Division of Investment Management is focused onensuring that disclosures about these investments are useful to retailcustomers, and that the regulatory costs which consumers must bear arenot excessive.

The Division's additional responsibilities include:

o assisting the Commission in interpreting laws and regulations forthe public and SEC inspection and enforcement staff;

o responding to no-action requests and requests for exemptive relief;

o reviewing investment company and investment adviser filings;

o assisting the Commission in enforcement matters involvinginvestment companies and advisers; and

o advising the Commission on adapting SEC ruies'to newcircumstances.

Division of Enforcement

First and foremost, the SEC is a law enforcement agency. The Division ofEnforcement assists the Commission in executing its law enforcementfunction by recommending the commencement of investigations ofsecurities law violations, by recommending that the Commission bringcivil actions in federal court or as administrative proceedings before anadministrative law judge, and by prosecuting these cases on behalf of theCommission. As an adjunct to the SEC's civil enforcement authority, theDivision works closely with law enforcement agencies in the U.S. andaround the world to bring criminal cases when appropriate.

The Division obtains evidence of possible violations of the securities lawsfrom many sources, including market surveillance activities, investor tipsand complaints, other Divisions and Offices of the SEC, the self-regulatoryorganizations and other securities industry sources, and media reports.

All SEC investigations are conducted privately. Facts are developed to thefullest extent possible through informal inquiry, interviewing witnesses,examining brokerage records, reviewing trading data, and other methods.

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With a formal order of investigation, the Division's staff may compelwitnesses by subpoena to testify and produce books, records, and otherrelevant documents. Following an investigation, SEC staff present theirfindings to the Commission for its review. The Commission can authorizethe staff to file a case in federal court or bring an administrative action.In many cases, the Commission and the party charged decide to settle amatter without trial.

Common conduct that may lead to SEC investigations include:

e misrepresentation or omission of important information aboutsecurities;

• manipulating the market prices of securities;

o stealing customers' funds or securities;

a violating broker-dealers' responsibility to treat customers fairly;

o insider trading (violating a trust relationship by trading while inpossession of material, non-public information about asecurity); and

o selling unregistered securities.

Whether the Commission decides to bring a case in federal court or withinthe SEC before an administrative law judge may depend upon the type ofsanction or relief that is being sought. For example, the Commission maybar someone from the brokerage industry in an administrativeproceeding, but an order barring someone from acting as a corporateofficer or director must be obtained in federal court. Often, when themisconduct warrants it, the Commission will bring both proceedings.

Civil action: The Commission files a complaint with a U.S. DistrictCourt and asks the court for a sanction or remedy. Often theCommission asks for a court order, called an injunction, thatprohibits any further acts or practices that violate the law orCommission rules. An injunction can also require audits, accountingfor frauds, or special supervisory arrangements. In addition, theSEC can seek civil monetary penalties, or the return of illegal profits(called disgorgement). The court may also bar or suspend anindividual from serving as a corporate officer or director. A personwho violates the court's order may be found in contempt and besubject to additional fines or imprisonment.

Administrative action: The Commission can seek a variety ofsanctions through the administrative proceeding process.Administrative proceedings differ from civil court actions in thatthey are heard by an administrative law judge (AU), who isindependent of the Commission. The administrative law judgepresides over a hearing and considers the evidence presented bythe Division staff, as well as any evidence submitted by the subjectof the proceeding. Following the hearing the AU issues an initialdecision that includes findings of fact and legal conclusions. The

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initial decision also contains a recommended sanction. Both theDivision staff and the defendant may appeal all or any portion ofthe initial decision to the Commission. The Commission may affirmthe decision of the AU, reverse the decision, or remand it foradditional hearings. Administrative sanctions include cease anddesist orders, suspension or revocation of broker-dealer andinvestment advisor registrations, censures, bars from associationwith the securities industry, civil monetary penalties, anddisgorgement.

Division of Risk, Strategy, and Financial Innovation

The Division of Risk, Strategy, and Financial Innovation was establishedin September 2009 to help further identify developing risks and trends inthe financial markets.

This new Division is providing the Commission with sophisticated analysisthat integrates economic, financial, and legal disciplines. The Division'sresponsibilities cover three broad areas: risk.and economic analysis;strategic research; and financial innovation.

The emergence of derivatives, hedge funds, new technology, and otherfactors have transformed both capital markets and corporate governance.The Division of Risk, Strategy, and Financial Innovation is working toadvise the Commission through an interdisciplinary approach that isinformed by law and modern finance and economics, as well asdevelopments in real world products and practices on Wall Street and

Main Street.

Among the functions being performed by the Division are: (1) strategicand long-term analysis; (2) identifying new developments and trends infinancial markets and systemic risk; (3) making recommendations as tohow these new developments and trends affect the Commission'sregulator,v activities; (4) conducting research and analysis in furtheranceand support of the functions of the Commission and its divisions andoffices; and (5) providing training on new developments and trends andother matters.

Offices

Office of the General Counsel

The General Counsel is appointed by the Chairman as the chief legalofficer of the Commission, with overall responsibility for the establishmentof agency policy on legal matters. The General Counsel serves as thechief legal advisor to the Chairman regarding all legal matters andservices performed within, or involving, the agency, and provides legaladvice to the Commissioners, the Divisions, the Offices, and other SECcomponents as appropriate.

The General Counsel represents the SEC in civil, private, or appellateproceedings as appropriate, including appeals from the decisions of thefederal district courts or the Commission in enforcement matters, andappeals from the denial of requests under the Freedom of Information

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Act. Through its amicus curiae program, the General Counsel oftenintervenes in private appellate litigation involving novel or importantinterpretations of the securities laws, and the Office is responsible forcoordinating with the Department of Justice in the preparation of briefs onbehalf of the United States involving matters in which the SEC has aninterest.

The General Counsel is also responsible for determining the adherence byattorneys in the SEC to appropriate professional standards, as well as forproviding advice on standards of conduct to Commissioners and staff, asappropriate. It is responsible for the final drafting of all proposedlegislation that the Chairman or the Commission choose to submit forconsideration to the Congress or the states, and for coordinating the SECstaff positions on such legislation.

Office of the Chief Accountant

The Chief Accountant is appointed by the Chairman to be the principaladviser to the Commission on'accoiunting and auditing matters. The Officeof the Chief Accountant assists the Commission in executing itsresponsibility under the securities laws to establish accounting principles,and for overseeing the private sector standards-setting process. TheOffice works closely with the Financial Accounting Standards Board,whose accounting standards the Commission has recognized as generallyaccepted for purposes of the federal securities laws, as well as theInternational Accounting Standards Board and the American Institute ofCertified Public Accountants.

In addition to its responsibility for. accounting standards, the Commissionis responsible for the approval or disapproval of auditing rules put forwardby the Public Company Accounting Oversight Board, a private-sectorregulator established by the Sarbanes-Oxley Act to oversee the auditingprofession. The Commission also has thorough-going oversightresponsibility for all of the activities of the PCAOB, including approval ofits annual budget. To assist the Commission in the execution of theseresponsibilities, the Office of the Chief Accountant is the principal liaisonwith the PCAOB. The Office also consults with registrants and auditors ona regular basis regarding the application of accounting and auditingstandards and financial disclosure requirements.

Because of its expertise and ongoing involvement with questionsconcerning the financial books and records of public companies registeredwith the SEC, the Office of the Chief Accountant is often called upon toassist in addressing issues that arise in the context of Commissionenforcement actions.

Office of Compliance Inspections and Examinations

The Office of Compliance Inspections and Examinations administers theSEC's nationwide examination and inspection program for registered self-regulatory organizations, broker-dealers, transfer agents, clearingagencies, investment companies, and investment advisers. The Officeconducts inspections to foster compliance with the securities laws, todetect violations of the law, and to keep the Commission informed ofdevelopments in the regulated community. Among the more important

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goals of the examination program is the quick and informal correction ofcompliance problems. When the Office finds deficiencies, it issues a"deficiency letter" identifying the problems that need to be rectified andmonitor the situation until compliance is achieved. Violations that appeartoo serious for informal correction are referred to the Division ofEnforcement.

Office of Credit Ratings

The Office of Credit Ratings ("OCR" or the "Office") assists theCommission in executing its responsibility for protecting investors,promoting capital formation, and maintaining fair, orderly, and efficientmarkets through the oversight of credit rating agencies registered withthe Commission as nationally recognized statistical rating organizations or"NRSROs."

The staff of OCR monitors the activities and conducts examinations ofNRSROs to assess and promote compliance with statutory andCommission requirements. The monitoring activities are geared towardsinforming Commission policy and rulemaking and include identifying andanalyzing risks, monitoring industry trends, and administering andmonitoring the NRSRO registration process as well as the periodicupdates by existing registrant of their Forms NRSRO. The examinationactivities of the Office are focused on conducting legislatively mandatedannual, risk-based examinations of all registered NRSROs to assesscompliance with federal securities laws and Commission rules. The Officealso conducts special risk-targeted examinations based on credit marketissues and concerns and to follow up on tips, complaints, and NRSRO self-reported _incidents. The Office collaborates and coordinates with otherCommission Offices and Divisions as warranted to enhance the Office'sability to serve the public interest and protect users of credit ratings.

OCR is responsible for drafting annual public reports to Congressaddressing adopted and proposed rules, the status of registrants andapplicants, and the state of competition, transparency, and issues relatedto the management of conflicts of interest. The Office also drafts anannual public report summarizing the examinations of all NRSROs. TheOffice may be called upon to leverage its expertise to conduct ad-hocresearch as warranted by industry or credit market conditions and draftstatutorily mandated studies.

Office of International Affairs

The SEC works extensively in the international arena to promotecooperation among national securities regulatory agencies, and toencourage the maintenance of high regulatory standards worldwide. TheOffice of International Affairs assists the Chairman and the Commission inthe development and implementation of the SEC's internationalregulatory and enforcement initiatives. The Office negotiates bilateral andmultilateral agreements for Commission approval on such subjects asregulatory cooperation and enforcement assistance, and oversees theimplementation of such arrangements. It is also responsible for advancingthe Commission's agenda in international meetings and organizations.The Office also conducts a technical assistance program for countries withemerging securities markets, which includes training both in the United

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States and in the requesting country. Over 100 countries currentlyparticipate in this program.

Office of Investor Education and Advocacy

The Office of Investor Education and Advocacy has three main functionalareas:

The Office of Investor Assistance responds to questions, complaints,and suggestions from the members of the public. Tens of thousands ofinvestors contact the SEC each year using the agency's online forms orour (800) SEC-0330 hotline (toll-free in U.S.) to ask questions on a widerange of securities-related topics, to complain about problems with theirinvestments or their financial professionals, or to suggest improvementsto the agency's regulations and procedures.

The Office of Investor Education carries out the SEC's investoreducation program, which includes producing and distributing educationalmaterials, participating in educational seminars and investor-orientedevents, and partnering with federal agencies, state regulators, and otherson investor literacy initiatives.

The Office of Policy has responsibility for reviewing agency action fromthe perspective of the individual investor, including conducting investorsurveys and focus groups. It also plays a role in the Commission's effortsto help ensure that investor disclosures are written in plain English.

Office of the Chief Operating Officer

The Office of the Chief Operating Officer assists the Chairman indeveloping and executing the management policies of the SEC. The Officeformulates budget and authorization strategies, supervises the allocationand use of SEC resources, promotes management controls and financialinteg-r-i-ty, manages the administrative support offices, and oversees thedevelopment and implementation of the SEC's automated informationsystems. The Office has five main functional areas:

The Office of Financial Management administers the financialmanagement and budget functions of the SEC. The Office assists theChairman and the Executive Director in formulating budget andauthorization requests, monitors the utilization of agency resources, anddevelops, oversees, and rnairitains SEC financial systems. These activitiesinclude cash management, accounting, fee collections, travel policydevelopment, and oversight and budget justification and execution.

The Office of Support Operations assists the Chairman and the ExecutiveDirector in managing the agency's facilities and assets, and provides awide range of support services to the SEC staff. The Office serves theHeadquarters Office and all Regional Office locations on matters includingproperty management, office lease acquisition and administration, spacerenovation, supplies and office equipment management, transportation,mail distribution, publications, printing, and desktop publishing. Also,OSO is responsible for the processing of requests under the Freedom ofInformation and Privacy Acts, the management of all agency records in

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accordance with the Federal Records Act, and maintaining the securityand safety of all SEC facilities.

The Office of Human Resources assists the kYChairman in recruiting and retaining the bestand the brightest professional staff in the federal hi^workforce, and in ensuring that the SEC remains `the employer of choice within the federalgovernment. The Office has overall responsibilityfor the strategic management of the SEC'shuman capital. In addition, it is responsible forensuring compliance with all federal regulationsfor the following areas: recruitment, staffing,retention, and separation; position managementand classification; compensation and benefitscounseling and processing; leadership andemployee development; performance management and awards;employee relations; labor relations; the SEC's disability, work/life, andtelework programs; employee records processing'and maintenance; andemployee financial disclosure. The Office also represents the Commissionas the liaison to the U.S. Office of Personnel Management and otherFederal Government agencies, various public and private-sectorprofessional human resources organizations, and educational institutionsin matters relating to human capital management.

The Office of Information Technology supports the Commission and staffof the SEC in all aspects of information technology. The Office has overallmanagement responsibility for the Commission's IT program includingapplication development, infrastructure operations and engineering, usersupport, IT program management, capital planning, security, andenterprise architecture. The Office operates the Electronic Data GatheringAnalysis and Retrieval (EDGAR) system, which electronically receives,processes, and disseminates more than 500,000 financial statementsevery year. The Office also maintains a very active website that containsa wealth of information about the Commission and the securities industry,and also hosts the EDGAR database for free public access.

Office of Legislative Affairs and Intergovernmental Relations

The Office of Legislative Affairs andIntergovernmental Relations serves as theaaencv's formal liaison with the Congress, otherExecutive Branch agencies, and state and localgovernments. The staff carefully monitor ongoinglegislative activities and initiatives on Capitol Hillthat affect the Commission and its mission.Through regular communication and consultationwith House and Senate members and staff, theOffice communicates legislators' goals to theagency, and communicates the agency's ownregulatory and management initiatives to theCongress.

The Office is responsible for responding to congressional requests fortestimony of SEC officials, as well as requests for documents, technical

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assistance, and other information. In addition, the Office monitorslegislative and oversight hearings that pertain to the securities marketsand the protection of investors, even when an SEC witness is not present.

Office of Public Affairs

The Office of Public Affairs assists theCommission in making the work ofthe SEC open to the public,understandable to investors, andaccountable to taxpayers. It helpsevery other SEC Division and Officeaccomplish the agency's overallmission - to protect investors,maintain fair, orderly, and efficientmarkets, and facilitate capitalformation. The Office coordinates theagency's relations with the media andthe general public, in this country andaround the world.

In addition to publicizing the work ofd it staff the

Additional InformationAbout the SEC

o Addresses of SEC OfficesAcross the U.S.

o Useful TelephoneNumbersat the SEC

o SEC Organization Chart

o Annual Reports

a The SEC News Digest(daily bulletin of SECbusiness and activities)

the Commission an s ,Office assists in the enforcement ofthe Commission's policy concerning the confidentiality of law enforcementand investigative information, which is designed to protect the privacyrights of American citizens. The Office reviews and distributes within theagency press coverage of the SEC and of Commission-related issues,including the securities industry and the financial markets. It alsoprovides limited research where policy and public affairs goals overlap.

Office of the Secretary

The Secretary of the Commission is appointed by the Chairman, and isresponsible for the procedural administration of Commission meetings,rulemaking, practice, and procedure. Among the responsibilities of theOffice are the scheduling and recording of public and non-public meetingsof the Commission; the administration of the process by which theCommission takes action without a meeting (called the seriatim process);the administration of the duty-officer process (by which a singleCommissioner is designated to authorize emergency action); themaintenance of records of Commission actions; and the maintenance ofrecords of financial judgments in enforcement proceedings. The Officealso provides advice to the Commission and the staff on questions of

practice and procedure.

The Office reviews all SEC documents submitted by the staff to theCommission. These include rulemaking releases, SEC enforcement ordersand litigation releases, SRO rulemaking notices and orders, and actionstaken by SEC staff pursuant to delegated authority. In addition, itreceives and tracks documents filed in administrative proceedings,requests for confidential treatment, and comment letters on ruleproposals. The Office is responsible for publishing official documents andreleases of Commission actions in the Federal Re ister and the

Do ket, and it posts them on the SEC Internet website, www.sec.gov. The

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Office also monitors compliance with the Government in the SunshineAct.

Office of Equal Employment Opportunity

Because the SEC's employees are its most important resource, the Officeof Equal Employment Opportunity works to ensure that the agency'sprofessional staff come from diverse backgrounds that reflect thediversity of the investing public. Equal employment opportunity at theSEC is a continuing commitment. To maintain neutrality in resolvingdisputes, the EEO Office is independent of any other SEC office. The EEODirector reports to the Chairman. The primary mission of the EEO Officeis to prevent employment discrimination, including discriminatoryharassment, so that all SEC employees have the working environment tosupport them in their efforts to protect investors, maintain healthymarkets, and promote capital formation.

Office of-the Inspector General

The Office of the Inspector General conducts internal audits andinvestigations of SEC programs and operations. Through these audits andinvestigations, the Inspector General seeks to identify and mitigateoperational risks, enhance government integrity, and improve theefficiency and effectiveness of SEC programs.

Office of Administrative Law Judges

The Commission's Office of Administrative Law Judcaes consists ofindependent judicial officers who conduct hearings and rule on allegationsof securities law violations in cases initiated by the Commission. Whenthe Commission initiates a public administrative proceeding, it refers thecases to the Office, where it is assigned to an individual AdministrativeLaw Judge (AU). The AU then conducts a public hearing that is similar to

a non-;ury trial in the federal co^!rts. Just as a federal judge can do, anALJ issues subpoenas, rules on motions, and rules on the admissibility ofevidence. At the conclusion of the hearing, the parties submit proposedfindings of fact and conclusions of law. The ALJ prepares an initialdecision that includes factual findings and legal conclusions that arematters of public record. Parties may appeal an initial decision to theCommission, which can affirm, reverse, modify, set aside or remand forfurther proceedings. Appeals from Commission action are to a UnitedStates'^^"^^ ^'^^^.vu^^'^ of Ar-,rnp..°ai^ ^ v^ S.

The aws That overn the Securities Industry

Securities Act of

Often referred to as the "truth in securities" law, the Securities Act of1933 has two basic objectives:

® require that investors receive financial and other significantinformation concerning securities being offered for public sale; and

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o prohibit deceit, misrepresentations, and other fraud in the sale ofsecurities.

The full text of this Act is available at:http: //www sec.aov/about/laws/sa33.pdf.

Purpose of Registration

A primary means of accomplishing these goals is the disclosure ofimportant financial information through the registration of securities. Thisinformation enables investors, not the government, to make informedjudgments about whether to purchase a company's securities. While theSEC requires that the information provided be accurate, it does notguarantee it. Investors who purchase securities and suffer losses haveimportant recovery rights if they can prove that there was incomplete orinaccurate disclosure of important information.

The Registration Process

In general, securities sold in the U.S. must beregistered. The registration forms companies fileprovide essential facts while minimizing theburden and expense of complying with the law.In general, registration forms call for:

o a description of the company's propertiesand business;

o a description of the security to be offeredfor sale;

,,.

4 ^

rti'

o information about the management of the company; and

m financial statements certified by independent accountants.

All companies, both domestic and foreign, must file their registrationstatements electronically. These statements and the accompanyingprospectuses become public shortly after filing, and investors can accessthem using EDGAR. Registration statements are subject to examinationfor compliance with disclosure requirements.

Not all offerings of securities must be registered with the C.^.mmiSSlon.Some exemptions from the registration requirement include:

o private offerings to a limited number of persons or institutions;

a offerings of limited size;

e intrastate offerings; and

e securities of municipal, state, and federal governments.

By exempting many small offerings from the registration process, the SEC

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http://www.sec.gov/about/whatwedo.shtml 11/5/2012


seeks to foster capital formation by lowering the cost of offering thesetypes of securities to the public.

Securities E change Act of

With this Act, Congress created the Securities and Exchange Commission.The Act empowers the SEC with broad authority over all aspects of thesecurities industry. This includes the power to register, regulate, andoversee brokerage firms, transfer agents, and clearing agencies as well asthe nation's securities self regulatory organizations (SROs). The variousstock exchanges, such as the New York Stock Exchange, and AmericanStock Exchange are SROs. The Financial Industry Regulatory Authority,which operates the NASDAQ system, is also an SRO.

The Act also identifies and prohibits certain types of conduct in themarkets and provides the Commission with disciplinary powers overregulated entities and persons associated with them.

The Act also empowers the SEC to require periodic reporting ofinformation by companies with publicly traded securities.

Corporate Reporting

Companies with more than $10 million in assets whose equity securitiesare held by more than a specified number of holders must file annual andother periodic reports. These reports are available to the public throughthe SEC's EDGAR database.

Proxy Solicitations

The Securities Exchange Act also governs the disclosure in materials usedto solicit shareholders' votes in annual or special meetings held for theelection of directors and the approval of other corporate action. Thisinformation, contained in proxy materials, must be filed with theCommission in advance of any solicitation to ensure compliance with thedisclosure rules. Solicitations, whether by management or shareholdergroups, must disclose all important facts concerning the issues on whichholders are asked to vote.

Tender Offers

• ..^.;,,.,The Securities Exchange Act requires disciosure of irr^portan

..L I nl `^1- 1 1_.,.1 a.. ^^^^^by anyone seeking to acquire more than 5 percent of a company'ssecurities by direct purchase or tender offer. Such an offer often isextended in an effort to gain control of the company. As with the proxyrules, this allows shareholders to make informed decisions on thesecritical corporate events.

Insider Trading

The securities laws broadly prohibit fraudulent activities of any kind inconnection with the offer, purchase, or sale of securities. These provisionsare the basis for many types of disciplinary actions, including actionsagainst fraudulent insider trading. Insider trading is illegal when a person

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i.,_


trades a security while in possession of material nonpublic information inviolation of a duty to withhold the information or refrain from trading.

Registration of Exchanges, Associations, and Others

The Act requires a variety of marketparticipants to register with the Commission,including exchanges, brokers and dealers,transfer agents, and clearing agencies.Registration for these organizations involvesfiling disclosure documents that are updated ona regular basis.

4'^^^^ 9i% The exchanges and the Financial Industry}.` Regulatory Authority ( FINRA) are identified as

self-regulatory organizations (SRO). SROs mustcreate rules that allow for disciplining membersfor improper conduct and for establishing

measures to ensure market integrity and investor protection. SROproposed rules are published for comment before final SEC review andapproval.

The full text of this Act can be read at:http://www.sec.qov/about/laws/-sea34.pd -

Trust Indenture Act of

This Act applies to debt securities such as bonds, debentures, and notesthat are offered for public sale. Even though such securities may beregistered under the Securities Act, they may not be offered for sale tothe public unless a formal agreement between the issuer of bonds andthe bondholder, known as the trust indenture, conforms to the standardsof this Act. The full text of this Act can be read at:http °//www sec aov/about/laws/tia39.odf.

Investment Company Act of

This Act regulates the organization of companies, including mutual funds,that engage primarily in investing, reinvesting, and trading in securities,and whose own securities are offered to the investing public. Theregulation is designed to minimize conflicts of interest that arise in thesecomplex operations. The Act requires these companies to discfose t heirfinancial condition and investment policies to investors when stock isinitially sold and, subsequently, on a regular basis. The focus of this Act ison disclosure to the investing public of information about the fund and itsinvestment objectives, as well as on investment company structure andoperations. It is important to remember that the Act does not permit theSEC to directly supervise the investment decisions or activities of thesecompanies or judge the merits of their investments. The full text of thisAct is available at: http:/Iwww.sec.gov/`about/laws/--ica4o.r)d f.

Investment Advisers Act of

This law regulates investment advisers. With certain exceptions, this Act

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requires that firms or sole practitioners compensated for advising othersabout securities investments must register with the SEC and conform toregulations designed to protect investors. Since the Act was amended in1996, generally only advisers who have at least $25 million of assetsunder management or advise a registered investment company mustregister with the Commission. The full text of this Act is available at:http://www.sec.qov/about/laws/laa40. pdf.

Sarbanes 0 ley Act of

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Actof 2002, which he characterized as "the most far reaching reforms ofAmerican business practices since the time of Franklin Delano Roosevelt."The Act mandated a number of reforms to enhance corporateresponsibility, enhance financial disclosures and combat corporate andaccounting fraud, and created the "Public Company Accounting OversightBoard," also known as the PCAOB, to oversee the activities of the auditingprofession. The full text of the Act is available at:http•//uscode house gov/download/p(s/15C98.txt. (Please check theClassification Tables maintained by the US House of RepresentativesOffice of the Law Revision Counsel for updates to any of the laws.) Youcan find links to all Commission rulemaking and reports issued under theSarbanes-Oxley Act at: http://www.sec.gov/spotiight/sarbanes-ox[ey.htm.

Dodd Frank all Street Reform and Consumer Protection Act of

The Dodd-Frank Wall Street Reform and Consumer Protection Act wassigned into law on July 21, 2010 by President Barack Obama. Thelegislation set out to reshape the U.S. regulatory system in a number ofareas including but not limited to consumer protection, tradingrestrictions, credit ratings, regulation of financial products, corporategovernance and disclosure, and transparency. The full text of the Act isav?-i(abJe at: http://www.sec.gov/about/laws/waIIstreetreform-cpa.pdf.(Please check the Classification Tables maintained by the US House ofRepresentatives Office of the Law Revision Counsel for updates to any ofthe laws.) You can find links to all Commission rulemaking and reportsissued under the Dodd Frank Act at: http•//www.sec.clov/spotlight/dodd-frank.shtml.

umpstart Our usiness Startups 0 S Act

On April 5, 2012, the Jumpstart Our Business Startups (JOBS)Act wassigned into law by President Barack Obama. The JOBS Act requires theSEC to write rules and issue studies on capital formation, disclosure, andregistration requirements. Cost-effective access to capital for companiesof all sizes plays a critical role in our national economy, and companiesseeking access to capital should not be hindered by unnecessary or overlyburdensome regulations. For more information on the JOBS Act, see ourJumpstart Our Business Startups (JOBS) Act Spotlight page.

http se . ov a o t hat edo.sht l

Modified: 10/12/2012

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< How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Fo... Page 20 of 20

Contact I Employment I Links I FOIA I Forms I Privacy Policy

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Accounting and Auditing for Related Partiesand Related Party Transactions

A Toolkit for Accountants and Auditors

Prepared by the staff of theAmerican Institute of Certified Public Accountants

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Notice To Readers and Acknowledgments

This electronic document was developed by staff of the American Institute of Certified Public

Accountants. While this toolkit is not intended to break any new ground, it is intended to provideaccountants and auditors with an overview of selected authoritative accounting and auditing literature,SEC requirements and nonauthoritative best practice guidance concerning related parties and relatedparty transactions. Additionally, this toolkit contains illustrative checklists and other tools that CPAs

may find useful in helping to comply with authoritative related party accounting and auditingstandards. This publication has not been approved, disapproved, or otherwise acted upon by any seniortechnical coinmittee of the AICPA or the Financial Accounting Standards Board and has no official or

authoritative status.

The auditing portion of this publication is an Otlzei• Auditing Publication as defined in SAS 95,

Gener•ally Accepted Auditing Standards. Other Auditing Publications have no autlioritative status;however, they may help the auditor understand and apply Statements on Auditing Standards (SASs).

If an auditor applies the auditing guidance included in an Other Auditing Publication, he or

she should be satisfied that, in his or her judgment, it is both appropriate and relevant to thecircumstances of his or her audit. This publication was reviewed by the AICPA Audit and AttestStandards staff and published by the AICPA, and is presumed to be appropriate.

I would particularly like to acknowledge and thank the AICPA Related Party Toolkit Team for

their exeinplary efforts in researching, writing and producing this timely document. The members ofthat team include:

Kim Gibson - Technical Manager, Audit and Attest StandardsFred Gill - Senior Technical Manager, Accounting StandardsJeanne Parsons - Technical Manager, SEC Practice Section

Appreciation is also expressed to the following AICPA staff for their support and contributions

to this guide:

Al Anderson, Senior Vice President, Technical StandardsSusan Coffey, Vice President, Self-Regulation and SEC Practice SectionJennifer Roddy, Director, SEC Practice Section

The AICPA is extremely grateful to the following accounting and auditing fn•ms that have

supporied this efioii by sharing with uS their related par!^,^ prartirP guirlance and for providing helpful

review comments.

Andersen LLPBDO Seidman LLPDeloitte & Touche LLPEmst & Young LLPGrant Thornton LLPKPMG LLPMcGladrey & Pullen LLPPricewaterhouseCoopers LLP

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Finally, we wish to acknowledge that this publication draws heavily from the AICPA

publication, Practice Alert No. 95-3, Auditing Related Parties and Related Party Ti•ansactions.

Charles E. LandesDirector, Audit & Attest Standards December 2001

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CONTENTSINTRODUCTION ..................................................... 5.............................................................................

SUMMARY OF ACCOUNTING LITERATURE .............................................................................. 7

DISCLOSURE OF TRANSACTIONS WITH RELATED PARTIES ......................................................................... 7

SEC NON-FINANCIAL STATEMENT DISCLOSURE REQUIREMENTS .............................................................. 9

ACCO UNTING FOR INVESTMENTS IN OTHER ENTITIES ............................................................................. 14

ACCOUNTING FOR SPECIAL-PURPOSE ENTITIES ..................................................................................... 19

OTHER FINANCIAL REPORTING MATTERS ............................................................................................... 22

SUMMARY OF AUDITING LITERATURE .................................................................................... 23

PLANNING'AND SUPERVISION ........... ............................................................ ........................................ .. 23

A UDITING RELATED PARTIES ................................................................................................................. 24

Related Party Indicators ................................................................................................................. 24Determining the Existence of Related Parties ................................................................................ 25

Identi, fying Transactions With Retated Parties ....................................................:.......................... 26Examining Identified Related Party Transactions .......................................................................... 26Auditing Disclosures .................................................................................................................... ... 27Audit Documentation ...................................................................................................................... 28

AUDITING OFF BALANCE SHEET ARRANGEMEN7S THAT MAYINVOLVE RELATED PARTIES ..................::::: ^89

RELATED PARTY TRANSACTIONSAND FRAUD ....................................................................................

MANAGEMENT REPRESENTATIONS ......................................................................................................... 31

ENGAGEMENTSTAFFING AND OTHER Q. C. CONSIDERATIONS ................................................................. 31

DISCLOSURE UPDATE AND CONSIDERATIONS ......................................................................................... 31

POTENTIAL RELATED PARTY INDICATORS .......................................................................... 33

APPENDIX I - ILLUSTRATIVE AUDIT PROGRAM FOR RELATED PARTIES ................... 35

APPENDIX II - ILLUSTRATIVE DISCLOSURE CHECKLIST FOR RELATED PARTIES.. 41

APPENDIX III - ILLUSTRATIVE RLLATED PARTY LETTERS .............................................. 45

ILL USTRATIVE RELATED PART}' CONFIRrLIAT1ON LETTER ......................................................................... 45

ILL USTRATIVE LETTER TO OTHER A UDITORS REGARDING RELATED PARTIES .......................................... 48

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INTRODUCTION

One of the more important and yet more difficult aspects of a financial statement audit is theidentification of related patties and transactions with related parties. This aspect of the audit isimportant because of (1) the requirement under generally accepted accounting principles to disclosematerial related party transactions and certain control relationships, (2) the potential for distorted ormisleading fmancial statements in the absence of adequate disclosure, and (3) the instances offraudulent fmancial reporting and misappropriation of assets that have been facilitated by the use of anundisclosed related party. An undisclosed related pat-ty is a powerful tool in the hands of anunscrupulous person. Related parties, such as controlled entities, principal stockholders ormanagement can execute transactions that improperly inflate eat-nings by masking their economicsubstance or distort reported mults through lack of disclosure, or can even defraud the company bytransfet-ring funds to conduit related pat-ties and ultimately to the perpetrators.

Related parties and related party transactions are difficult to audit for several reasons. First,transactions with related parties are not always easily identifiable. For example, a series of sales in thenormal course of business, individually insignificant, could be executed with an undisclosed relatedparty that in total could be material. Second, although other procedures are ordinarily perfonned, theauditor relies primarily upon managetnent and principal owners to identify all related parties andrelated party transactions. Third, such transactions may not be easily tracked by a company's intetnal

control.

Due to this complexity, the proper accounting and auditing of related party transactions requires asound understanding and extremely careful analysis. We believe that this toolkit will assistaccountants and auditors in better understanding some of iie current issues pertaining to related pat-tiesand related pat-ty transactions. Additionally, we believe that this toolkit will serve as a valuable

reference guide when dealing with this complex topic.

Generally accepted accounting principles define related pat-ties and requires certain disclosuresregarding material related pat-ty transactions, as weli as the nature of control relationships that couldresult in operating results or financial positions significantly different fi•om those that would have been

achieved in the absence of such relationships, regardless of wliether there were transactions between oramong the related parties. In the "Summaty of Accountin- Literature" you will find an ovetview of

accounting guidance applicable to related pat-ties; and, because some unconsolidated, non-independent,limited putpose entities, often referred to as structured finance or special putpose entities may berelated parties, we have also included in this summat certa.in accounting guidance we believe you

.1:.., nr ^N^h Pilt lQltiC,may finci useful in better undersianuu^g a:count^iun.brt ^f^. s

Generally accepted auditing standards provide guidance on procedures that should be considered bythe auditor to identify related party relationships and transactions, and to satisfy him or herself thatsuch relationships and material transactions are properly accounted for and adequately disclosed in thefinancial statements. In the section titled "Summat-y of Auditing Literature," we have providedsummaries of authoritative auditing guidance as well as nonautlioritative guidance applicable toauditing related pat-ties including nonauthoritative guidance on auditing off-balance sheet arrangements

that may involve related pat-ties.An audit pet-fotmed in accordance with generally accepted auditing standards cannot be expected toprovide assurance that all related pat-ties have been identified. However, during the auditor'sassessment of risk, one of the factors that should be considered is the existence of related parties and

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the extent and nature of transactions with those parties, particularly if one of the related parties is eitherunaudited or audited under questionable circumstances, such as significant scope limitations orquestions as to the professional reputation and independence of the other auditors. When there aresignificant transactions between related parties and the scope of the audit does not cover the records ofthe other significant pat-ties to the transactions (for example, an entity owned by the president of thecompany that provides management seivices to the company, but is not subject to audit), there isincreased audit riskt . This issue may be particularly troublesome when material transactions involveindividuals such as stockholders or officers, because individuals are rarely subject to audit.

The existence of related parties and transactions with such parties alone is not necessarily an indicationof increased audit risk. However, the auditor should consider the possibility that related. partytransactions might have been motivated by a desire to improve reported earnings or financial positionor by fiaud. Specific examples of related party relationships and related issues have been compiledbased on input from the patticipattng accounting and auditing fn-ms as well as the AICPA SECPractice Section and are included in the section entitled "Potetitial Related Party Indicators ".

This toollcit also includes an Illustrative Audit Program for Related Parties, an Illustrative Disclosure

Checklist for Related Pat-ties and Illustrative Related Party Letters. These tools are based on the best

practices guidance received from the pat-ticipating accounting and auditing fitms and should be

appropriately tailored to the specific client.

As announced in our December 4, 2001 press release; the AICPA is working cooperatively with the

five largest U.S. auditing fums on several other related projects. One task force will provide specific

recoinmendations to the SEC. Those recormnendations include asking the SEC to provide interpretive

disclosure guidance for 2001 public company annual reports in tluee critical areas where greatertransparency could provide investors with information important to an understanding of the financial

statements. Another task force is preparing a document that will provide an assessment of risk factors

that may be important for financial statement preparers, auditors, and audit comtnittees to consider

during the current reporting cycle and suggestions as to how each of these major constituencies can

contribute to promoting better financial reporting for the benefit of investois.

Because of these and other events and current circumstances, we encourage accountants and auditors to

continue to monitor the AICPA's website for these and other new developments. We will occasionallyupdate this electronic toolkit as new standards or guidance applicable to related pat-ties become

available.

1 Audit risk consists of (a) the risk (consisting of inherent risk and control risk) that the balance or class and relatedassertions contain misstatements (whether caused by error or fraud) that could be material to the financial statements whenaggregated with misstatements in other balances or classes and (b) the risk (detection risk) that the auditor will not detect

such misstatements. See SAS No. 47, Atidit Risk and Malei•iality in Conducting anAudit, (AICPA, Professional

Slandards, vol. 1, AU sec.3 12.27) for further discussion of inherent risk, control risk and detection risk.

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SUMMARY OF ACCOUNTING LITERA.TURE

This section provides an overview of selected authoritative accounting literature and Securities andExchange Commission (SEC) requirements concerrting accounting for related entities and disclosureof transactions with related pat-ties. It also includes an ovetview of selected authoritative accountingliterature and SEC requirements concerrting special-purpose entities. Accounting for related entitiesand disclosure of transactions with related parties are pervasive financial reporting issues, and thissection is not intended to identify or address all possible matters concerning those issues. Furthermore,this publication should not be used as a substitute for the original authoritative accounting literatureand SEC literature; readers should consult the original authoritative accounting literature and SECliterature in identifying and resolving accounting and disclosure issues affecting a pat-ticular reportingentity. Moreover, SEC registrants are encouraged to discuss unusual transactions with the SEC staff

on a pre-filing basis.

Disclosui•e of Transactions with Related Pai•ties

FASB Statement No. 57, Related Party Discloszmes, `provides guidance on the disclosure of

transactions with related pat-ties. Examples of related pat-ties transactions include transactions between:

• A parent company and its subsidiaries;

• Subsidiaries of a cotrunon parent;• An entetprise and trusts for the benefit of employees, such as pension and profit-sharing trusts that

are managed by or under the trusteeship of the enterprise's management;• An enterprise and its principal owners, management, or tnembers of their immediate families, and

• Affiliates.

Transactions between related pat-ties commonly occur in the normal course of business. Someexamples of common types of transactions with related parties are: sales, purchases, and transfers ofrealty and personal property; setvices received or futrtished, for example, accounting, management,engineering, and legal services; use of property and equipment by lease or otherwise; borrowings andlendings; guarantees; maintenance of bank balances as compensating balances for the benefit ofanother; intercompany billings based on allocations of common costs; and filings of consolidated taxreturns. Transactions between related parties are considered to be related pat-ty transactions eventhough they may not be given accounting recognition. For example, an enterprise may receive setvicesfrom a related party without cllarge and not record receipt of the setvices.

FASB Statement No. 57 defines related parties as the following:• Affiliates of the entetprise. An affiliate is a party that, directly or indirectly through one or more

intermediaries, controls, is controlled by, or is under common control with an enterprise. Control

for purpose of FASB Statement No. 57 means the possession, direct or indirect, of the power todirect or cause the direction of the management and policies of an enterprise through ownership, by

contract, or otherwise.• Entities for wliich investments are accounted for by the equity method by the entetprise.

• Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by

or under the trusteeship of management.• Principal owners of the enterprise. Principal owners are owners of record or known beneficial

owners of more than 10 percent of the voting interests of the enterprise.

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• Management of the enterprise. Management includes persons who are responsible for achievingthe objectives of the enterprise and who have the authority to establish policies and make decisionsby which those objectives are to be pursued. Management normally includes members of the boardof directors, the chief executive officer, chief operating officer, vice presidents in charge ofprincipal business functions (such as sales, administration, or finance), and other persons wlioperfoim similar policymaking functions. Persons without fortnal titles also may be members of

management.• Members of the immediate families of principal owners of the entetprise and its management.

Imtnediate family includes family membets whom a principal owner or a member of managementmight control or influence or by whom they might be controlled or influenced because of the

family relationship.• Other parties with which the entetprise may deal if one party controls or can significantly influence

the management or operating policies of the other to an extent that one of the transacting partiesmight be prevented fiotn fully pursuing its own separate interests.

• Other parties that can signif cantly influence the management or operating policies of thetransacting patties or that have an ownership interest in one of the transacting pat-ties and cansignificantly influence the other to an extent that one br more of the transacting pat-ties might beprevented from fully pursuing its own separate interests.

Financial statements must include disclosures of material related pat-ty transactions, other thancompensation arrangements, expense allowances, and other similar items in the ordinaty course ofbusiness. However, disclosure of transactions that are eliminated in the preparation of consolidated orcombined financial statements is not required in those statetnents? The disclosures must include ?

a. The nature of the relationship(s) involved.b. A description of the transactions, including transactions to which no amounts or nominal

amounts were ascribed, for each of the periods for which income statements are presented, andsuch other infortnation deemed necessaty to an understanding of the effects of the transactions

on the fmancial statements.c. The dollar amounts of transactions for each of the periods for which income statements are

presented and the effects of any change in the method of establishing the terms frorn that used

in the preceding period.d. Amounts due fiom or to related parties as of the date of each balance sheet presented and, if not

otherwise apparent, the tenns and manner of settlement.

Transactions involving related pat-ties catirtot be presumed to be carried out on an arm's-length basis,as the requisite conditions of competitive, free-market dealings may not exist. Representations abouttransactions with related pat-ties, if made, may not imply that the i°eiated patty t-L ansactions v.ere

consummated on tenns equivalent to those that prevail in ann's-length transactions unless those

representations can be substantiated.

2 The requirements of FASB Statement No. 57 are applicable to separate financial statements of each or combined groupsof each of the following: a parent company, a subsidiary, a corporate joint venture, or.a 50-percent-or less owned investee.However, it is not necessary to duplicate disclosures in a set of separate financial statements that is presented in thefinancial report of another enterprise (the primary reporting enterprise) if those separate financial statements also areconsolidated or combined in a complete set of financial statements and both sets of _fi_nancial statements are presented in the

same financial report.3 In some cases, aggregation of similar transactions by type of related party may be appropriate. Sometimes, the effect ofthe relationship between the parties may be so pervasive that disclosure of the relationship alone will be sufficient. Ifnecessary to the understanding of the relationship, the name of the related party should be disclosed.

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If the reporting entetprise and one or more other entetprises are under common ownership ormanagement control and the existence of that control could result in operating results or fmancialposition of the reporting entetprise significantly different from those that would have been obtained ifthe enterprises were autonomous, the nature of the control relationship must be disclosed even though

there are no transactions between the entetprises.

For SEC registrants, SEC regulation S-X, rules 4-08(k)(1) and (2) set forth the following additional

requirements:(k) Related party transactions, which affect the financial statements. (1) Related party

transactions should be identified and the amounts stated on the face of the balancesheet, income statement, or statement of cash flows.(2) In cases where separate financial statements are presented for the registrant, certaininvestees, or subsidiaries, separate disclosure shall be made in such statements of theamounts in the related consolidated fmancial statements which are (i) elitninated and (ii)

not eliminated. Also, any - intercompany profits or losses resulting from transactionswith related parties and not eliminated and the effects thereof shall be disclosed.

SEC Non-Financial Statement Disclosure Requirements

SEC Regulation S-K (Reg. § 229.404. Item 404) requires disclosure of certain relationships and relatedtransactions in the nonfinancial-statetnent portions of registration statements filed under the 1933securities act and registration statements, annual reports, proxy statements, and any other documentsrequired to be filed under the 1934 securities act, as follows:

(a) Transactions with management and others. Describe briefly any transaction, or series

of similar transactions, since the beginning of the registrant's last fiscal year, or anycut-rently proposed transaction, or series of similar transactions, to which the registrant orany of its subsidiaries was or is to be a party, in which the amount involved exceeds$60,000 and in which any of the following persons had, or will have, a direct or indirectmaterial interest, naming such person and indicating the person's relationship to theregistrant, the nature of such person's interest in the transaction(s), the annount of suchtransaction(s) and, where practicable, the amount of such person's interest in the

transaction(s):(1) Any director or executive officer of the registrant;(2) Any nominee for election as a director;(3) Any security holder who is lcnown to the registrant to own of record

beneficially tnore than five percent of any class of the registrant's voting

securities; and(4) Any tnember of the immediate fatnily of any of the foregoing persons.

Instructions to Paragraph (a) of Itenz 404.1. The materiality of any interest is to be detennined on iie basis of the

significance of the infonnation to investors in light of all the circumstances of thepat-ticular case. The importance of the interest to the person having the interest,the relationship of the paities to the transaction with each other and the amountinvolved in the transactions are among the factors to be considered in determiningthe significance of the information to investors.

9 -87-

2. For purposes of paragraph (a), a person's immediate family shallinclude such person's spouse; parents; children; siblings; mothers and fathers-in-law; sons and daughters-in-law; and brothers and sisters-in-law.

3. In computing the amount involved in the transaction or series of similartransactions, include all periodic installments in the case of any lease or otheragreement providing for periodic payments or installments.

4. The amount of the interest of any person specified in paragraphs (a)(1)through (4) shall be computed without regard to the amount of the profit or loss

involved in the transaction(s).5. In describing any transaction involving the purchase or sale of assets by

or to the registrant or any of its subsidiaries, otherwise than in the ordinary courseof business, state the cost of the assets to the purchaser and, if acquired by theseller within two years prior to the transaction, the cost thereof to the seller.Indicate the principle followed in detennining the registrant's purchase or saleprice and the name of the person making such deterinination.

6. Information shall be furnished in answer to paragraph (a) with respectto transactions that involve remuneration from, the registrant or its subsidiaries,directly or indirectly, to any of the persons specified in paragraphs (a)(1) through(4) for seivices in any capacity unless the interest of such person arises solelyfrom the ownership individually and in_ the aggregate of less than ten percent ofany class of equity securities of another coiporation fumishing the services to the

registrant or its subsidiaries.7. No infortnation need be given in answer to paragraph (a) as to any

transactions where:A. The rates or charges involved in the transaction are determined by

competitive bids, or the transaction involves the rendering of seivices as acommon or contract carrier, or public utility, at rates or charges fixed in

confonnity with law or governmental authority;B. The transaction involves services as a bank depositary of funds,

transfer agent, registrar, trustee under a trust indenture, or similar seivices;

orC. The interest of the person specified in paragraphs (a)(1) through (4)

arises solely fiom the ownership of securities of the registrant and suchperson receives no extra or special benefit not shared on a pro rata basis.8. Paragraph (a) requires disclosure of indirect, as well as direct, material

interests in transactions. A person who has a position or relationship with a firm,cotporation, or other entity that engages in a transaction with the registrant or itssu'os i''Pct ;,,te,•est in such transaction by reason of suchidiaries ;na-y have an indposition or relationship. Such an interest, however, shall not be deemed "material"within the meaning of paragraph (a) where:

A. The interest arises only (i) from such person's position as a directorof another coiporation or organization which is a party to the transaction;or (ii) from the direct or indirect ownership by such person and all otherpersons specified in paragraphs (a)(1) through (4), in the aggregate, of lessthan a ten percent equity interest in another person (other than apartnership) which is a pai-ty to the transaction; or (iii) from both such

position and ownership;B. The interest arises only from such person's position as a limited

partner in a partnership in which the person and all other persons specified

10 -88-

in paragraphs (a)(1) through (4) have an interest of less than ten percent;

orC. The interest of such person arises solely from the holding of an

equity interest (including a limited pat•tnership interest, but excluding ageneral partnership interest) or a creditor interest in another person that isa party to the transaction with the registrant or any of its subsidiaries, andthe transaction is not material to such otller person.9. There may be situations where, although these instructions do not

expressly authorize nondisclosure, the interest of a person specified in paragraphs(a)(1) through (4) in a particular transaction or series of transactions is not a director indirect material interest. In that case, information regarding such interest andtransaction is not required to be disclosed in response to this paragraph.

(b) Certain business relationships. Describe any of the following relationships regardingdirectors or nominees for director that exist, or have existed during the registrant's lastfiscal year, indicating the identity of the entity with which the registrant has such arelationship, the name of the nominee or director affiliated with such entity and the natureof such nominee's or d'u•ector's affiliation, - the ielationship between such entity and theregistrant and the amount of the business done between the registrant and the entityduring the registrant's last full fiscal year or proposed to be done during the registrant'scurrent fiscal year:

(1) If the nominee or director is, or during the last fiscal year has been, anexecutive officer of, or owns, or during the last fiscal year has owned, of record orbeneficially in excess of ten percent equity interest in, any business or professional entitythat has made during the registrant's last full fiscal year, or proposes to make during theregistrant's cuu-rent fiscal year, payments to the registrant or its subsidiaries for propertyor seivices in excess of five percent of (i) the registrant's consolidated gross revenues forits last full fiscal year, or (ii) the otller entity's consolidated gross revenues for its last full

fiscal year;(2) If the nominee or director is, or during the last fiscal year has been, an

executive officer of, or owns, or during the last fiscal year has owned, of record orbeneficially in excess of ten percent equity interest in, any business or professional entityto which the registrant or its subsidiaries has made during the registrant's last iall fiscalyear, or proposes to make during the registrant's current fiscal year, payments forproperty or services in excess of five percent of (i) the registrant's consolidated grossrevenues for its last full fiscal (year, or (ii) the other entity's consolidated gross revenues

for its last full fiscal year;(3) If the nominee or director is, or during the last fiscal year has been, an

executive officer of, or owns, or during the last fiscal year has owned, of record orbeneficially in excess of ten percent equity interest in, any business or rn,rnfPCSinnal entityto which the registrant or its subsidiaries was indebted at the end of the registrant's lastfull fiscal year in an aggregate amount in excess of five percent of the registrant's total

consolidated assets at the end of such fiscal year;(4) If the nominee or director is, or during the last fiscal year has been, a member

of, or of counsel to, a law firin that the issuer has retained during the last fiscal year or toretain during the current fiscal year; Provided, however, that the dollar amount of fees

paid to a law firm by the registrant need not be disclosed if such amount does not exceedfive percent of the law finn's gross revenues for that firm's last full fiscal year;

(5) If the nominee or director is, or during the last fiscal year has been, a partneror executive officer of any investment banking firm that has performed seivices for the

11-89-

registrant, other than as a participating underwriter in a syndicate, during the last fiscalyear or that the registrant proposes to have pet-fortn services during the current- year;

Provided, however, that the dollar amount of compensation received by an investmentbanking firm need not be disclosed if such amount does not exceed five percent of theinvestment banking firtn's consolidated gross revenues for that firm's last full fiscal year;

or(6) Any other relationships that the registrant is aware of between the

nominee or director and the registrant that are substantially similar in nature and scope tothose relationships listed in paragraphs (b)(1) through (5).

Instructions to Paragraph (b) of Itenz 404.1. In order to detertnine whetller payments or indebtedness exceed five

percent of the consolidated gross revenues of any entity, other than the registrant,it is appropriate to rely on information provided by the nominee or director.

2. In calculating payments for property and setvices the following may be

excluded:A. Paytnents where the rates or charges involved in the transaction aredetertnined by competitive bids, or the transaction involves the renderingof setvices as a common contract carrier, or public utility, at rates orcharges fixed in confonnity with law or governmental authority;B. Payments that arise solely from the ownership of securities of theregistrant and no extra or special benefit not shared on a pro rata basis byall holders of the class of securities is received; orC. Payments made or received by subsidiaries other than significantsubsidiaries as defined in Rule 1-02(w) of Regulation S-X [§ 210.1-02(w)], provided that all such subsidiaries making or receivirtg payments,when considered in the aggregate as a single subsidiaty, would notconstitute a significant subsidiaty as defined in Rule 1-02(w).3. In calculating indebtedness the following may be excluded:A. Debt securities that have been publicly offered, admitted to trading ona national securities exchange, or quoted on the automated quotationsystem of a registered securities association;B. Amounts due for purchases subject to the usual trade tertns; orC. Indebtedness incurred by subsidiaries other than significantsubsidiaries as defined in Rule 1-02(w) of Regulation S-X [§ 210.1-02(w)], provided that all sucll subsidiaries incurring indebtedness, whenconsidered in the aggregate as a single subsidiaty, would not constitute asignificant subsidiary as defined in Rule 1-02(w).

tt t t ; NP ^evtin4. ivo information cattea for oy paragraph kv) r^ee .-1U v. gtve:. ..,sr ==gany director who is no longer a director at the tune of filing the registrationstatement or report containing such disclosure. If such information is beingpresented in a proxy or uifonnation statement, no information need be givenrespecting any director whose term of office as a director will not continue afterthe meeting to which the statement relates.

(c) Indebtedness of management. If any of the following persons has been indebted tothe registrant or its subsidiaries at any time since the beginning of the registrant's lastfiscal year in an amount in excess of $60,000, indicate the name of such person, thenature of the person's relationship by reason of which such person's indebtedness isrequired to be described, the largest aggregate amount of indebtedness outstanding at

12-90-

any time during such period, the nature of the indebtedness and of the transaction inwhich it was incurred, the amount thereof outstanding as of the latest practicable dateand the rate of interest paid or charged thereon:(1) Any director or executive officer of the registrant;(2) Any nominee for election as a director;(3) Any member of the irrunediate family of the persons specified in paragraph (c)(1) or

(2);(4) Any corporation or organization (other than the registrant or a majority-owned subsidiary of the registrant) of which any of the persons specified inparagraphs (c)(1) or (2) is an executive officer or partner or is, directly or

indirectly, the beneficial owner of ten percent or more of any class of equity

securities; and(5) Any trust or other estate in which any of the persons specified in paragraph (c)(1)or (2) has a substantial beneficial interest or as to which such person serves as a trustee

or in a similar capacity.

Instructions to Paragraph (c) of Item 404.1. For purposes of paragraph (c), the members of a person's immediate

family are those persons specified in Instruction 2 to Item 404(a).2. Exclude fiom the detennination of the amount of indebtedness all

amounts due from the pat-ticular person for purchases subject to usual tradetenns, for ordinaty travel and expense payments and for other transactions in the

ordinary course of business.3. If the lender is a bank, savings and loan association, or broker-dealer

extending credit under Federal Reseive Regulation T [12 CFR Part 2201 and theloaris are not disclosed as nonaccrual, past due, restructured or potential problems(see Item.III.C.l. and 2. of Industhy Guide 3, Statistical Disclosure by BankHolding Companies), disclosure may consist of a statement, if such is the case,that the loans to such persons (A) were made in the ordina ►y course ofbusiness,(B) were made on substantially the same teims, including interest ratesand collateral as those prevailing at the tune for comparable transactions withotlier persons, and (C) did not uivolve more than the normal risk of collectibility

or present other unfavorable features.4. If any indebtedness required to be described arose under Section 16(b) of theExchange Act and has not been discharged by payment, state the amount of anyprofit realized, that such profit will inure to the benefit of the registrant or itssubsidiaries and whether suit will be brought or other steps taken to recover suchprofit. If, in the opinion of counsel, a questiori reasonably exists as to therecoverability of such profit, it will suffice to state all facts necessaty to describethe transactions, including the prices and number of shares involved.(d) Transactions with promoters. Registrants ilat have been organized within the

past five years and that are filing a registration statement on Foim S-1 under theSecurities Act [§239.11] or on Form 10 and Form 10-SE under the Exchange Act

[§249.210 and § 249.210b] shall:(1) State the names of the promoters, the nature and amount of anything of value

(including money, property, contracts, options or rights of any kind) received or to bereceived by each promoter, directly or indirectly, from the registrant and the nature andamount of any assets, set vices or otlier consideration therefor received or to be received

by the registrant; and

13 -91-

(2) As to any assets acquired or to be acquired by the registrant from a promoter,state the amoutit at which the assets were acquired or are to be acquired and the principlefollowed or to be followed in detetmining such amount and identify the persons makingthe determination and their relationship, if any, with the registrant or any promoter. If theassets were acquired by the promoter within two years prior to their transfer to theregistrant, also state the cost thereof to the promoter.

Instructions to Item 404.1. No information need be given in response to any paragraph of Item 404

as to any compensation or other transaction reported in response to any otherparagraph of Item 404 or to Item 402 of Regulation S-K [§229.402] or as to anycompensation or transaction with respect to which infotmation may be omitted

pursuant to Item 402.2. If the infonnation called for by Item 404 is being presented in a

registration statement filed pursuant to the Securities Act or the Exchange Act,infonnation shall be given for the periods specified in this Item and, in addition,for the two fiscal years preceding the registrant's last fiscal year.

3. A foreign private issuer may respond to Item 404 only to the extent thatthe registrant discloses to its security holders or otherwise malces public theinfonnation specified in that Item.

[As last amended in Release No. FR-44, December 13, 1994, 59 F.R. 65632.1]

Accounting for Investments in Other Entities

Consolidation. Accounting Research Bulletin (ARB) 51, Consolidated Financial Statements, as

amended by Financial Accounting Standards Board (FASB) Statement No. 94, Consolidation of All

Majority-Owned Subsidiat•ies, requires the consolidation of all majority-owned subsidiaries unlesscontrol is temporaty or does not rest with the majority owner. ARB 51 also provides guidance on thepreparation of combined financial statements where a controlling financial interest does not restdirectly or indirectly with one of the companies included in the consolidation, for exatnple, where oneindividual owns a controlling interest in several cotporations that are related in their operations.

FASB Statement No. 94 prohibits the issuance of parent-company financial statements as general-purpose financial statements of an entetprise that has one or more subsidiaries.

EITF Issue No. 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of theW ^:v olttl^ lill

^. T^^eres

+l. 1„vut

. the Sha.ehoidPt or Shareholders Have Certain Approval or Veto Rights,"ui irauavaa^J

provides that substantive minority rights (whether granted by contract or by law) to effectivelypatticipate in significant decisions that would be expected to be made "in the ordinary course ofbusiness" would overcome the presumption that the investor with a majority voting interest shouldconsolidate its investee, while rights that are only "protective" of the minority shareholder'sinvestment would not overcome that presumption. EITF Issue No. 96-16 also provides guidance ondetermining whether minority rights are substantive patticipating rights or protective rights. EITFIssue No. 96-16 applies only to investments in which the investor has a majority voting interest ininvestees that are corporations or analogous entities (such as liinited liability companies that havegoverning provisions that are the functional equivalent of regular corporations).

14 -92-

EITF Issue No. 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to PhysicianPractice Management Entities and Cet-tain Other Entities with Contractual ManagementAlTangements," addresses situations in which physician practice management entities establish acontrolling financial interest in a physician practice through a contractual management agreementwithout having ownership of a majority of the outstanding voting equity instruments of the physicianpractice. There may be industries other than the health care industry in which a contractualmanagement arrangement is established under circumstances similar to those addressed in EITF Issue97-2; the use of the guidance in EITF Issue 97-2 should be considered when the circumstances are

similar.

For SEC registrants, further guidance is provided in SEC Regulation S-X, Rule3A-02, which states in

part:In deciding upon consolidation policy, the registrant tnust consider what financialpresentation is tnost meaningful in the circumstances and should follow in theconsolidated itnancial statements principles of inclusion or exclusion which will clearlyexhibit the financial position and results of operations of the registrant. There is apresumption that consolidated statements are more meaningful than separate statementsand that they are usually necessaty for a fair presentation when one entity directly orindirectly has a controlling financial interest in another entity. Other pat-ticular facts andcircumstances may require combined itnancial statements, an equity method ofaccounting, or valuation allowances in order to achieve a fair presentation. In any case,the disclosures required by § 210.3A-03 should clearly explain the accounting policiesfollowed by the registrant in this area, including the circumstances involved in anydeparture from the nonnal practice of consolidating majority owned subsidiaries andnot consolidating entities that are less than majority owned. Among the factors that theregistrant should consider in detennining the most meaningful presentation are the

following:

(a) Majority ownership: Generally, registrants shall consolidate entities thatare majority owned and shall not consolidate entities that are not majorityowned. The detertnination of "majority ownership" requires a carefulanalysis of the facts and circumstances of a pat-ticular relationship amongentities. In rare situations, consolidation of a majority owned subsidiaty maynot result in a fair presentation, because the registrant, in substance, does nothave a controlling financial interest (for example, when the subsidiary is inlegal reorganization or in bankruptcy, or when control is likely to betetnporaty). In other situations, consolidation of an entity, notwithstandingthe lack of technical majority ownership, is necessary to present fairly thefinancial position and results of operations of t he registrant, beeause of thPexistence of a parent-subsidiaty relationship by means other than of voting

stock.(b) D fferent fiscal periods: Generally, registrants shall not consolidate any

entity wllose financial statements are as of a date of for periods substantiallydifferent fiom those of the registrant. Rather, the earnings or losses of suchentities should be reflected in the registrant's financial statements on the

equity method of accounting. However:

(1) A difference in fiscal periods does not of itself justify the exclusionof an entity fi•om consolidation. It ordinarily is feasible for such entity

15 -93-

to prepare, for consolidation purposes, statements for a period whichcorresponds with or closely approaches the fiscal year of the registrant.Where the dfference is not more than 93 days, it is usually acceptableto use, for consolidation putposes, such entity's statements for itsfiscal period. Such difference, when it exists, should be disclosed asfollows: the closing date of the entity should be expressly indicated,and the necessity for the use of different closing dates should bebriefly explained. Furthennore, recognition should be given bydisclosure or othet-wise to the effect of intervening events whichmaterially affect the financial position or results of operations....

(c) Foreign subsidiaries: Due consideration shall be given to the propriety ofconsolidating with domestic corporations foreign subsidiaries which areoperated under political, economic or cutrency restrictions. If consolidated,disclosure should be made as to the effect, insofar as this can reasonably bedetennined, of foreign exchange restrictions upon the consolidated financialposition and operating results of the registrant and its subsidiaries.

The equity nzetiaod. Accounting Principles Board (APB) Opinion No. 18, The Equity Method of

Accounting for Investments in Conznzon Stock, as amended, requires entetprises to use the equity

tnethod of accounting for an investtnent in common stock if the investment gives ' the investor the

ability to exercise significant influence over operating and financial policies of an investee even if theinvestor holds 50 percent or less of the voting stock. Ability to exercise a significant influence may be

indicated in several ways, such as representation on the board of directors, participation inpolicymaking processes, material intercompany transactions, interchange of managerial pe ►sonnel, or

technological dependency. Another important consideration is the extent of ownership by an investorin relation to the concentration of other shareholdings, but substantial or majority ownership of thevoting stock of an investee by another investor does not necessarily preclude the ability to exercisesignificant influence by the investor. Determining the ability of an investor to exercise significantinfluence is not always clear and applying judgment is necessaty to assess the status of each

investtnent. However, an investment (direct or indirect) of 20 percent or more of the voting stock of aninvestee should lead to a presumption that in the absence of evidence to the contraty an investor hasthe ability to exercise significant influence over ati investee. 4 Conversely, an investtnent of less than20 percent of the voting stock of an investee should lead to a presumption that an investor does nothave the ability to exercise significant influence unless that ability can be demonstrated.

The significance of an investment to tiie investor's financial pocitinn and results of operations should

be considered in evaluating the extent of disclosures of the financial position and results of operationsof an investee. If the investor has more than one investtnent in common stock, disclosures wholly orpartly on a cotnbined basis may be appropriate. The following disclosures are generally applicable tothe equity method of accounting for investtnents in common stock:

a. Financial statements of an investor should disclose parenthetically, in notes to financialstatetnents, or in separate statements or schedules (1) the name of each investee and percentage

of ownership of cotnmon stock, (2) the accounting policies of the investor with respect to

4 An investor's voting stock interest in an investee should be based on those currently outstanding securities whose holdershave present voting privileges. Potential voting privileges that may become available to holders of securities of an investee

should be disregarded.

16 -94-

investments in cotnmon stock,5 and (3) the difference, if any, between the amount at which aninvestment is catried and the amount of underlying equity in net assets and the accounting

treatment of the difference.

b. For those investments in common stock for which a quoted market price is available, theaggregate value of each identified investment based on the quoted market price usually shouldbe disclosed. This disclosure is not required for investments in common stock of subsidiaries.

c. If investments in common stock of cotporate joint ventures or other itivestments accounted forunder the equity method are, in the aggregate, material in relation to the financial position orresults of operations of an investor, it may be necessaty for summarized information as toassets, liabilities, and results of operations of the investees to be presented in the notes or inseparate statements, either individually or in groups, as appropriate.

d. Conversion of outstanding convertible securities, exercise of outstanding options and wat-rantsand other contingent issuances of an investee may have a significant effect on an investor'sshare of reported eamings or losses. Accordingly, material effects of possible conversions,exercises, or contingent issuances should be disclosed in notes to the financial statements of an

investor.

APB Opinion No. 18 applies to investments in common stock; it therefore does not specifically applyto investments in unincotporated entities. However, AICPA Intetpretation No. 2 of APB Opinion No.

18 states that many of the provisions of APB Opinion No. 18 would be appropriate in accounting forinvestments in unincotporated entities such as partnerships and unincorporated joint ventures.

For SEC registrants, Rules 3-09, 4-08(g), 10-01(b)(1), and 1-02(bb) of Regulation S-X set forth furtherrequiretnetzts for the presentation of sutnmarized financial infotmation of subsidiaries not consolidated

and 50 percent or less owned persons.

AICPA Statement of Position (SOP) 78-9, Accounting for Investments in Real Estate Ventures,

provides gu_idance on consolidation of real estate ventures, including those organized as a general orlitnited partnership or undivided interest. In practice, the guidance in SOP 78-9 also is applied byanalogy in accounting for non-real estate ventures outside the scope of APB Opinion No. 18. Among

other things, SOP 78-9 provides that• Investments in noncontrolled real estate general parttlerships should be accounted for and

reported under the equity method.• A general partnership that is controlled, directly or indirectly, by an investor is, in substance, a

subsidiaty of the investor. If pattrtership voting interests are not clearly indicated, a conditionthat would usually indicate control is ownership of a majority (over 50 percent) of the financialinterests in profit or losses. The power to control may also exist with a lesser percentage ofownership, for example, by contract, lease, agreement with other partners, or by coutt decree.On the other hand, majority ownership may not constitute control if major decisions such as theacquisition, sale, or refinancing of principal parlnership assets must be approved by one or

more of the other pat-tners.

Disclosure should include the names of any significant investee corporations in which the investor holds 20 percent ormore of the voting stock, but the common stock is not accounted for on the equity method, together with the reasons whythe equity method is not considered appropriate, and the names of any significant investee corporations in which theinvestor holds less than 20 percent of the voting stock and the common stock is accounted for on the equity method,together with the reasons why the equity method is considered appropriate.

17 -95-

• General parlners in a limited partnership are in control and should account for the l'unitedpartnership as a subsidiaty only if the substance of the partnership or other agreements provides

for control by the general partners.• If the general pat-tner in a limited partnership is not in control of the major operating and

fmancial policies of the partnership, a litnited partner may be in control. An example could bea limited partner holding over 50 percent of the total patfiiership interest. A controlling limitedpartner should be guided in accounting for its investtnent by the principles for investments in

subsidiaries.• Investors should record their share of the real estate venture's losses, detertnined in conformity

with generally accepted accounting principles, without regard to unrealized increases in theestimated fair value of the venture's assets.

• An investor that is liable for the obligations of the venture or is othetwise comtnitted to provideadditional financial support to the venture should record its equity in real estate venture lossesin excess of its investment, including loans and advances. The following are examples of such

circumstances:- The investor has a legal obligation 'as a. guarantor or general partner.- The investor has indicated a commitment, based on considerations such as business

reputation, intercotnpany relationships, or credit standing, to provide additional financialsupport. Such a comtnitment might be indicated by previous support provided by theinvestor or statements by the investor to other investors or third parties of the investor's

intention to provide support.• An investor in a real estate venture should report its recorded share of losses in excess of its

investtnent, including loans and advances, as a liability in its financial statements.• If it is probable that one or more investors cannot bear their share of losses, the remaining

investors should record their propot-tionate shares of venture losses othet-wise. allocable toinvestors considered unable to bear their share of losses. An investor who is deemed by otherinvestors to be unable to bear its share of losses should continue to record its contractual shareof losses unless it is relieved from the obligation to make payment by agreement or operation of

law.• The accoianting by an investor for losses otherwise allocable to other investors should be

governed by the provisions of FASB Statement No. 5 relating to loss contingencies.Accordingly, the investor should record a proportionate share of the losses otherwise allocableto other investors if it is probable that they will not bear their share.

• An investor that contributes real estate to the capital of a real estate venture generally shouldrecord its investtnent in the venture at the investor's cost (less related depreciation andvaluation allowances) of the real estate contributed, regardless of whether the other investorscontrib,^te cash, pt•opP,-ty^ or services. Unless the investor that contributes real estate to theventure withdraws cash (or other hard assets) and has no commitment to reinvest, such atransaction is not the culmination of the earnings process.

• An investor contributitlg property to a venture may obtain a dispropot-tionately small interest inthe venture based on a comparison of the cartying amount of the property with the cashcontributed by the other investors. That situation might indicate that the investor contributingthe property has suffered a loss that should be recognized.

• The considerations that apply to real p'opet-ty contributed to a partnership or joint venture alsoapply to contributions of services or intangibles.

• Interest on loans and advances that are in substatice capital contributions (for example, if all theinvestors are required to malce loans and advances proportionate to their equity interests)should be accounted for as distributions rather than as interest income by the investors.

18 -96-

• An investor-lender that does not capitalize interest on its own real estate construction anddevelopment projects should account for interest on loans and advances that are not insubstance capital contributions as follows:a. All interest income on the investor's loans or advances to the venture should be deferred if

either of the following conditions is present.(i) Collectibility of the principal or interest is in doubt. This condition may exist if

adequate collateral and other terins norinally required by an independent lender arenot present.

(ii) There is a reasonable expectation that the other investors will not bear their sharesof losses, resulting in uncertainty as to the lender's share of the venture's relatedinterest expense.

b. If neither of the conditions in (a) is present and either the venture has recorded interest as anexpense or the venture has capitalized the interest but in order to confonn to the investor'saccounting policies, the investor has recorded its equity in the income or loss of the ventureas if the venture had charged the interest to expense, the entire interest income accrued onloans or advances to a venture should be recorded as earned.

c. If the conditions in (a) or (b) are not present, a, portion of interest income from loans andadvances to a venture should be deferred based on the investor's percentage interest in theprofits and losses ofthe venture. However, an evaluation similar to that discussed above forrecording the investor's share of losses should be made to avoid recording as interestincome amounts that may ultunately be borne as losses by the investor making the loan.

• If seivices are petfonned for a venture by an investor and their cost is capitalized by theventure, profit may be recognized by the investor to the extent attributable to the outsideinterests in the venture if the following conditions are met:a. The substance of the transaction does not significantly differ from its fonn.b. There are no substantial uncertainties about the ability of the investor to complete

performance (as may be the case if the investor lacks experience in the business of theventure) or the total cost of services to be rendered.

c. There is a reasonable expectation that the other investors will bear their share of losses, if

any.The method of recognizing income from seivices rendered should be consistent with themethod followed for services performed for unrelated parties.

• An investor should not record as income its equity in the venture's profit fi•om a sale of realestate to that investor; the investoi•'s share of such profit should be recorded as a reduction inthe canying amount of the purchased real estate and recognized as income on a pro rata basisas the real estate is depreciated or when it is sold to a third pai-ty. Similarly, if a ventureperfotms setvices for an investor and the cost of those setvices is capitalized by the investor,the investor's share of the venture's proftt in the transaction s hould be recorded as a red;.tction :n

the cat-tying amount of the capitalized cost.• Investors in real estate ventures should be guided by the provisions of paragraph 20 of APB

Opinion No. 18 in detennining the disclosures to be made in their financial statements.

Accountingfor Special-Purpose Entities

Sotne business entities make use of off-balance sheet arrangements to conduct financing or otherbusiness activities. These may iiivolve unconsolidated, non-independent, limited putpose entities,often referred to as structured finance or special putpose entities (hereinafter referred to as "SPEs").These entities may be in the form of coiporations, paih-terships, limited liability companies, trusts,structured finance entities or other types of agreements, relationships or understandings. These

19-97-

entities may be used to provide financing, liquidity, market risk or credit support, or involve leasing,hedging, and/or research and development seivices. Although ARB 51, Statement 94 and Opinion 18are generally applicable to SPEs, the SEC staff expressed the following views concerning theaccounting for SPEs at the February and May 1990 Emerging Issues Task Force (EITF) meetings(EITF Topic D-14):

The SEC Obseiver announced that the SEC staff is becoming increasingly concemedabout certain receivables, leasing, and other transactions involving special-purposeentities (SPEs). Certain characteristics of those transactions raise questions aboutwhether SPEs should be consolidated (notwithstanding the lack of majority ownership)and whether transfers of assets to the SPE should be recognized as sales. Generally, theSEC staff believes that for nonconsolidation and sales recognition by the sponsor ortransferor to be appropriate, the majority owner (or owners) of the SPE must be anindependent third party who has made a substantive capital investment in the SPE, hascontrol of the SPE, and has substantive risks and rewards of ownership of the assets ofthe SPE (including residuals). Conversely, the SEC staff believes that nonconsolidationand sales recognition are not appropriate by the sponsor or transferor when the majorityowner of the SPE makes only a nominal capital investment, the activities of the SPE arevirtually all on the sponsor's or transferoi's behalf, and the substantive risks and rewardsof the assets or the debt of the SPE rest directly or indirectly with the sponsor or

transferor.

Also, the SEC staff has objected to a proposal in which the accounting for a transactionwould change only because an SPE was placed between the two parties to thetransaction. The SEC staff believes that inseition of a nominally capitalized SPE doesnot change the accounting for the transaction.

The SEC staff is considering the issuance of a Staff Accounting Bulletin setting forthguidelines on the accounting for transactions involving SPEs and until such time wouldconsider transactions on a case-by-case basis. The SEC Obseiver emphasized that theSEC staff views the issue of SPEs to be primarily a consolidation issue.

The SEC Observer reminded the Task Force of previous SEC Obseiver commentsregarding the SEC stafPs position on the proper accounting for certain leasetransactions, including build-to-order lease transactions and those involving SPEs. TheSEC staff has reviewed many variations of such transactions and generally objected tosales or operating lease treatment. The transactions involve a lessor that may be a SPEwho holds title to the asset, but performs little, if any, substantive functions, while it isclear that the lessee assumes substantially all the risks and rewards of ownership. T heSEC staff is not attempting to change generally accepted accounting principles in thisarea but believes that the application of such principles should result in an accountingtreatment that is not misleading and pointed out that literature in addition to FASB

Statement No. 13, Accounting for Leases, including that related to consolidation,should be considered. While the SEC staff encourages the Task Force to clarify thisarea, the SEC staff will continue its review of such transactions on a case-by-caseapproach based on its previously stated position. The Task Force agreed to add theissue to the agenda.

EITF Topic D- 14 relates to developments subsequent to the issuance of those staff views as follows:

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In July 1990, Issue No. 90-15, "Impact of Nonsubstantive Lessors, Residual ValueGuarantees, and Other Provisions in Leasing Transactions," was added to the agenda.This Issue deals with the subject of leasing transactions involving SPEs. In January1991, a consensus was reached on this Issue. The Task Force indicated that if certainconditions exist, as described in Issue 90-15, then the assets, liabilities, results ofoperations, and cash flows of the SPE should be consolidated in the lessee's financial

statements.

FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities, was issued in June 1996. Statement 125 wasreplaced by FASB Statement No. 140, Accounting for Transfers and Servicing of

Financial Assets and Extinguishments of Liabilities, in September 2000.

Statement 140 provides guidance for determining whether transfers of financial assets(including financing lease receivables) qualify as sales or secured borrowings basedupon'the notion of control set forth in paragraph 9. Lease accounting issues (other thantransfers of financial assets that arise from sales-type and direct financing leases) areoutside the scope of Statement 140.

Statement 140 also provides that a qualifying SPE shall not be consolidated by thetransferor or its afFiliates. As a result, this announcement is partially resolved byStatement 140. Consolidation of qualifying SPEs by other parties, and consolidation ofentities that are not considered qualifying SPEs, are outside the scope of Statement 140.Those pa-ties should apply existing consolidation policy guidance including AICPAAccounting Research Bulletin No. 51, Consolidated Financial Statements, FASB

Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, Topic D- 14, and

Issue 90-15.

Related issues were discussed in Issues No. 96-20, "Impact of FASB Statement No. 125on Consolidation of Special-Purpose Entities," and No. 97-6, "Application of Issue No.96-20 to Qualifying Special-Puipose Entities Receiving Transferred Financial AssetsPrior to the Effective Date of FASB Statement No. 125." Statement 140 nullified bothIssues 96-20 and 97-6.

FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and

Extinguishment of Liabilities, prohibits the consolidation of qualifying SPEs and sets forth specific

conditions that a SPE must meet to be a qualifying SPE. The description of qualifying SPEs inStatement No. 140 is restrictive, and the accounting for qualifying SPEs and transfers of fmancialassets to them should not be extended to any entity that does not currently satisfy all of the conditions

set forth in the Statement.

EITF Issue 90-15, "Impact of Nonsubstantive Lessors, Residual Value Guarantees, and OtherProvisions in Leasing Transactions," provides that a lessee is required to consolidate an SPE lessor ifall of the following conditions exist:1. Substantially all of the activities of the SPE involve assets that are to be leased to a single lessee2. The expected substantive residual risks and substantially all the residual rewards of the leased

asset(s) and the obligation imposed by the underlying debt of the SPE reside directly or indirectlywith the lessee through such means as

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a. The lease agreementb. A residual value guaranteed through, for example, the assumption of first dollar of loss

provisionsc. A guarantee of the SPE's debtd. An option granting the lessee a right to (1) purchase the leased asset at a fixed price or at a

defined price other than fair value detet-inined at the date of exercise or (2) receive any of thelessor's sales proceeds in excess of a stipulated amount

3. The owner(s) of record of the SPE has not made an initial substantive residual equity capitalinvestment that is at risk during the entire tenn of the lease.

EITF Issue 90-15 also contains SEC staff positions on a number of itnpleinentation questions related to

this issue.

EITF Issue 96-21, "Implementation Issues in Accounting for Leasing Transactions involving Special-Purpose Entities," and EITF Issue 97-1, "Implementation Issues in Accounting for Lease Transactions,including Those involving Speciai Purpose Entities" provide further guidance on related issues.

Other Financial Reporting Mattet•s

Receivables fi•om the sale of stock. EITF Issue 85-1, "Classifying Notes Receivable Received forCapital Stock," provides that it is generally not appropriate to repoi-t as an asset a note received as acontribution to an entetprise's equity, except in vety limited circumstances where there is substantialevidence of ability and intent to pay witliin a reasonably short period of time. The SEC requires inRegulation S-X, Rule 5-02.30 that public companies report notes received in payment for theentetprise's stock as a deduction fiom shareholders' equity.

Payment of expenses on behalf of a r•elated party. SEC Staff Accounting Bulletins Topic IB,

"Allocation of expenses and related disclosure in financial statements of subsidiaries, divisions orlesser business cotnponents of another entity," provides guidance on the repot-ting in the fmancialstatements of a subsidiary of expenses incurred by the parent company on behalf of the subsidiaty andnot charged to the subsidiaty. SEC Staff Accounting Builetins Topic 5T, "Accounting for Expenses orLiabilities Paid by Principal Shareholder(s)," provides guidance on the reporting in a company'sfinancial statements of expenses of the company paid by a principal stockholder.

Transfers of nonmonetary assets by promoters or shareholders. SEC Staff Accounting Bulletins

Topic 5G, "Transfers of Nonmonetary Assets by Promoters or Shareholders," provides that transfers ofnonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at

the time OT tlr,

le co '., •iii •+'iLia,.ti pul.lul 'iVl. VL1 „srr 1n...1.,=rv7r^ a.11 ,^! chOlilf, b_. recorded at the transferor'st'^pat-^y ^#'Vlor lAl

historical cost basis detennined under generally accepted accounting principles.

Divestiture to former employees. SEC Staff, Accounting Bulletins Topic 5E, "Accounting fordivestiture of a subsidiaty or other business enterprise," sets forth accounting and disclosure guidanceconcerning the divestiture of a subsidiaty or otlier business operation to fot-tner employees.

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SUMMARY OFA UDITING LITERATURE

The following section provides a summary of Statements on Auditing Standards (SAS), interpretationsand other auditing literature applicable to related parties, related pat-ty transactions and auditing off-balance sheet arrangements, some of which may involve related parties. An auditor conducting anaudit of financial statements in accordance with generally accepted auditing standards should considerthe referenced auditing standards and the related inteipretations in their entirety.

Planning and Supervision

SAS No. 22, Planning and Supervision, (AICPA, Professional Standards, vol. 1, AU sec. 311.03)

states:

Audit planning involves developing an overall strategy for the expected conduct and scope of theaudit. The nature, extent, and timing of planning vaty with the size and complexity of the entity,experience with the entity, and knowledge of the entity's business. In planning the audit, theauditor should consider among other matters: [Bold type added for emphasis only.]

a. Matters relating to the entity's business and the industry in which it operates.b. The entity's accounting policies and procedures.c. The metllods used by the entity to process significant accounting infortrtation, including the

use of service organizations, such as outside setvice centers.d. Planned assessed level of control risk.e. Preliminary judgment about materiality levels for audit putposes.f. Financial statement items likely to require adjustment.g. Conditions that may require extension or modifzcation of audit tests, such as the risk of

material err-or• or fraud or the existence of r•elated par•ty transactions.h. The nature of reports expected to be rendered (for example, a report on consolidated or

consolidating financial statements, reports on ftnancial statements filed with the SEC, orspecial reports such as those on compliance with contractual provisions).

The auditor's understanding of the client's business, its organization and its operating characteristics is

critical for planning and perfonning an effective audit.

AU Sec. 311 also discusses supervision of personnel assigned to the audit. Paragraph 11 states in part:"The extent of supervision appropriate in a given instance depends on many factors, including thecomplexity of the subject matter and the qualification of persons performing the work." SAS No. 47,

Audit Risk and Nlateriali'ry in Cona 7uciing and enu_.ua«;f inrrne pNnfeUSin,vral ;^'tat^daYdS; vol. 1, AU sec., `AAVl 1^, <, ^

312.17) adds to the discussion of supetvision with the following:

The knowledge, skill, and ability of personnel assigned significant engagement responsibilitiesshould be commensurate with the auditor's assessment of the level of risk for the engagement.Ordinarily, higller risk requires more experienced personnel or more extensive supetvision bythe auditor with final responsibility for the engagement during both the planning and the

conduct of the engagement.

The existence of related parties and related pat-ty transactions especially in a complex corporatestructure may indicate the need for more experienced personnel to be assigned and more extensive

23 -101-

supervision to be provided during the planning phase of the engagement and also during the conduct of

the audit.

Auditing Related Parties

SAS No. 45, Related Parties, (AICPA, Professional Standards, vol. 1, AU sec. 334) provides guidance

on procedures that should be considered witli respect to related pat-ties when perfotming an audit offinancial statements. In particular, this standard is intended to help auditors identify related partyrelationships and transactions and to satisfy the auditor concerrting the financial statement accountingand disclosures pertaining to related party transactions. The auditor should also plan to perfoirnextended audit procedures if unusual related party transactions exist or there is an indication of amaterial misstatement to the financial statements as a result of a related party transaction.

Related Party IndicatorsAn audit cannot be expected to provide assurance that all related parties have been identified. AU Sec.334 lists the following as transactions that- because of their nature may indicate of the existence of

related parties. They are:

- Borrowing or lending on an interest-free basis or at a rate of interest significantly above orbelow market rates prevailing at the time of the transaction.

- Selling real estate at a price that differs significantly from its appraised value.

- Exchanging property for similar property in a nonmonetary transaction.

- Making loans wit11 no scheduled terms for when or liow the funds will be repaid.

In addition, Practice Alert No. 95-3, Auditing Related Parties and Related Party Transactions,

includes the following exatnples of events that may be indicative of transactions with undisclosed

related patties:

- Sales without substance, including funding the other party to the transaction so that thesales price is fully remitted.

- Sales with a comrrtitment to repurchase that, if lcnown, would preclude recognition ofall or part of the revenue.

- Acctuing interest at above marlcet rates on loans.

- Loans to parties that do not possess the ability to repay.

- Advancing company funds that are subsequently transferred to a debtor and used torepay what would otherwise be an uncollectible loan or receivable.

- Services or goods purchased from a pat-ty at little or no cost to the entity.

- Loans advanced ostensibly for a valid business putpose and later written off as

uncollectible.

- Payments for services never rendered or at inflated prices.

24 -102-

- Sales at below market rates to an unnecessary "middle man" related party, who in tutnsells to the ultimate customer at a higher price with the related party (and ultitnately

its principals) retaining the difference.

- Purchases of assets at prices in excess of fair market value.

[For additional examples of related pat-ty indicators, see the section entitled Potential Related Party

Indicators]

When detennining the scope of the audit work to be performed with respect to related pat-ties, the

auditor should:

-Obtain an understanding of management responsibilities and the relationship of eachcomponent to the total entity.

- Consider controls over management activities.

- Consider the business putpose setved by the various components of the entity.

AU Sec. 334 also states that the auditor should not assume that all transactions with related parties areoutside the normal course of business. However the auditor should consider the possibility that thetransactions may have been motivated solely, or in large measure, by conditions similar to the

following:

a. Lack of sufficient working capital or credit to continue the businessb. An urgent desire for a continued favorable earnings record in the hope of supporting the price

of the company's stockc. An overly optimistic eatnings forecastd. Dependence on a single or relatively few products, customers, or transactions for the

continuing success of the venturee. A declining industiy characterized by a large number of business failures^ Excess capacityg. Significant litigation, especially litigation between stockholders and managementh. Significant obsolescence dangers because the cotnpany is in a high-technology industty

Detetmining the Existence of Related Pat-tiesAlthough certain relationships may be clearly evident, such as parent-subsidiaty or investor-investee,

others may not be so apparent. AU Sec. 334 includes the following specific audit procedures to help

detettnine the existence of other related parties:

a. Evaluate the company's procedures for identifying and properly accounting for related pat-tytransactions.

b. Request from appropriate management personnel the names of all related parties and inquirewhether there were any transactions with these parties during the period.

c. Review filings by the reporting entity with the Securities and Exchange Commission and otherregulatoiy agencies for the names of related parties and for other businesses in which officersand directors occupy directorship or management positions.

d. Determine the names of all pensions and otller trusts established for the benefit of employeesand the names of their officers and trustees.

e. Review stockholder listings of closely held companies to identify principal stockholders.

25-103-

f. Review prior years' working papers for the names of known related parties.g. Inquire of predecessor, principal, or other auditors of related entities concerning their

knowledge of existing relationships and the extent of management involvement in material

transactions.h. Review material investment transactions during the period under audit to determine whether the

nature and extent of investments during the period create related parties.

Identifying Transactions With Related PartiesAU Sec. 334 also provides guidance for identifying material transactions with known related partiesand for identifying material transactions that may be indicative of the existence of undeteimined

relationships. They are as follows:

a. Provide audit personnel perfonning segments of the audit or auditing and reporting separatelyon the accounts of related components of the reporting entity witli the names of known relatedparties so that they may become aware of transactions with such parties during their audits.

b. Review the minutes of meetings of the board of directors and executive or operatingcommittees for information about material transactions authorized or discussed at their

meetings.c. Review proxy and other material filed with the Securities and Exchange Commission and

comparable data filed with other regulatory agencies for infoimation about material

transactions with related parties.d. Review conflict-of- interests statements obtained by the company from its management.e. Review the extent and nature of business transacted with major customers, suppliers,

boixowers, and lenders for indications of previously undisclosed relationships.f. Consider whether transactions are occurring, but are not. being given accounting recognition,

such as receivin.g or providing accounting, management, or other seivices at no charge or amajor stockllolder absorbing corporate expenses.

g. Review accounting records for large, unusual, or nonrecurring transactions or balances, payingparticular attention to transactions recognized at or near the end of the reporting period.

h. Review confn-inations of compensating balance arrangements for indications that balances are

or were maintained for or by related parties.i. Review invoices from law finns that have perfonned regular or special seivices for the

company for indications of the existence of related parties or related par.ty transactions.

j. Review confnxnations of loans receivable and payable for indications of guarantees. Whenguarantees are indicated, determine their nature and the relationships, if any, of the guarantors

to the reporting entity.

Examining Identified Related Party TransactionsOnce related parties are identified, the auditor should place einphasis on testing material transactionswitli parties known to be related or associated to the reporting entity. The auditor should apply theaudit procedures he or she considers appropriate to determine the purpose, nature, and extent of therelated party transaction and the effect on the financial statements. In obtaining sufficient competentevidential matter, the auditor should extend the procedures beyond just inquiiy of management.Procedures that should be considered include the following:

a. Obtain an understanding of the business puipose of the transaction.b. Examine invoices, executed copies of agreements, contracts, and other pertinent documents,

such as receiving reports and shipping documents.

26 -104-

c. Determine whether the transaction has been approved by the board of directors or otherappropriate officials.

d. Test for reasonableness the compilation of amounts to be disclosed, or considered fordisclosure, in the financial statements.

e. Arrange for the audits of intercompany account balances to be peiformed as of concurrentdates, even if the fiscal years differ, and for the examination of specified, important, andrepresentative related party transactions by the auditors for each of the pat-ties, with appropriateexchange of relevant infonnation.

f. Inspect or confirm and obtain satisfaction concerning the transferability and value of collateral.

In addition, the auditor may detertnine that extended procedures should be perfonned in order to fullyunderstand the transactions. If so, the auditor should consider the following procedures:

a. Confu-m transaction amount and tetms, including guarantees and other significant data, with theother party or parties to the transaction.

b. Inspect evidence in possession of the other party or parties to the transaction.c. Confirm ' or discuss significant infonnation with intermediaries, such as banks, guarantors,

agents, or attorneys, to obtain a better understanding of the transaction.d. Refer to financial publications, trade journals, credit agencies, and other information sources

when there is reason to believe that unfamiliar customers, suppliers, or other businessenterprises with which material amounts of business have been transacted may lack substance.

e. Witli respect to material uncollected balances, guarantees, and other obligations, obtaininformation about the financial capability of the other party or parties to the transaction. Suchinfonnation may be obtained from audited financial statements, unaudited financial statements,income tax returns, and reports issued by regulatoty agencies, taxing authorities, financialpublications, or credit agencies. The auditor sliould decide on the degree of assurance requiredand the extent to which available infonnation provides such assurance.

Auditing DisclosuresCertain accounting standards (as previously discussed) including FASB Statement No. 57 requiredisclosure of material related party transactions or of conunon ownership or management controlrelationships. AU Sec. 334 requires the auditor to consider whether sufficient competent evidentialmatter has been obtained during the audit to understand the relationship of the parties and, for relatedparty transactions, the effects of the transaction on the financial statements. The auditor should thenevaluate all the infonnation available conceming the related party transaction or control relationshipand deterinine that the financial statement disclosures are adequate and appropriate.

Except for routine transactions, it will generally not be possible to detennine whether a pat-ticulartransaction would have taken place if the parties had not been related, or, assuming it would have takenplace, what the tetms and manner of settlement would have been. Accordingly, it is difficult tosubstantiate representations that a transaction was consummated on tenns equivalent to those thatprevail in atm`s-length transactions. If such a representation is included in the financial statements andthe auditor believes that the representation is unsubstantiated by management, he or she should expressa qualified or adverse opinion because of a departure from generally accepted accounting principles,

depending on materiality.

In addition, Interpretation No.7, `lYlanagenzent's and Auditor's Responsibility With Regard to Related

Party Disclosures Prefaced by Terminology Such As "Management Believes That" of SAS No. 45,

Related Parties (AICPA, Professional Standards, vol. 1, AU sec.9334.22-.23), raises the question:

27-105-

When management discloses in its financial statements that a related party transaction wasconsummated on terms equivalent to those that prevail in ann's length transactions, and prefaces therepresentation with a phrase such as "Management believes that," or "It is the company's belief that",does the use of such terminology change management's responsibility to substantiate the

representation?

The interpretive reply is as follows: FASB Statement No. 57, Related Party Disclosures, paragraph 3

[AC section R36.103], states that the representations about a related party transaction "shall not implythat the related party transactions were consummated on teims equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated." A preface to a disclosure such as"Management believes that," or "It is the company's belief that" does not change management'sresponsibility to substantiate the representation. AU Section 334, Related Parties, paragraph .12

(Section 334.12), indicates that if such a representation is included in the financial statements and theauditor believes that the representation is unsubstantiated by management, he should express aqualified or adverse opinion because of a departure fiom generally accepted accounting principles,

depending on materiality.

Audit DocumentationAs with other audit areas, the auditor should document related party or related party transactionfindings or issues that in his or her judgment are significant, actions taken to address them (includingany additional evidence obtained), and the basis for final conclusions reached.

Auditing Off Balance Slieet Arrangements That May Involve Related Parties

As previously discussed, some business entities make use of off-balance sheet arrangements toconduct fin.ancing or other business activities. These may involve unconsolidated, non- independent,limited puipose entities, often referred to as structured finance or special purpose entities (hereinafterreferred to as "SPEs"). These entities may be in the fonn of coiporations, partnerships, limitedliability companies, trusts, structured finance entities or other types of agreements, relationships orunderstandings. These entities may be used to provide financing, liquidity, market risk or creditsupport, or involve leasing, hedging, andlor research and developrnent se^ ^ices.

Auditors should be aleit to the existence or creation of SPEs. - When a SPE has been identified,

auditors should ensure that they understand the ownership structure of the entity, all significant teimsof the transactions between the entity and the SPE and that management's conclusions regardingnonconsolidation and off-balance sheet treatment are appropriate under generally accepted accountingprinciples. Due to the complexity of these stiuctures and the scrutiny that this area of accounting is

currently undergoirig, auditors cnay need t.^, cons' t1 nx4{'1'1 thei,• national office or other technical expei-t.s

regarding these types of structures and related transactions to ensure the appropriateness of accounting

and disclosures.

These arrangements may present exposures to the company for which the company's maximumpossible liability is not reflected in the financial statements. The exposure can consist of exposuresarising from contractual or other commitments as well as economic or legal compulsions to fundlosses, provide additional funding, purchase capital stock or assets or otherwise be financiallyimpacted by the performance or non-performance of the other party.

In light of the unique nature of SPEs, the auditor should carefully consider whether transactions

entered into with the SPE represent related party transactions. Incremental procedures, as appropriate,

28 -106-

may be necessary to understand the nature of the arrangements and to ascertain whether they representrelated party transactions. This is particularly the case when an entity enters into transactions withSPEs that are outside the company's normal course of business. Incremental procedures that the

auditor may with to consider include:

• Whether the issuer of loans or investments held or the primary obligor of debt guaranteesissued indicate that an SPE may be involved.

• Inquiring as to the nature and terms of any SPE or structured financial an•angements.• Reviewing significant documents and agreements related to significant transactions involving

SPEs.• Inquiring about any modifications to existing SPEs that may have been made in the current

period that could affect the accounting determined at the date of the transaction.

In some circumstances, there may be different auditors for the SPE, or the SPE may not be audited.There also may be situations when the auditor is denied access to the books and records of the SPEbecause of a lack of an equity interest in -tlle SPE or other legal right to demand such access.Particularly in view of recent events and the rislc of material misstatement of the financial statementsdue to fraud, auditors should consider conducting further procedures with respect to the books andrecords of the SPE, patticularly focusing on whether the requisite outside investment in the SPEexisted at the time of the transaction and continues to exist in subsequent periods. If the auditor is notallowed to confu-m that generally accepted accounting principles has been followed, either throughtesting of the SPE's accounting records or tluough confirination with other investors, auditors, or otherthird paities the auditor should consider whether there is a scope limitation.

If the auditor deterinines that these arrangements and transactions represent related party transactions,the auditor should refer to the related party standards and guidance discussed above. Additionally, theauditor should consider tailoring the management representation letter to include specificrepresentations on critical issues and assumptions related to SPE transactions and confuming that allrelevant information and documents have been provided. When warranted, representations should alsoconfu-in that there are no side agreements that would materially affect the accounting. See SAS No. 85,

Management Representations.

Related Party Tt•ansactions and Fraud

The number one rule for potentially identifying related parties and related paty transactions thatmanagement does not disclose to the independent auditor is simply to be alert to that possibility. SAS

No. 82, Consideration of Fraud in a Financial Statement Audit, (AICPA, Professional Standards, vol.

1, AU sec. 316) requires the auditor to "assess the risk ofmaterial rnisstate=ner.t of the fnancial

statements due to fraud and consider that assessment in designing the audit procedures to beperfoimed." This assessment is based on the auditor's consideration of certain risk factors that relate tomisstatements that may arise from fraudulent financial reporting and misappropriation of assets. Whenconsidering risk factors relating to an entity's operating characteristics and financial stability, theauditor may conclude that related parties and/or related party transactions are a potential source formaterial misstatement. Following are examples of indicators that may cause the auditor to concludethat such a potential exists:

- Significant related party transaction not in the ordinaty course of business or with related entitiesnot audited or audited by another finn.

29 -107-

- Significant, unusual, or highly complex transactions, especially those close to year-end, that posedifficult "substance over foim" questions.

- Highly complex business practices that enhance the ability of management to mask the economicsubstance of a business transaction.

- Significant bank accounts or subsidiary or branch operations in tax haven jurisdictions for whichthere appears to be no clear business justification.

- Overly complex organizational sti ucture involving numerous or unusual legal entities, manageriallines of authority, or contractual arrangements without apparent business puipose.

- Difficulty in detennining the organization or individual(s) that control(s) an off-balance sheet

entity.

When the auditor concludes there is a significant risk of material misstatement due to fiaud he or shemight respond in a number of ways, such as assigning more experienced staff to the engagement. Asdiscussed in the planning section, ordinarily, higher risk requires more experienced personnel or mor'eextensive supet vision.by the auditor with final responsibility for the engagement during both theplanning and the conduct of the engagement. Higher risk also may cause the auditor to expand theextent of procedures applied, apply procedures closer to or as of the balance sheet date, or modify thenature of procedures to obtain more persuasive evidence. Other procedures that can be perfonned tohelp identify potential related party transactions if the auditor decides to modify his or her proceduresbased on the consideration of fraud risk factors include the following:

• Review material cash disbursements, advances, and investments to consider wllether thecompany provided funds to a related entity.

• Discuss with tax and consulting personnel wllo have provided services to the client theirknowledge of the client's relationships and knowledge of related parties.

• Discuss with intennediaries (such as lawyers, predecessor auditors, and otllers providingprofessional seivices to the client) their knowledgP of the identity of principal parties to

material transactions.

• Use sources of infonnation about principal pat-ties to material transactions (such asnewspapers, phone books, industry or trade publications, the Internet, etc.) to search forinformation about key members of management and the company. (For example, the Internetcan be used to search for coiporation and limited partnership records in which a particular

person's name appears.)

According to generally accepted auditing standards, evidential matter obtained from independentoutside sources provides a greater assurance of reliability than evidence secured solely within the

company (SAS No. 31, Evidential Matter, as amended by SAS No. 80, Amendnaent to Statement on

Auditing Standards No. 31, Evidential Matter, (AICPA, Professional Standard, vol. 1, AU sec.

326.21a). Higher risk will also ordinarily cause the auditor to be more skeptical of the audit evidence

obtained.

30 -108-

Management Representations

SAS No. 85, Management Representations, (AICPA, Professional Standards, vol. 1, AU sec. 333)

requires the auditor to obtain written representations from management and provides guidanceconcerning the representations to be obtained. Although SAS No. 45 requires the auditor to performspecific procedures regarding related pat-ties, SAS No. 85 requires the auditor to also obtain specificwritten representation regarding infortnation concerning related pat-ty transactions and amountsreceivable from or payable to related parties. AU Section 333.16, Appendix A, Illustrative

Management Representation Letter, (AICPA, Professional Standards, vol. 1, AU sec. 333.16)

provides auditors with an example management representation letter. Included in that letter is anexample representation regarding related parties; it is as follows:

...The following have been properly recorded or disclosed in the financial statements:a. Related party transactions, including sales, ' .purcliases, loans, transfers, leasing

arrangements, and guarantees, and amounts receivable from or payable to related parties.b. Guarantees, whether written or oral, under which the company is contingetitly liable.c. Significant estimates and material concentrations known to management that are required

to be disclosed in accordance with the AICPA's Statement of Position 94-6, Disclosure of

Certain Significant Risks and Uncertainties. [Significant estimates are estimates at thebalance sheet date that could change materially within the next year. Concentrations referto volutnes of business, revernies, available sources of supply, or markets or geographicareas for whicli events could occur that would significantly disrupt notmal finances within

the next year.]

Engagement Staffing and other Q.C. Considerations

It is clear that while auditing related parties and related party transactions the auditor needs to be alert

for many complex a,.zdit issues as well as changes in the client's business strategy. These changes and

conditions, which may be reflective of higher audit risks, may call for changes in engagementcapabilities to include partners and staff with the expet-tise to address audit issues effectively. This

may also require the auditor to consider certain quality control considerations such as:• Assigrunent of personnel• Competencies required by a Practitioner- in- Charge

• Consultation• Conc„rri-rig reviewer requirements for SEC engagements

Disclosure Update and Considerations

Reliable and transparent financial reporting is particularly nnportant in this troubled environment.This requires the special attention of CPAs to work together with management and audit committees,when applicable, to ensure that related parties and related party transactions are identified and thatmanagement's disclosure of related party transactions are appropriately and completely disclosed in

accordance with GAAP.

While long an important part of full disclosure in financial statements, the SEC has recently called onregistrants and auditors to increase disclosure of the critical accounting policies or those "three-to-

31 -109-

five" accounting issues that require significant judgment or involve complex estimation processes.SEC Chief Accountant Robert Herdman introduced this concept during a speech on December 6,2001. A copy of the speech can be viewed on the SEC's web site. The SEC expanded on the matterscovered in the speech in a release issued December 12, 2001, Cautionary Advice Regarding

Disclosure About Critical Accounting Policies.

Since this speech only occuired recently, management may be unaware ofthe issue. Compliance withthis area should be a top priority to both management and audit committees, as the SEC staff will befocusing on these disclosures in their reviews of Form 10-K filings next spring. In another recent pressrelease the Securities and Exchange Commission said its accountants and attorneys would reviewannual reports of all Fortune 500 companies for possible instances of unorthodox accounting or lack ofclarity. The SEC said it was taking the action as part of its process of reviewing both financial andnon-financial disclosures made by publicly held companies. Matters of particular interest to the SECare the judgments and uncertainties affecting the application of these critical accounting policies, andthe lilcelihood that materially different amounts would be reported under different conditions or using

different assumptions. -

Engagement teams auditing public companies should meet with management and the audit committeeto discuss how disclosure issues surrounding these "top accounting issues" will affect them, and thework that will need to be done in order to comply. Engagement teams may find it helpful to review theguidance in AICPA Statement of Position 94-6, Disclosure of Certain Significant Risks and

Uncertainties, in addressing these accounting policies.

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POTENTIAL RELATED PARTY INDICATORS

Auditors sliould be alert to indicators of potential related party issues that may require special attentionwhen performing the audit. This section provides best practices guidance through the use of examplesof related party relationships and related party issues that, if present, should alert the auditor to thepossible existence of material related party relationships or transactions. Difficult economic timesincrease the possibility that the economic substance of certain transactions may be other than theirlegal form, or that transactions may lack economic substance. These examples are oriented toidentification of related pat-ties and do not address accounting issues that may be involved. Thus, theauditor should never infer from reading these exatnples that improper accounting can be cured by meredisclosure. A key to consider is whether the accounting for the transaction is appropriate given itssubstance.

Agr•eements under• wltich one par•ty pays expenses on behalf of anotlaer- party. A related pat-ty is to

pay certain expenses on behalf of a company and then pass tht•ough the expenses back to that company.Under this type of at7angetnent, the auditor should be alert to the fact that the pass through andexpense recognition by the compariy may never occut•, ' resulting in understated expenses on thecompany's financial statements, pat-ticularly wllen the company is struggling financially.

Cir•cular• ar•r•angernents between r•elated parties: Sales atrangements in which the seller of goods or

setvices has concurrent obligations to the buyer to purchase goods or services or provide other benefitsshould be exatnined closely. In addition, collectibility and liquidity should be closely examined incases in which a party's ability to repay a loan is depetident on continued cash funding or sales from a

related party.

Engaging in business deals (sucla as leases) at mor•e or less than market value: A cotnpany may

enter into a lease agreement with anothet• party owned in patt by a member of an officer's family atless than market rates. This relationship and the related transactions should be appropriately disclosedin the company's fmancial statements.

Xdentifrcation of an unidentified r•elated party: When an undisclosed related pat-ty has beenidentified, the audit team should assess whether managetnent's failure to disclose was merely anoversight or a deliberate attetnpt to hide the relationship. If the latter, the auditor should reassess theoverall audit scope and the ability to rely on management's representations in other areas. If theauditor believes management can no longer be trusted, the best course of action, after consulting othersin the fu-tn designated as consultants in accounting and auditing matters, as well as legal counsel, maybe to withdraw from the engagement.

•^

Inadequate disclosur•es: A common obsetvation regarding related parties is that companies riatito

satisfactorily describe the nature of related pat-ty relationships and transactions and to disclose theterms and dollar amounts of related party transactions and amounts due to or from related parties asrequired by FASB Statement No. 57, Related Party Disclosures. Including a lack of disclosure of

related party pledges of fmancial support that help mitigate doubt about going concem. The auditorshould consider guidance in FASB Statement No. 57 when evaluating the company's related party

disclosures.

Payments for services at inflated pr•ices: An officer, director or management representative of a

company also may be employed by a professional setvices or consulting firm utilized by the company.

33 -111-

This could lead to the professional seivices or consulting firm charging inflated fees for services

rendered.

Revenue recognition: Auditors should be aware that revenue recognition is not appropriate when a

substantive exchange is not present. Sales transactions should stem fiom express or implied contractsand represent exchanges between independent parties at arm's-length prices and terms. Aim's-lengthtransactions may be difficult to achieve between related parties as well as in situations in which a sellercan exercise substantial control over a buyer or vice-versa. Instances of fictitious sales and sales torelated parties lacking economic substance have been attributed in the past to managementrepresentatives who are anxious to meet sales quotas and earnings performance goals. See AICPA

Audit Guide, Auditing Revenue, for additional guidance on revenue recognition.

Sale of land witla arranged financing: If a principal owner of a company sold land at fair marketvalue and obtained financing for the buyer wlio was a marginal credit risk, the transaction wouldrequire related party disclosure by the company if the financing were obtained from a lender whoagreed to the transaction primarily to preseive a significant business relationship with the company.

Sale of securities: The sale of marketable securities, by a principal owner of a company, at asignificant 'discount fi•om quoted market prices to a large customer of the company, would be a relatedparty transaction. As such a transaction has no apparent business puipose absent the principal owner'srelationship to the company, it appears that the facts may require disclosure of the transaction to reflecta fair presentation of financial position and results of operations of the company. However, it shouldbe noted that if the owner had sold the securities to the same party at fair market value, there would beno presumption of a related party transaction.

Sales without substance: Funds transferred to the company from a related party for goods or services

that were never rendered.

Services or goods are pui-claased fi-om a pal-ty at little oi- no cost: Goods are purchased from another

party at less than cost. An airangement like this should be investigated for related party relationships

and if they exist, disclosed accordingly.

Unusual, material trrtnsactions, pai-ticularly close to quarter or year-end: A company may recognize

revenue on large, unusual transactions with another party conducted close to quatter end.Consideration should be given to whether or not the two parties migl7t be related in some way. Thesetransactions may not always be individually significant, but rather may involve several small salestransactions that in total are material. Repetitive quarter or year-end transactions with the same party

should also be investigated for potential related party relationships.

Utilization of related party to mitigate mai•ket i-isks: A company and its advisers create a "shell

company" to help mitigate market risks on various equity transactions. Circumstances may changeover time, requiring the company to consolidate the shell company. Earnings may be affected if thecompany failed to consolidate. Auditors should continuously work with their consultants in accountingand auditing matters to review these complex structures for changes in consolidation, tax, andaccounting implications. The nature of the structure established and the details of the relatedtransactions rnust be adequately disclosed in the financial statements from the time of inception.

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APPENDIX I - ILLUSTRATIVE AUDIT PROGRAM FOR RELATED PARTIES

The audit program provided in this section is presented for illustrativepurposes only. The illustrative audit objectives and procedures areneither all- inclusive nor are they prescribed minimums. The illustrativeaudit procedures are numbered merely to organize the materials; thosenumbers are not intended to imply completeness or a prescribedsequence. The nature, extent and timing of the auditing procedures tobe applied on a pat-ticular engagement are a matter of professionaljudgment to be determined by the auditor based on the specific facts

and circumstances.

Financial Statement Assertions:

1. Existence or occun•ence.2: Completeness.3. Rights and obligations.4. Valuation or allocation.5. Presentation and disclosure.

Objectives:A. To identify related parties and related party transactions. (Assertions 1 and 2)

B. To detennine the substance of such transactions is reflected in the accounts.

(Assertions 2,3, and 4)C. To obtain all infonnation necessaiy for footnote and/or report disclosure. (Assertions 2

and 5)

Done Date References/By Comments

Procedures:

A. Preliminary Procedures

1. Review the results of applicable sections of thefollowing to detennine the nature, timing, and extent

of procedures:

a. Preliminaty analytical review

b. Assessment of risk of material misstatement

c. Other planning documents and risk assessments

35 -113-

2. Based on the risk assessment made during planning,determine whether additional procedures, beyondthose included in this program, are necessary.Consult all relevant planning documents whenmaking this decision. If additional procedures arenecessary, add them to this program.

3. Evaluate the company's procedures used to identify,authorize, account for and disclose related party

transactions.

B. Substantive Test Procedures

Obtain from appropriate managementrepresentatives a list of all known related parties andany transactions with those parties during the period,including the affiliations of directors and officerswith other entities. The list of transactions shouldinclude significant related party transactions thatwere not recognized for accounting pu ►poses.

2. Obtain names of stockholders and directors forevidence of related party transactions.

3. Review the list of related parties for completeness byperforming the following procedures:

^ Review the comp-any's income tax retums andSEC and other regulatory filings for related partyinfonnation and for the involvement of officersand directors in other businesses.

n Review "conflict-of- interests" statements obtainedby the company from management.

n Detennine the names of all pension and othertrusts estabiis'fied for tLil^i benelit of eii;ployeeS a::d

the names of their officers and trustees.

n Review stockholder listings of closely-heldcompanies to identify major stockholders.

n Review prior year working papers for the names of

known related parties.

n Inquire of predecessor or principal auditors orauditors of related entities concerning theirknowledge of existing relationships and the extentof management involvement in materialtransactions.

Done I Date I References/By Comments

36 -114-

n Inquire of the principal auditors regarding theirknowledge of any plans of the parent, which mayaffect the subsidiaty's assets or liabilities.

n Review material investment and sales transactionsduring the audit period to detetmine whether thenature and extent of such transactions createrelated parties.

n Review board of directors and other committeeminutes for indications of related pat-ties.

4. In detennining the scope of procedures the auditorsshould perfortn with respect to possible related pat-tytransactions, the auditors should perfotm thefollowing:

n Obtain an understanding of managementresponsibilities and the relationships of eachcomponent of the total entity.

n Consider controls over management activities.

n Consider the business putpose setved by thevarious components of the entity. (The auditorsshould be particularly alet-t to a business ororganizational structure that appears to be designedto obscure related pat-ty transactions.)

n If the audit procedures reveal the existence ofpreviously undisclosed related pat-ties or relatedpat-ty transactions, consider their effect on thefraud assessment and the possible need to petiortnadditional procedures.

5. Distribute the list of all related pat-ties and all knownrelated patty transactions to all engagetnentpersonnel, participating offices, other auditors andpredecessor auditors and inquire whether any ofthem are aware of additional related pat-ties orrelated party transactions.

6. The following procedures should be performed inidentifying related party transactions:

n Review the minutes of all meetings of the board ofdirectors and other committees for infonnationabout material transactions authorized or discussed

at their meetings.

n Review proxy and other material filed with theSEC and comparable filings with other regulatory


37 -115-

agencies for information about materialtransactions with related parties.

n Review the extent and nature of businesstransacted with major customers, suppliers,borrowers and lenders for indications of previouslyundisclosed relationships by detennining who theprincipals are and wliether the entity and thetransaction have economic substance.

n Consider whether transactions are occurring, butare not recorded, such as receiving or providingaccounting, managetnent, or other services at nocharge or a major stockholder absorbing cotporateexpenses.

n Review accounting records and manual joutnalentries for large, unusual, or nonrecurringtransactions or balances, paying particularattention to transactions at or near the end of thereporting period.

n Review cotrespondence and invoices from all lawfitms that have performed work for the companyfor indications of the existence of related parties orrelated party transactions.

n Review confinnations of compensating balancesarrangements for indications that balances are orwere maintained for or by related parties.

n For significant loans (receivable and payable),review for unusual interest rates and terms.

n Review confinnations of loans receivable andpayable for indications of guarantees. Ifguarantees are indicated, detennine their natureand the relationship of the guarantor witll thecompany.

n Consider whether the performance of detailed testsof transactions and balances in other areas of theaudit indicated the possibility that related pat-tytransactions may exist.

If the company does not have adequate controlsand processes in place to identify related partytransactions and the auditor has not otherwise beensatisfied as to the extent of related pat-tytransactions, obtain a related party confirmationletter from all.directors, principal officers andmajor stockholders. (See example related pat-tyconfinnation letter in Appendix III)


38 -116-

7. Consider the effect, if any, of the related partytransactions on the tax provision. Notify the taxengagement team of all related party transactions forpurposes of their review of taxes under FASBStatement No. 109, Accountingfor Income Taxes,and the preparation of tax returns.

8. Document the identification and testing of all relatedparties and related party transactions in theworkpapers.

9. Obtain written representations from managementregarding the completeness of infonnation providedregarding related parties and related partytransactions and the adequacy of related partydisclosures in the financial statements.

C. Reporting Considerations

If representations are made by management in theirfinancial staternent disclosures about transactionswith related pat-ties, the representations should notimply that the related party transactions wereconsummated on terms equivalent to those thatprevail in ann's-length transactions unless suchrepresentations can be substantiated. If suchrepresentations do imply this and the engagementteam believes that the representation isunsubstantiated by management, it should,depending on materiality, express a qualified oradverse opinion because of a depaifiare fromgenerally accepted accounting principles.

2. If the auditor is unable to obtain sufficientappropriate audit assurance concerning relatedparties and transactions with such parties, a reportmodification may be necessaty.

3. When there are significant transactions with relatedparties, in cei-tain circumstances, the auditor maywish to emphasize a matter by adding an explanatoryparagraph (for example, in cases where the entity isdependent upon few customers, the entity is heavilyr1PnP„r1Pnt ,ir,r,n narent financing. or the entitv had a

Done Date References/By Comments

39 -117-

40 -118-

APPENDIX II - ILLUSTRATIVVE DISCLOSURE CHECKLIST FOR RELATED PARTIES

This checklist should be read in conjunction with theSummaty of Accounting Literattire section of this toolkit.

1. Consolidation and Combination Principles:If there is a difference in fiscal periods of not more than 93 daysbetween a consolidated entity and the registrant, such differenceshould be disclosed as follows:

â The closing date of the entity should be expressly indicated

â The necessity for the use of different closing dates shouldbe briefly explained

â The effect of intetvening events which materially affect thefinancial position or results of operations

n Consider the propriety of consolidating foreign subsidiaries thatoperate under political, economic or cuirency restrictions. Ifconsolidated, disclose the effects of foreign exchangerestrictions on financial positions and operating results.

n Describe the principles followed in consolidation, includingthose followed in determining the inclusion or exclusion ofsubsidiaries. Disclose the circumstances involved in anydeparture from the general practice of consolidating majority-owned subsidiaries and not consolidating entities that are lessthan majority-owned. Consider the guidance in EITF 96-16that prohibits the consolidation of a majority owned entity whenthe minority interest has certain participating rights.

n Disclose any material change from the preceding fiscal periodin the entities included or excluded in consolidation.

n Disclose changes in fiscal periods of consolidated entities thathave a material effect on the financial statements, and indicatethe manner of treatment.

n Eliminate intercompany items and transactions in consolidatedfinancial statements, and unrealized intercompany profits andlosses on transactions with equity method investees. Ifeliminations are not .auv,

nstatea raaSonS and method ofiia'

treatment.

2. Securities of Related Parties:

a) For investments accounted for under the equity method,disclose:

n Name of each investee and percentage of common stockownership

n Accounting policies of investor with respect to investmentsin common stock

6 See kev exeainine literature references in table at the bottom of the checklist.41

S-X 3A-02

S-X 3A-02(d)

FAS 94, par 9-10;ARB 51, par 5;APB 22, par 13;FRP 105; S-X3A-02 & 3A-03(a); EITF 96-16; EITF 96-20;EITF 97-2

S-X 3A-03(b)

ARB 51, par 6;

S-X 3A-04

S-X 4-08(k), 5-02.10

APB 18, par 19-20

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n Difference, if any between cat-rying amount and amount ofunderlying equity in net assets, and accounting treatment forthe difference

n Aggregate value of each investment (except subsidiaries),based on quoted market price if available

n The investments (as a single amount) in the investor'sbalance sheet, with earnings and losses fiom applying theequity method generally disclosed as a single amount aspart of income from continuing operations

n The investor's share of extraordinary items and prior-periodadjustinents classified in a manner similar to the investee'sclassification as extraordinary items or prior-periodadjustments, if material

n Material effects of possible conversions, exercises or othercontingent issuances of investee

n Names of significant investees in which less than 20% ofthe voting stock is held and the common stock is accountedfor on the equity method and the reason for using the equitymethod

n Investments in investee debt

n Material subsequent events and transactions, labeled asunaudited information

b) For investments not accounted for under the equity method,disclose:

n Accounting basis used

n Quoted market value, if available

n Allowance for losses

n Equity in underlying net assets and net income ofsubsidiaries or affiliates for the current period

n Dividends received in current period

n Any other applicable debt or equity security disclosures;

n The names of significant investees in which 20% or more ofvoting Siock is iieid and the reason fnr not using the equitymethod

c) For unconsolidated subsidiaries and for 50 percent or lessowned entities accounted for by the equity method, disclosuresof the following summarized financial information are requiredas of the same dates and for the same periods presented in theaudited financial statements, if an of the "significantsubsidiary" tests in S-X Rule 1-02(w), individually or inaggregate, are met by any combination of such subsidiaries or

persons:

n Current assets

n Noncurrent assets

S-X 5-02.11, 4-08(k)SAS I Sec 332.13

S-X 5-02.12

APB 12, par 3

APB 18, par 20a

S-X 1-02(w), 1-02(bb) and 4-08(g)(1)

42 -120-

Reference6: Compliance:

n Current liabilities

n Noncuirent liabilities

n Redeemable preferred stock

n Minority interest

n Specialized industries that do not normally present aclassified balance sheet should disclose the nature andamount of the major components of assets and liabilities

n Net sales or gross revenues

n Gross profit, or costs and expenses applicable to net sales orgross revenues

n Income or loss fiom continuing operations beforeextraordinaty items and cumulative effect of a change inaccounting principle

n Net income or loss

n Specialized industries may substitute other infonnation forsales and related costs and expenses if necessary for a moremeaningful presentation SAB Topic 5-J

n The provisions of SAB Topic 5-J (Push-down Accounting)should be considered with respect to these disclosures

3. For related party transactions that are material, individually or in FAS 57, par 2, 4the aggregate, other than compensation airangements, expense and Note 3;allowances and other snnilar items in the ordinaty course of S-X 4-08(k)business, disclose:

n The nature of the relationship

n A description of the transactions, including transactions towhich no amounts or nominal amounts were ascribed, for eachof the periods for which an income statement is presented, andsuch otlier information as is necessary to understand the effectsof the transactions on the financial statements

n Amounts of the transactions for each of the periods for which anincome statement is presented

n The effects of any change in the method of establishing thetet7ns fi•om that used in the preceding period

n Amounts due to or from related parties as of the date of eachbalance sheet presented and, if not otherwise apparent, the termsand manner of settlement

n Amounts of investments in related parties

n Material receivables, payables, revenue, expense, gains orlosses, or cash flows from related parties, should be disclosedseparately on the face of the applicable financial statement(Details may be provided in the notes)

n Compensating balances maintained for the benefit of affiliates,officers, directors, principal stockholders, or related parties

43 -121-

Reference6: Compliance:

n Compensating balances maintained by affiliates, officers,directors, principal stockholders or related parties on behalf ofthe company

n Any pledges by a parent company or major investor to providefinancial support

4. If representations about transactions with related parties are made, FAS 57, par 3do they avoid the implication that the related party transactionswere consuminated at arm's length? If such implications are made,can they be substantiated?

5. If the entity and one or more other entities are under common FAS 57, par 4ownership or management control and the existence of that controlcould result in operating results or financial position of therepoiting entity significantly different from those that would havebeen obtained if the entities were autonomous, disclose the natureof the control relationship even if there are no transactions betweenthe entities.

6. Nature and extent of leasing transactions between related pat-ties. FAS 13, par 29-30; S-X 4-08 k

Key to Literature References Above:

FRP

S-X

FAS

ARB

APB

EITF

SAS

SAB

SEC Codification of Financial Repot-ting Policies (section)

SEC Financial Statement Requirements Regulation S-X (article, rule & paragraph)

Statement of Financial Accounting Standards Board (number & paragraph)

Accounting Research Bulletin (number & paragraph)

Accounting Principles Board Opinion (number & paragraph (Cun•ent Text reference))

Emerging Issues Task Force (number)Statement of Auditing Standards Board (number & Codification of Statements onAuditing Standards AU section reference)

SEC Staff Accounting Bulletin

44 -122-

A.PPENDIX III - ILLUSTRATIVE RELATED PARTY LETTERS

Illustrative Related paf•ty Confas•mation Letter

In certain situations, the auditor may want to confirm the existence of related parties with directors,principal officers, major shareholders, or others. For example, a company does not have adequatecontrols and processes in place to identify related party transactions and the auditor has not otherwisebeen satisfied as to the extent of related pat-ty transactions. The following is an illustrative relatedparty confirmation letter that an auditor may use when the auditor is not otherwise satisfied as to theextent of related party transactions.

[Date]

[Name of Director, Principal Officer or Major Stockholder][Address line 1][Address line 2]

Dear [Name]:

In connection witli the audit of our financial statements, please furnish answers to the attachedquestionnaire, sign your name and return the questionnaire in the enclosed stamped, addressed

envelope directly to our auditors, [Name of the fif•m], [Local office address]. The questionnaire is

designed to provide the auditors with information about the interests of officers, directors and otherrelated parties in transactions with the Company.

Please answer all questions. If the answer to any question is "Yes," explain. Certain tenns used in thequestions are defined at the end of the questionnaire. Please read the definitions carefully beforeanswering the questions. Thank you for your cooperation.

Sincerely,

[Chief executive officer and title][Client name]

45-123-

[Client Name]Related party Questionnaire

Please answer all questions. If the answer to any question is "Yes," explain. Certain terms used in thequestions are defined at the end of the questionnaire. Please read the definitions carefully beforeanswering the questions.

1. Have you or any related pat-ty of yours had any interest, direct or indirect, in any sales,purchases, transfers, leasing arrangements or guarantees or other transactions since [Beginning

ofperiod of audit] to which the company [Or specify and pension, retirement, savings or

similar plan provided by the client] was, or is to be, a pai-ty?

2. Do you or any related pat-ty of yours have any interest, direct or indirect,'in any pending orincomplete sales, purchases, transfers, leasing atrangements, guarantees or other transactions towhich the company [Or specify any pension, retirement, savings or sinzilar plan provided by

the client] is, or is to be, a party?

3. Have you or any related pat-ty of yours been indebted to the company [Or specify any pension,

retirement, savings or sinzilar plan provided by the client] at any time since [Beginning of

period ofaudit]? Please exclude amounts due for purchases on usual trade tettns and forordinary travel and expense advances.

The answers to the foregoing questions are correct to the best of my knowledge and belief.

Date: Signature:

DEFINITIONS:

COMPANY - parent company, any subsidiaty or investee for which investments are accounted forby the equity method.

RELATED PARTY - any: (1) party (other than the Company) of which you are an officer, directoror pat-tner or are, directly or indirectly, the beneficial owner of 10% or more of the voting interests,(2) ttust or other estate in which you have a substantial beneficial ownership or for which you setveas trustee or in a similar fiduciaty capacity, (3) any member of your immediate family, and (4)other party with which you may deal if you (or the other party) control or can sigtiificantlyinfluence the other to an extent that either of you might be prevented from fully pursuing your ownseparate interests.

46-124-

CONTROL - possession, direct or indirect, of the power to direct or cause the direction of themanagement and policies of a party, whether through ownership, by contract or othetwise.

PARTY - an individual, a corporation, a patfinership, an association, a joint-stock company, abusiness trust or an unincotporated organization.

BENEFICIAL OWNER - a party who enjoys or has the right to secure benefits substantiallyequivalent to those of the ownership of securities, even though the securities are not registered inthe party's name. Examples of beneficial ownership include securities held for the party's benefitin the name of others, such as nominees, custodians, brokers, trustees, executors and otherfiduciaries; a partnership of which the person is a partner; and a corporation for which the partyowns substantially all of the stock. Shares: (1) held (individually or in a fiduciary capacity) by theparty's spouse, the party's or his or her spouse's minor children or a relative of the party or his orher spouse who shares the same hotime with the party; or (2) as to which the party can vest or revesttitle in himself at once or at some future tnne are also considered as being beneficially owned.

47-125-

Illustrative Letter To Otlier• Auditors Regar•ding Related Parties

The following illustrative letter may be used when using the work of other auditors. This letter willhelp facilitate a tunely exchange of infoirnation regarding known related patties and related party

transactions.

Date

[Name offirm][Address line 1][Address line 2]

Dear Sir or Madam:

In connection with our audit of the consolidated financial statements of ExampleCompany, Inc. and subsidiaries for the year ended December 31, 20X3, in which youare participating as auditors of ABC Company, enclosed is a list of related parties (asdefined in FASB Statement No. 57, Related Party Disclosures) of wliich we are awareand a description of transactions with such pa-ties. (Note: If additional related partiesor transactions are identified later in the engagement, a list of transactions with thoseparties should be forwarded to the other auditors.)

Our primaiy audit objectives associated with related party transactions are thefollowing:

v Detvi:iri-r':e the ex:stence of related pabtiesn Identify transactions with related pat-tiesn Examine identified related party transactionsn Detet7nine the adequacy of disclosure

As a participant in this audit, you should refer to the enclosed list and should be alert forany transactions with related pat-ties (those on the list or others that may come to yourattention) during the conduct of your audit.

Based on your knowledge, please advise us of other related parties not included on thelist and of transactions with related pat-ties that differ from those described herein.

Very truly yours,

YOUR FIRM'S NAME

48-126-

Note:If this letter is sent at interim, wording should be added, if applicable, to note thatupdated information may be foiv,rarded at year-end. Additionally, before completion ofthe audit it may be desirable to confiim with the other auditors matters such as thefollowing:

n A description of the transactions, including transactions to which no amounts ornominal amounts were ascribed, for each of the periods under audit

n Dollar volume of transactions with related paities for each of the periods underaudit and the effects of any clzange in the metliod of establishing the terms fromthat used in the preceding period

n Amounts due to or from related pat-ties as of the date of each of the balance sheetpresented along with the tet-ins and manner of settlement

49-127-

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