Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the New York Stock Exchange, Inc. Relating to Amendments to the Listed Company Manual Regarding Original and Continued Listing Criteria and Procedures
Federal RegisterMay 3, 1999
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41324; File No. SR-NYSE-99-13]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 by the New York Stock Exchange, Inc.
Relating to Amendments to the Listed Company Manual Regarding Original
and Continued Listing Criteria and Procedures
April 22, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 31, 1999, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. On April 21, 1999, the Exchange submitted Amendment No. 1 to
the proposed rule change. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change consists of amendments to the Listed
Company Manual (``Manual'') \3\ with regards to the original and
continued listing criteria and procedures of the Exchange. The text of
the proposed rule change follows. New text is italicized. Deleted text
is bracketed.
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\3\ The Exchange notes that it has a pending filing to make
certain amendments to its listing standards (SR-NYSE-98-21). The
instant filing is marked against the Manual in its current form, not
the Manual as proposed to be amended in the already pending filing.
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NYSE Listed Company Manual
* * * * *
Section 1
The Listing Process
101.00 Introduction
* * * * *
The Exchange has broad discretion regarding the listing of a
company. The Exchange is committed to list only those companies that
are suited for auction market trading and that have attained the status
of being eligible for trading on the Exchange. Thus, the Exchange may
deny listing or apply additional or more stringent criteria based on
any event, condition, or circumstance that makes the listing of the
company inadvisable or unwarranted in the opinion of the Exchange. Such
determination can be made even if the company meets the standards set
forth below.
102.01 Minimum Numerical Standards
--Domestic Standards [Companies]
--Equity Listings
102.01A. A company must meet one of the following size/volume
criteria:
* * * * *
102.01B. A company must demonstrate an [A]aggregate market value of
publicly-held shares [(C) , subject to adjustment depending on market
conditions, as described below]......[$40,000,000] of $60,000,000 for
companies that list either at the time of their initial public
offerings (``IPOs'') (C) or as a result of spin-offs, and $100,000,000
for other companies (D).
[(While greater emphasis is placed on market value, an additional
measure of size is $40,000,000 in net tangible assets.)]
* * * * *
(C) For companies that list at the time of their IPOs, the Exchange
will rely on a written commitment from the underwriter to represent the
anticipated value of the company's offering in order to determine a
company's compliance with this listing standard. Similarly, for spin-
offs, the Exchange will rely on a representation from the parent
company's investment banker (or other financial advisor) in order to
estimate the market value based upon the as disclosed distribution
ratio. For purpose of this paragraph, an IPO is an offering by an
issuer which, immediately prior to its original listing, does not have
a class of common stock registered under the Securities Exchange Act of
1934. An IPO includes a carve-out, which is defined for purposes of
this paragraph as the initial offering of an equity security to the
public by a publicly traded company for an underlying interest in its
existing business (which may be a subsidiary, division, or business
unit).
[C] (D) Shares held by directors, officers, or their immediate
families and other concentrated holdings of 10 percent or more are
excluded in calculating the number of publicly-held shares. If a
company either has a significant concentration of stock, or changing
market forces have adversely impacted the public market value of a
company which otherwise would qualify for listing on the Exchange, such
that its public market value is no more than 10 percent below
$60,000,000 or $100,000,000, as applicable, the Exchange will generally
consider $60,000,000 or $100,000,000, as applicable, in stockholders'
equity as an alternate measure of size and therefore as an alternate
basis on which to list the company.
* * * * *
[Calculation of Aggregate market Value Adjustment--On January 15 and
July 15 of each year the NYSE Composite Index, at the close of business
for that date, or on the next succeeding business day if the Exchange
is closed, is divided by the base value of 55.06 (the NYSE Composite
Index for July 15, 1971). The $40,000,000 standard multiplied by the
adjustment factor as so calculated (after rounding up to the nearest
thousandth). The resulting product is rounded to the nearest $100,000.
The adjustment is made only when the NYSE Composite Index is lower
than that of the base value, and is limited to a maximum reduction of
50 percent of the standard which will be in effect for the succeeding
six months following the calculation.
Since the NYSE Composite Index has remained above 55.06 in recent
years, no adjustment has been necessary]
* * * * *
----------------------------------------------------------------------
[Demonstrated earning power--income before federal income taxes and
under competitive conditions:
Latest fiscal year...................................... $2,500,000
Each of the preceding two fiscal years.................. $2,000,000
[[Page 23711]]
OR
Demonstrated earning power--income before federal income taxes and
under competitive conditions:
Aggregate for last 3 fiscal years....................... $6,500,000
together with
A minimum in most recent fiscal year.................... $4,500,000
(All three years must be profitable.)
OR
For companies with not less than
$500,000,000 market capitalization and
$200,000,000 revenues in the most recent fiscal year:
Demonstrated earning power--adjusted net income*:
Aggregate for last 3 fiscal years--$25,000,000
(Each year must report a positive amount.)]
102.01C. A company must meet one of the following financial
standards:
(I) (1) Pre tax earnings from continuing operations and after
minority interest and equity in the earnings or losses of investees as
adjusted (E) for items specified in (2)(a) through (i) below (F) must
total at least:
$2,500,000 in the latest fiscal year together with $2,000,000 in each
of the preceding two years; or
$6,500,000 in the aggregate for the last three fiscal years together
with a minimum of $4,500,000 in the most recent fiscal year, and
positive amounts for each of the preceding two years.
(2) Adjustments that must be included in the calculation of the
amounts required in paragraph (1) are as follows:
(a) Application of Use of Proceeds.
If a company is in registration with the SEC and is in the process
of an equity offering, adjustments should be made to reflect the net
proceeds of that offering, and the specified intended application(s) of
such proceeds to:
(i) Pay off existing debt. The adjustment will include elimination
of the actual historical interest on debt being retired with offering
proceeds for all relevant periods. If the event giving rise to the
adjustment occurred during a time-period such that pro forma amounts
are not set forth in the SEC registration statement (typically, the pro
forma effect of repayment of debt will be provided in the current
registration statement only with respect to the last fiscal year plus
any interim period in accordance with SEC rules), the company must
prepare the relevant adjusted financial data to reflect the adjustment
to its historical financial data, and its outside audit firm must
provide a report of having applied agreed-upon procedures with respect
to such adjustments. Such report must be prepared in accordance with
the standards established by the American Institute of Certified Public
Accountants.
(ii) Fund an acquisition.
(1) The adjustments will include those applicable with respect to
acquisition(s) to be funded with the proceeds. Adjustments will be made
that are disclosed as such in accordance with Rule 3-05 ``Financial
Statements of Businesses Acquired or to be Acquired and Article 11 of
Regulation S-X. Adjustments will be made for all the relevant periods
for those acquisitions for which historical financial information of
the acquiree is required to be disclosed in the SEC registration
statement; and
(2) Adjustments applicable to any period for which pro forma
numbers are not set forth in the registration statement shall be
accompanied by the relevant adjusted financial data to combine the
historical results of the acquiree (or relevant portion thereof) and
acquiror, as disclosed in the company's SEC filing. Under SEC rules,
the number of periods disclosed depends upon the significance level of
the acquiree to the acquiror. The adjustments will include those
necessary to reflect (a) the allocation of the purchase price,
including adjusting assets and liabilities of the acquiree to fair
value recognizing any intangibles (and associated amortization and
depreciation), and (b) the effects of additional financing to complete
the acquisition. The company must prepare the relevant adjusted
financial data to reflect the adjustment to its historical financial
data, and its outside audit firm must provide a report of having
applied agreed-upon procedures with respect to such adjustments. Such
report must be prepared in accordance with the standards established by
the American Institute of Certified Public Accountants.
(b) Acquisitions and Dispositions
In instances other than acquisitions (and related dispositions of
part of the acquiree) funded with the use of proceeds, adjustments will
be made for those acquisitions and dispositions that are disclosed as
such in a company's financial statements in accordance with Rule 3-05
``Financial Statements of Businesses Acquired or to be Acquired'' and
Article 11 of Regulation S-X. If the disclosure does not specify pre-
tax earnings from continuing operations, minority interest, and equity
in the earnings or losses of investees, then such data must be prepared
by the company's outside audit firm for the Exchange's consideration.
In this regard, the audit firm would have to issue an independent
accountant's report on applying agreed-upon procedures in accordance
with the standards established by the American Institute of Certified
Public Accountants.
(c) Exclusion of Merger or Acquisition Related Costs Recorded under
Pooling of Interests
(d) Exclusion of Charges or Income Specifically Disclosed in the
Applicant's SEC Filing for the Following:
(i) In connection with exiting an activity for the following:
(1) Costs of severance and termination benefits
(2) Costs and associated revenues and expenses associated with the
elimination and reduction of product lines
(3) Costs to consolidate or re-locate plant and office facilities
(4) Loss or gain on disposal of long-lived assets
(ii) Environmental clean-up costs
(iii) Litigation settlements
(e) Exclusion of Impairment Charges on Long-lived Assets (goodwill,
property, plant, and equipment, and other long-lived assets)
(f) Exclusion of Gains or Losses Associated with Sales of a
Subsidiary's or Investee's Stock
(g) Exclusion of In-Process Purchased Research and Development Charges
(h) Regulation S-X Article 11 Adjustments
Adjustments will include those contained in a company's pro forma
financial statements provided in a current filing with the SEC pursuant
to SEC rules and regulations governing Article 11 ``Pro forma
information of Regulation S-X Part 210--Form and Content of and
Requirements for Financial Statements.''
(i) Exclusion of the Cumulative Effect of Adoption of New Accounting
Standard (APB Opinion No.20)
OR
(II) A Company with not less than $500,000,000 market
capitalization and $200,000,000 in revenues during the most recent 12
month period must demonstrate from the operating activity section of
its cash flow statement that its cash flow, which represents net income
adjusted to (a) reconcile such amounts to cash provided by operating
activities, and (b) exclude changes in operating assets and
liabilities, is at least
[[Page 23712]]
$25,000,000 in the aggregate for the last three fiscal years, and each
year is reported as a positive amount as adjusted (E)(F) pursuant to
Para. 102.01C (I)(2)(a) and (b) as applicable. With respect to
reconciling amounts pursuant to this Paragraph, all such amounts are
limited to the amount included in the company's income statement.
(E) Only adjustments arising from events specifically so indicated
in the company's SEC filing(s) as to both categorization and amount can
and must be made. Any such adjustment applies only in the year in which
the event occurred except with regard to the use of proceeds or
acquisitions and dispositions. Any company for which the Exchange
relies on adjustments in granting clearance must include all relevant
adjusted financial data in its listing application as specified in
Para. 702.04, and disclose the use of adjustments by including a
statement in a press release (i) that additional information is
available upon which the NYSE relied to list the company and is
included in the listing application and (ii) that such information is
available to the public upon request.
(F) The above-referenced adjustments are measured and recognized in
accordance with any relevant accounting literature, such as that
published by the Financial Accounting Standards Board (``FASB''), the
Accounting Principles Board (``APB''), the Emerging Issues Task Force
(``EITF''), the American Institute of Certified Public Accountants
(``AICPA''), and the SEC. Any literature is intended to guide issuers
and investors regarding the affected adjustment listed. If successor
interpretations (or guidelines) are published with respect to any
particular adjustment, the most recent relevant interpretations (or
guidelines) should be consulted.
102.01D. Policy on restated financial statements due to a change
from an unacceptable to acceptable accounting principle or a correction
of errors
If at any time following the Exchange's initial determination that
a company meets the Exchange's original listing criteria, the company
restates its financial statements due to a change from an unacceptable
to an acceptable accounting principle or a correction of errors, and
the restatement encompasses financial statements included in its SEC
filings at the time of application for listing on the Exchange, the
Exchange will re-evaluate the company's listing status. In this regard,
the Exchange will determine whether, at the time of the original
clearance, the company would have qualified under the Exchange's
original listing standards utilizing the restated financial data. If
not, unless the company meets original listing standards at the time of
the restatement, the company will be notified that it does not meet the
original listing standards and, if its securities have been listed,
such securities will be suspended from trading and the company will
immediately be subject to the delisting procedures in Para. 804.
[*Net income, adjusted to remove the effects of all items whose cash
effects are investing or financing cash flows (determined pursuant to
paragraph 28(b) of Statement of Financial Accounting Standards No. 95,
Statement of Cash Flows, subject to the following limitations: the
adjustment to net income with respect to the cash effects of
discontinued operations, the cumulative effect of an accounting change,
an extraordinary item or the gain or loss on extinguishment of debt
will be limited to reversing the amount charged or credited in
determining net income for the period.)
The adjusted net income standard is designed to provide the
opportunity for substantial companies that are valued more on the basis
of ``cash flow'' than reported income to list on the Exchange. The NYSE
will consider each company on a case by case basis and will look not
only at the specifics of the company's business but will also look to
its industry, peer group and other relevant factors in performing its
due diligence with respect to the application of this standard.]
102.05 Minimum Numerical Standards--Real Estate Investment Trusts
For Real Estate Investment Trusts (REITs) that do not have a three-
year operating history, the following listing standards apply:
For such companies with at least $60,000,000 in
stockholders' equity, the Exchange will generally authorize the listing
of the REIT. For those REITs listing in conjunction with an offering,
this requirement must be evidenced by a written commitment from the
underwriter (or, in the case of a spin-off or carve-out, from the
parent company's investment banker or other financial advisor) on
behalf of the REIT;
For such companies with stockholders' equity below
$60,000,000, the Exchange will not consider the REIT eligible for
listing.
* * * * *
103.00 Non-U.S. Companies
* * * * *
103.01 Minimum Numerical Standards--Non U.S Companies--Equity Listings
103.01A. A company must meet the following distribution and size
requirements:
[Distribution]
Number of shareholder, holders of 100 or 5,000 Worldwide
more shares.
Number of shares publicly held............ 2.5 million Worldwide
Market value of publicly-held shares (A).. $100 million Worldwide (B)
(A) Shares held by directors, officers, or their immediate families
and other concentrated holdings of 10 percent or more are excluded in
calculating the number of publicly-held shares. If a company either has
a significant concentration of stock, or if changing market forces have
adversely impacted the public market value of a company which otherwise
would qualify for listing on the Exchange such that its public market
value is no more than 10 percent below $100,000,000, the Exchange will
generally consider $100,000,000 in stockholders' equity as an alternate
measure of size and therefore, as an alternative basis to list the
company.
(B) For companies that list at the time of their initial public
offerings (``IPOs''), if necessary, the Exchange will rely on a written
commitment from the underwriter to represent the anticipated value of
the company's offering in order to determine a company's compliance
with this listing standard. Similarly, for spin-offs, the Exchange will
rely on a representation from the parent company's investment banker
(or other financial advisor) or transfer agent in order to estimate the
market value based upon the as disclosed distribution ratio. For
purpose of this paragraph, an IPO is an offering by an issuer which,
immediately prior to its original listing, does not have a class of
common stock registered under the Securities Exchange Act of 1934. An
IPO includes a carve-out, which is defined for purposes of this
paragraph as the initial offering of an equity security to the public
by a publicly traded company for an underlying interest in its existing
business (may be a subsidiary, division, or business unit).
[Size and Earnings
Net tangible assets................... $100 million Worldwide
Pre-tax income........................ $100 million cumulative for
latest 3 years with $25
million minimum for any one
of the 3 years]
[[Page 23713]]
103.01B. A company must meet one of the following financial
standards:
(I) (1) Pre tax earnings from continuing operations and after
minority interest and equity in the earnings or losses of investees as
adjusted (C)(D) for items specified in para. 102.01C(I)(2)(a) through
(i) above, and 103.01B(I)(2) below, must total at least:
$100,000,000 in the aggregate for the last three fiscal years together
with a minimum of $25,000,000 in each of the three years.
(2) Additional Adjustment Available for Foreign Currency
Devaluation. Non-operating adjustments when associated with translation
adjustments representing a significant devaluation of a country's
currency (e.g., the currency of a company's country of domicile
devalues by more than 10 percent against the U.S. dollar within a six-
month period). Adjustments may not include those associated with normal
currency gains or losses.
OR
(II) Companies with not less than $500,000,000 market
capitalization and $200,000,000 revenues in the most recent 12 month
period must demonstrate from the operating activity section of its cash
flow statement that its operating cash flow excluding changes in
operating assets and liabilities is at least $25,000,000 in the
aggregate for the last three fiscal years, where each year is reported
as a positive amount as adjusted (C)(D) for Para. 102.01C(I)(2) (a) and
(b).
(C) Only adjustments arising from events specifically so indicated
in the company's SEC filing(s) as to both categorization and amount can
and must be made. Any such adjustment applies only in the year in which
the event occurred except with regard to the use of proceeds or
acquisitions and dispositions. Any company for which the Exchange
relies on adjustments in granting clearance must include all relevant
adjusted financial data in its listing application as specified in
Para. 702.04, and disclose the use of adjustments by including a
statement in a press release (i) that additional information is
available upon which the NYSE relied to list the company and is
included in the listing application and (ii) that such information is
available to the public upon request.
(D) Interested parties should apply the list of adjustments in
accordance with any relevant accounting literature, such as that
published by the Financial Accounting Standards Board (``FASB''), the
Accounting Principles Board (``APB''), the Emerging Issues Task Force
(``EITF''), the American Institute of Certified Public Accountants
(``AICPA''), and the SEC. Any literature is intended to guide issuers
and investors regarding the affected adjustment listed. If successor
interpretations (or guidelines) are published with respect to any
particular adjustment, the most recent relevant interpretations (or
guidelines) should be consulted.
103.01C. Policy on restated financial statements due to a change
from an unacceptable to acceptable accounting principal or a correction
of errors
If at any time following the Exchange's initial determination that
a company meets the Exchange's original listing criteria, the company
restates its financial statements due to a change from an unacceptable
to an acceptable accounting principle or a correction of errors, and
the restatement encompasses financial statements included in its SEC
filings at the time of application for listing on the Exchange, the
Exchange will re-evaluate the company's listing status. In this regard,
the Exchange will determine whether, at the time of the original
clearance, the company would have qualified under the Exchange's
original listing standards utilizing the restated financial data. If
not, unless the company meets original listing standards at the time of
the restatement, the company will be notified that it does not meet the
original listing standards and, if its securities have been listed,
such securities will be suspended from trading and the company will
immediately be subject to the delisting procedures in Para. 804.
* * * * *
Section 7
Listing Applications
* * * * *
702.04 Supporting Documents
* * * * *
Financial Statements--
* * * * *
Adjustments to historical financial data--
If the Exchange requires any adjustments to historical financial
data submitted by the company during the financial eligibility review
process and such data is necessary to demonstrate that the company
meets the Exchange's listing standards, the company must include such
data in its listing application. Exchange Staff will advise the company
as to which, if any, adjustments to historical financial data submitted
to it by the company must be included in the listing application. Such
information must include the agreed upon procedures report, if any,
submitted to the Exchange.
* * * * *
Section 8
Suspension and Delisting
* * * * *
801.00 Policy
* * * * *
In connection with this rule, the Exchange has adopted certain
quantitative and qualitative continued listing criteria. When a company
falls below any criterion, the Exchange will review the appropriateness
of continued listing. The Exchange may give consideration to any
definitive action that a company would propose to take that would bring
it [in line with original listing standards] above continued listing
standards. The specific procedures and timelines regarding such
proposals are delineated in Para. 802.02 and 802.03. [However, changes
that a company might consider or make that would bring it above
continued listing standards but not in line with original listing
standards would normally not be adequate reason to warrant continued
listing.]
* * * * *
802.00 Continued Listing [Criteria]
802.[00] 01 Continued Listing Criteria
* * * * *
Earnings--
Aggregate market value of shares outstanding $12,000,000
(excluding treasury stock) is less than...................
and average net income (A) after taxes for past 3 years is $600,000
less than.................................................
Net tangible assets available to common stock are $12,000,000
less than.................................................
and average net income (A) after taxes for past 3 years is $600,000
less than.................................................
(A) For a company that included in its original listing application
adjustments to historical financial data, during the first three years
following the date of its original listing, the Exchange will calculate
the company's average net income after taxes for any year considered in
assessing its qualification for listing taking into consideration those
specific adjustments made to the company's historical financial data
for that year in the original listing application.
[[Page 23714]]
802.02 Continued Listing
Evaluation and Follow-Up Procedures for Domestic Companies
The following procedures shall be applied by the Exchange to
domestic companies which are identified as being below the Exchange's
continued listing criteria. Notwithstanding the above, when the
Exchange deems it necessary for the protection of investors, trading in
any security can be suspended immediately, and application made to the
SEC to delist the security.
Once the Exchange identifies, through internal reviews or notice (a
press release, news story, company communication, etc.), a company as
being below the continued listing criteria set forth in Para. 802.01,
the Exchange will notify the company by letter of its status within 10
business days. This letter will also provide the company with an
opportunity to provide the Exchange with a plan (the ``Plan'') advising
the Exchange of definitive action the company has taken, or is taking,
that would bring it into conformity with continued listing standards
within 18 months of receipt of the letter. Within 10 business days
after receipt of the letter, the company must contact the Exchange to
confirm receipt of notification, discuss any possible financial data of
which the Exchange may be unaware, and indicate whether or not it plans
to present a Plan; otherwise, suspension and delisting procedures will
commence. If the company submits a Plan, it must identify specific
quarterly milestones against which the Exchange will evaluate the
company's progress.
The company has 45 days from the receipt of the letter to submit
its Plan to the Exchange for review; otherwise, suspension and
delisting procedures will commence. Exchange staff will evaluate the
Plan, including any additional documentation that supports the Plan,
and make a determination as to (1) whether the Plan shows the company
meeting the continued listing standards within the 18 months and (2)
whether the company has made a reasonable demonstration in the Plan of
an ability to come into conformity with continued listing standards.
The Exchange will make such determination within 45 days of receipt of
the proposed Plan, and will promptly notify the company of its
determination in writing.
The company also has 45 days from receipt of the letter to issue a
press release disclosing the fact that it has fallen below the
continued listing standards of the Exchange. If the company fails to
issue this press release during the allotted 45 days, the Exchange will
issue the requisite press release.
If the Exchange does not accept the Plan, the Exchange will
promptly initiate suspension and delisting procedures and issue a press
release disclosing the forthcoming suspension and application to the
SEC for delisting of the company's securities.
If the Exchange accepts the Plan, the Exchange will review the
company on a quarterly basis for compliance with the Plan. If the
company fails to meet the material aspects of the Plan or any of the
quarterly milestones, the Exchange will review the circumstances and
variance, and determine whether such variance warrants commencement of
suspension and delisting procedures. Should the Exchange determine to
proceed with suspension and delisting procedures, it may do so
regardless of the company's continued listing status at that time. In
any event, if the company does not meet continued listing standards at
the end of the 18-month period, the Exchange promptly will initiate
suspension and delisting procedures.
* * * * *
802.03 Continued Listing
Evaluation and Follow-up Procedures for Non-U.S. Companies
The following procedures shall be applied by the Exchange to non-
U.S. companies who are identified as being below the Exchange's
continued listing criteria. Notwithstanding the above, when the
Exchange deems it necessary for the protection of investors, trading in
any security can be suspended immediately, and application made to the
SEC to delist the security.
Once the Exchange identifies, through internal reviews or notice (a
press release, news story, company communication, etc.), a company as
being below the continued listing criteria set forth in Para. 802.01,
the Exchange will notify the company by letter of its status within 10
business days. This letter will also provide the company with an
opportunity to provide the Exchange with a plan (the ``Plan'') advising
the Exchange of definitive action the company has taken, or is taking,
that would bring it into conformity with continued listing standards
within 18 months of receipt of the letter. Within 30 business days
after receipt of the letter, the company must contact the Exchange to
confirm receipt of notification, discuss any possible financial data of
which the Exchange may be unaware, and indicate whether or not it plans
to present a Plan; otherwise, suspension and delisting procedures will
commence. If the company submits a Plan, it must identify specific
semi-annual milestones against which the Exchange will evaluate the
company's progress.
The company has 90 days from the receipt of the letter to submit
its Plan to the Exchange for review; otherwise, suspension and
delisting procedures will commence. Exchange staff will evaluate the
Plan, including any additional documentation that supports the Plan,
and make a determination as to (1) whether the Plan shows the company
meeting the continued listing standards within the 18 months and (2)
whether the company has made a reasonable demonstration in the Plan of
an ability to come into conformity with continued listing standards.
The Exchange will make such determination within 45 days of receipt of
the proposed Plan, and will promptly notify the company of its
determination in writing.
The company also has 90 days from receipt of the letter to issue a
press release disclosing the fact that it has fallen below the
continued listing standards of the Exchange. If the company fails to
issue this press release during the allotted 90 days, the Exchange will
issue the requisite press release.
If the Exchange does not accept the Plan, the Exchange will
promptly initiate suspension and delisting procedures and issue a press
release disclosing the forthcoming suspension and application to the
SEC for delisting of the company's securities.
If the Exchange accepts the Plan, the Exchange will review the
company on a semi-annual basis for compliance with the Plan. If the
company fails to meet the material aspects of the Plan or any of the
semi-annual milestones, the Exchange will review the circumstances and
variance, and determine whether such variance warrants commencement of
suspension and delisting procedures. Should the Exchange determine to
proceed with suspension and delisting procedures, it may do so
regardless of the company's continued listing status at that time. In
any event, if the company does not meet continued listing standards at
the end of the 18-month period, the Exchange will promptly initiate
suspension and delisting procedures.
[[Page 23715]]
NYSE Rules
Delisting of Securities
Suspension from Dealings or Removal from List by Action of the
Exchange
The aim of the New York Stock Exchange is to provide the foremost
auction market for securities of well-established companies in which
there is a broad public interest and ownership.
Rule 499.
.20 NUMERICAL AND OTHER CRITERIA.--WHEN A COMPANY FALLS BELOW ANY
OF THESE CRITERIA, THE EXCHANGE MAY GIVE CONSIDERATION TO ANY
DEFINITIVE ACTION THAT A COMPANY WOULD PROPOSE TO TAKE THAT WOULD BRING
IT ABOVE CONTINUED LISTING STANDARDS. [IN LINE WITH ORIGINAL LISTING
STANDARDS. ON THE OTHER HAND, CHANGES THAT A COMPANY MIGHT CONSIDER OR
MAKE THAT WOULD BRING IT ABOVE THE DELISTING CRITERIA BUT NOT IN LINE
WITH ORIGINAL LISTING STANDARDS WOULD NORMALLY NOT BE ADEQUATE REASON
TO WARRANT CONTINUED LISTING.]
* * * * *
.50 [Procedure for Delisting.--] Continued Listing Evaluation and
Follow-up Procedures for Domestic Companies
The following procedures shall be applied by the Exchange to
domestic companies which are identified as being below the Exchange's
continued listing criteria. Notwithstanding the above, when the
Exchange deems it necessary for the protection of investors, trading in
any security can be suspended immediately, and application made to the
SEC to delist the security.
Once the Exchange identifies, through internal reviews or notice (a
press release, news story, company communication, etc.), a company as
being below the continued listing criteria set forth in Para. 802.01,
the Exchange will notify the company by letter of its status within 10
business days. This letter will also provide the company with an
opportunity to provide the Exchange with a plan (the ``Plan'') advising
the Exchange of definitive action the company has taken, or is taking,
that would bring it into conformity with continued listing standards
within 18 months of receipt of the letter. Within 10 business days
after receipt of the letter, the company must contact the Exchange to
confirm receipt of notification, discuss any possible financial data of
which the Exchange may be unaware, and indicate whether or not it plans
to present a Plan; otherwise, suspension and delisting procedures will
commence. If the company submits a Plan, it must identify specific
quarterly milestones against which the Exchange will evaluate the
company's progress.
The company has 45 days from the receipt of the letter to submit
its Plan to the Exchange for review; otherwise, suspension and
delisting procedures will commence. Exchange staff will evaluate the
Plan, including any additional documentation that supports the Plan,
and make a determination as to (1) whether the Plan shows the company
meeting the continued listing standards within the 18 months and (2)
whether the company has made a reasonable demonstration in the Plan of
an ability to come into conformity with continued listing standards.
The Exchange will make such determination within 45 days of receipt of
the proposed Plan, and will promptly notify the company of its
determination in writing.
The company also has 45 days from receipt of the letter to issue a
press release disclosing the fact that it has fallen below the
continued listing standards of the Exchange. If the company fails to
issue this press release during the allotted 45 days, the Exchange will
issue the requisite press release.
If the Exchange does not accept the Plan, the Exchange will
promptly initiate suspension and delisting procedures and issue a press
release disclosing the forthcoming suspension and application to the
SEC for delisting of the company's securities.
If the Exchange accepts the Plan, the Exchange will review the
company on a quarterly basis for compliance with the Plan. If the
company fails to meet the material aspects of the Plan or any of the
quarterly milestones, the Exchange will review the circumstances and
variance, and determine whether such variance warrants commencement of
suspension and delisting procedures. Should the Exchange determine to
proceed with suspension and delisting procedures, it may do so
regardless of the company's continued listing status at that time. In
any event, if the company does not meet continued listing standards at
the end of the 18-month period, the Exchange promptly will initiate
suspension and delisting procedures.
.60 [Procedure for Delisting.--] Continued Listing Evaluation and
Follow-up Procedures for Non-US Companies
The following procedures shall be applied by the Exchange to non-
U.S. companies who are identified as being below the Exchange's
continued listing criteria. Notwithstanding the above, when the
Exchange deems it necessary for the protection of investors, trading in
any security can be suspended immediately, and application made to the
SEC to delist the security.
Once the Exchange identifies, through internal reviews or notice (a
press release, news story, company communication, etc.), a company as
being below the continued listing criteria set forth in Para. 802.01,
the Exchange will notify the company by letter of its status within 10
business days. This letter will also provide the company with an
opportunity to provide the Exchange with a plan (the ``Plan'') advising
the Exchange of definitive action the company has taken, or is taking,
that would bring it into conformity with continued listing standards
within 18 months of receipt of the letter. Within 30 business days
after receipt of the letter, the company must contact the Exchange to
confirm receipt of notification, discuss any possible financial data of
which the Exchange may be unaware, and indicate whether or not it plans
to present a Plan; otherwise, suspension and delisting procedures will
commence. If the company submits a Plan, it must identify specific
semi-annual milestones against which the Exchange will evaluate the
company's progress.
The company has 90 days from the receipt of the letter to submit
its Plan to the Exchange for review; otherwise, suspension and
delisting procedures will commence. Exchange staff will evaluate the
Plan, including any additional documentation that supports the Plan,
and make a determination as to (1) whether the Plan shows the company
meeting the continued listing standards within the 18 months and (2)
whether the company has made a reasonable demonstration in the Plan of
an ability to come into conformity with continued listing standards.
The Exchange will make such determination within 45 days of receipt of
the proposed Plan, and will promptly notify the company of its
determination in writing.
The company also has 90 days from receipt of the letter to issue a
press release disclosing the fact that it has fallen below the
continued listing standards of the Exchange. If the
[[Page 23716]]
company fails to issue this press release during the allotted 90 days,
the Exchange will issue the requisite press release.
If the Exchange does not accept the Plan, the Exchange will
promptly initiate suspension and delisting procedures and issue a press
release disclosing the forthcoming suspension and application to the
SEC for delisting of the company's securities.
If the Exchange accepts the Plan, the Exchange will review the
company on a semi-annual basis for compliance with the Plan. If the
company fails to meet the material aspects of the Plan or any of the
semi-annual milestones, the Exchange will review the circumstances and
variance, and determine whether such variance warrants commencement of
suspension and delisting procedures.
Should the Exchange determine to proceed with suspension and
delisting procedures, it may do so regardless of the company's
continued listing status at that time. In any event, if the company
does not meet continued listing standards at the end of the 18-month
period, the Exchange will promptly initiate suspension and delisting
procedures.
.70 Procedure for Delisting.--
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to clarify and codify
how the Exchange evaluates a company's listing eligibility, codify the
Exchange's application and interpretation of certain original listing
standards, change the benchmark used as an alternate measure of size,
codify its original listing standard for real estate investment trusts,
and codify both existing and enhanced procedures applicable to
companies identified as being below the Exchange's continued listing
criteria. Where applicable, conforming changes are proposed regarding
non-U.S. listings. In proposing these rule codifications and changes,
the Exchange seeks to ensure that its original and continued listing
standards are fully transparent, applied consistently and easily
auditable.
Original Listing Criteria and Procedures. The Exchange's numerical
listing criteria include requirements regarding size, earnings and
share distribution of a company. With regard to the size component of
the financial eligibility criteria, and general eligibility, the
Exchange proposes to make four amendments:
The proposed amendment clarifies and codifies the
Exchange staff's authority to delve further into the suitability of
the applicant company for auction market trading on the Exchange
even if the applicant meets the Exchange's quantitative criteria.
The Exchange notes that such authority is specifically codified in
the suspension and delisting section of the Manual and believes that
it is equally appropriate to codify its authority in the original
listing section.
The current original listing criteria include a
requirement that a company have an aggregate market value of
publicly-held shares of $40 million. The Exchange proposes to raise
this requirement to $100 million for all listings other than spin-
offs and initial public offerings (``IPOs'') (including carve-outs
\4\), as to which the Exchange proposes raising the standard to $60
million. The Exchange proposes to raise the current $40 million
standard somewhat less for IPOs, carve-outs and spin-offs because
these are companies that have not had the opportunity to establish
themselves as public companies.\5\
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\4\ The Exchange proposes to define a carve-out as the initial
offering of an equity security to the public by a publicly-traded
company for an underlying interest in its existing business (which
may be a subsidary, division, or business unit). In the case of a
``target stock,'' the security is treated in the same way as any
other second class of stock of the issuer.
\5\ The Exchange proposes to define an IPO as a company that,
prior to its original listing did not have a class of common stock
registered under the Act. The Exochange notes that this definition
differs from the definition of an IPO in Section 12(f)(1)(G)(i) of
the Act, which turns on whether a company has a reporting obligation
under the Act prior to a stock offering. Because the Exchange is
applying its definition of IPO in the context of the original
listing of common stock, the Exchange believes it is more
appropriate to focus on the existense of U.S. publicly-traded stock
rather than on prior reporting requirement. For example, while a
company could have a reporting requirement under the Act if it
conducted a public sale of debt securities, that would not be
relevant in considering the appropriateness of listing a company's
first public class of common stock.
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The current additional measure of a company's size is a
net tangible assets (``NTAs'') test. The Exchange proposes two
changes:
a. First, the word ``additional in this context has been read by
some to imply that NTAs are a stand-alone measure of size that must
be met in addition to the market value standard. This reading was
never intended. The Exchange clarifies that the test, as modified
below, is an alternate measure of size to be relied upon in those
instances where circumstances warrant an alternate measure and where
the public market capitalization is no more than 10 percent below
the public market value listing standard. Such circumstances would
include occurrences such as large private holdings that drive down
the public market capitalization or changing market forces that
drive down the price of the stock.
b. Second, the Exchange proposes to replace the NTA test with a
stockholders' equity test ($60 million for IPOs or spin-offs and
$100 million for all other domestic listings \6\ The Exchange views
stockholders' equity as a better reflection of a company's value in
the current economy, where a company's value often is not based
solely on hard assets, but also on intangibles. The Exchange would,
in reviewing a company, look to the composition of the stockholders'
equity in order to determine the origination of such equity.
Furthermore, stockholders' equity is a more straight-forward
calculation than NTAs.
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\6\ For non-U.S. companies, the $100 million requirement applies
to all issuers and will be measured under this proposal in
stockholders' equity instead of the current NTA valuation.
---------------------------------------------------------------------------
The Exchange proposes to codify its practice of
accepting a written commitment from the underwriter for IPOs (for
spin-offs, from the parent company's investment banker or other
financial advisor) to demonstrate that the company will satisfy the
public market value requirement of $60 million ($100 million
worldwide for non-U.S. issuers).
Original Financial Listing Criteria and Procedures. i. Overview and
Discussion of Current Practice Regarding Financial Listing Standards.
In addition to specific criteria regarding the size of a listing
applicant, the Manual also contains criteria regarding a company's
earnings. The Exchange is proposing a series of amendments relating to
this section of the Manual.
Under the current provisions of the Manual, a company that seeks to
qualify for listing on the Exchange under its domestic standards must
meet one of three financial tests. Two of the tests call for an
analysis of the company's ``demonstrated earning power under
competitive conditions.'' The third test, which only applies to
companies with at least $500,000,000 in market capitalization and
$200,000,000 in revenues during the most recent fiscal year, analyzes
the company's ``demonstrated earning power--adjusted net income,'' as
such latter term is defined in the current accompanying
[[Page 23717]]
footnotes. The Exchange proposes both to codify its current policies
and practices with respect to the interpretation of these criteria and
to amend certain of its policies. In doing so, the Exchange seeks to
ensure that the financial criteria applied to companies seeking to list
on the Exchange are fully transparent, applied consistently and easily
auditable.
The Exchange seeks to ascertain the financial strength of the
company as it will exist on the day of listing. For more than 60 years,
it has been the policy and practice of the Exchange to give
consideration to certain adjustments to assure that at the time of
listing the company has the earnings capacity--the ``demonstrated
earning power'' requisite to auction-agency trading of its securities
on the Exchange.
In conducting its review of the financial condition of an applicant
company, the Exchange historically relied upon financial statements
presented to it by the company, both historical and pro forma; in many
cases, such financial information included that obtained from SEC
filings (e.g., for an acquisition, pro forma financial statements may
have been provided by the listing applicant acquiror and presented to
Exchange staff from the relevant past SEC filings for the acquiree if
it was a reporting company). Finally, if the Exchange relied on the
adjustments in granting financial clearance to the company, the company
would be required to include them in its original listing application
as a condition to eligibility clearance. Thus, any adjustments were
available to the public because the listing application is a matter of
public record.
The Exchange has not accepted all pro forma adjustments presented
by the listing applicant. Moreover, the Exchange has required pro forma
adjustments from companies in instances where the outcome was not
favorable to the company if the adjustments were considered necessary
to accurately evaluate the company's financial eligibility.
While the Exchange believes that the current process has served
investors and the listed company community well, the Exchange
recognizes the need to provide more transparency as to the application
of the financial criteria and the financial analysis used in the
listing process. Thus, the proposed rule change sets forth more
explicit standards and enumerates specifically the applicable
adjustments. In addition, the proposed rule change makes conforming,
clarifying changes to the non-U.S. financial listing standards in
Section 103.01 of the Manual.
ii. Proposed Changes to Financial Eligibility Standards. The
proposed rule change codifies the Exchange's financial listing
standards and current practices, as well as clarifies and modifies the
relevant interpretations. The modifications have been made to ensure
transparency, auditability, replicability and certainty in the
application of the standards. In detailing its standards, the Exchange
has sought to preserve its goal of analyzing the financial strength of
a listing applicant as the entity will exist at the time of listing.
Specifically, the Exchange seeks to continue to be able to determine
whether the company in its current form is financially suited for
trading on the Exchange, taking into account (1) changes in
capitalization, (2) acquisitions completed or committed to, and (3)
excluding certain items which, based upon the Exchange's experience,
should not be considered in assessing earnings strength on a going
forward basis, because, by their nature, they are not necessarily
recurring.
a. Standard #1--``Pre-Tax Adjusted Earnings. The Exchange proposes
to replace its current requirement that applicants ``demonstrate
earning power under competitive conditions'' with a standard providing
more specificity. The proposed standard is ``pre-tax earnings from
continuing operations and after minority interest and equity in the
earnings or losses of investees as adjusted''. In turn, the ``as
adjusted'' phrase refers the reader to various items that are a part of
the test. Each element of the restated test is discussed separately
below.
First, ``pre-tax earnings'' captures the current standard of
``income before federal income taxes.'' Thus, the Exchange proposes to
continue to begin its analysis with a company's income before the
application of all income taxes (state income taxes, although removed
for NYSE analysis purposes in the past, have not materially altered any
listing eligibility decision and, therefore, are now excluded as such)
in order to create a picture of the company's gross income potential.
Second, ``from continuing operations'' focuses our analysis on
ongoing operations and excludes any discontinued operations included in
the company's historical financial statements. Discontinued operations
by definition do not go forward and thus are not considered to be
relevant to the entity being considered for listing. The Exchange notes
that accounting rules specify that, upon management's commitment to
discontinue an operation, financial statements for all relevant periods
presented must be restated. Therefore, if the commitment is made after
the period under Exchange review and the historical financial
statements have not yet been restated, the Exchange will rely on the
company to prepare this presentation of the adjusted data and accompany
such presentation with an agreed upon procedures letter provided by the
company's outside audit firm at the request of the company. The
auditor's letter will state the procedures performed with respect to
calculating the pre-tax earnings from continuing operations and after
minority interest and equity in the earnings or losses of investees as
adjusted giving effect to the discontinuance for each period under
review.
Third, ``after minority interest'' removes results of an affiliate
of the applicant company accrued to owners other than the applicant
company due to its less than 100 percent ownership. The Exchange does
not consider those results to be reflective of the equity interest in
the security that would be trading on the Exchange. For example, in the
case of a subsidiary that has a 20 percent privately held interest
(i.e., a 20 percent minority interest), only 80 percent of the interest
in the subsidiary is reflected in the public stock. In this scenario,
although 100 percent of the subsidiary is consolidated into the
applicant parent's operations, only 80 percent of the subsidiary's
earnings will accrue to common stock holders of the applicant parent
company, as the 20 percent minority interest will be reflected as a
liability on the company's books and removed from its consolidated
operations. The Exchange would make the appropriate adjustment in its
analysis to essentially include 80 percent of the earnings in the
subsidiary by adjusting the pre-tax income for the reported minority
interest provided such minority interest is not included as part of the
company's pre-tax income on the face of the financial statement.\7\
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\7\ The Exchange notes that in the case of equity in the
earnings or losses of investees, the reporting of the amount may not
necessarily be included in ``pre-tax earnings'' but might be
reported by the company below this presentation in its income
statement. Accordingly, the Exchange would make the requisite
adjustment for these amounts if necessary.
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Fourth, ``after equity in the earnings or losses of investees''
arises when an applicant company has an ownership interest in another
corporation, the results of which are not consolidated into the
applicant company's financial statements due to the application of the
governing accounting principles. The Exchange considers these results
to be part of the financial picture of the applicant company because
they
[[Page 23718]]
represent income or losses that will affect its income stream on an
ongoing basis. Thus, any results of investments that accrue to the
company will be accounted for in the Exchange's analysis to determine
whether or not the company is eligible for listing in order to reflect
all of the earnings accruing to the common shareholders. This will be
effected by including these results from the company's income statement
provided such results are not included as part of the company's pre-tax
income on the face of the financial statement.
Fifth, the Exchange proposes to enumerate the adjustments to be
made to the amount computed pursuant to the preceding four paragraphs.
These adjustments would be part of the proposed standard and, as such,
apply to every listing applicant. Applicant companies may only apply
those adjustments arising from events specifically identified in the
company's SEC filing(s) as to both categorization and amount. Thus, in
order for an adjustment to be appropriately applied, it must be
specifically identified and the amount applied must be specifically
disclosed in the SEC filing, or subject to an agreed upon procedures
letter in certain cases as discussed below. The following discussion
itemizes and clarifies the Exchange's interpretation of the adjustments
to be made to pre-tax income from continuing operations after minority
interest and equity in the earnings and losses of investees.
The above-referenced adjustments are measured and recognized in
accordance with the relevant accounting literature, such as that
published by the Financial Accounting Standards Board (``FASB''), the
Accounting Principles Board (``APB''), the Emerging Issues Task Force
(``EITF''), the American Institute of Certified Public Accountants
(``AICPA''), and the SEC.
Use of Proceeds. When the financial status of a company is
evaluated in anticipation of an equity offering, whether an IPO or a
secondary offering, the application of its intended use of proceeds to
the company's historical financial statements can affect its ongoing
earnings strength. Because it is this post-offering and recapitalized
entity that is applying to list on the Exchange, its financial
eligibility can best be analyzed by taking into account the application
and intended use of the offering proceeds.
The Exchange has a long-standing policy of using the proceeds for
all periods in determining the financial eligibility of a company
seeking to list its securities on the Exchange. The company's
registration documents (e.g., Form S-1) often include pro-forma
capitalization information that takes into effect the net proceeds and
the ultimate intended use. The Exchange's practice is conceptually
consistent with the Commission's rules governing pro forma statements,
which permit the application and use of proceeds in the capitalization
table with regard to deleveraging, and in the pro forma financial
statement section of a registration statement with regard to both
deleveraging and acquisitions and dispositions.
With respect to the scope of the application, however, the Exchange
has a three-year eligibility review period and evaluates companies
accordingly. In reviewing a company's historical results, the Exchange
will continue to consider the effect of the offering on that three-year
review period where the proceeds are used to pay existing indebtedness
or to fund an acquisition. Thus, for a company that is in registration
with the SEC and is in the process of an equity offering, the Exchange
proposes to give effect to the pro forma presentation in the
registration statement and to continue to give effect to the net
proceeds of that offering, and its specified intended application, in
two circumstances--deleveraging and acquisitions and dispositions.
With regard to use of proceeds for deleveraging, the Exchange's
practice is to analyze the financial data that reflect the
recapitalized entity seeking to qualify for listing on the Exchange. In
doing so, because a recapitalization can fundamentally change the
financial viability of a company, the Exchange will conduct its review
as if the recapitalization occurred on the first day of the first year
of its three-year analysis. In applying the standard, the actual
historic interest paid each year on the debt to be retired by the
application of the proceeds will be removed, and the principal amount
of the debt will be retired. The pro forma effects of the deleveraging
for the latest fiscal year and the interim period will be reflected in
the company's SEC filing. If that specific debt was incurred prior to
that period, the company would need to prepare adjusted financial
statement data to account for the relevant preceding periods.
Adjustments will not be made on any interest or principal payment(s)
made on indebtedness other than that specifically being retired. To
ensure reliability and accuracy of the adjusted data, the Exchange
proposes to require that this adjustment be accompanied by an agreed
upon procedures letter provided by the company's outside audit firm at
the request of the company. The auditor's letter will state the
procedures performed with respect to: (1) The existence of the debt and
(2) the accuracy of the adjustments applied to the company's historical
pre-tax earnings reflecting the retirement of the principal amount of
the debt and the actual historic interest payments made.
Similarly, with regard to use of proceeds for acquisitions, the
Exchange conducts its review as if the acquisition occurred on the
first day of the first year of its analysis, provided the historical
financial statements of the acquiree for such period are included in
the company's SEC filings. The starting point for this analysis is the
company's SEC filing, which will include a pro forma presentation for
the latest fiscal year and the subsequent interim period. This pro
forma presentation will give effect to those acquisitions that meet the
significance test of SEC Rule 3-05 of Regulation S-X (``Rule 3-05'').
Generally, the historical financial statements of the acquiree included
in the filing also will be limited to the requisite periods disclosed
pursuant the Rule 3-05 significance test.\8\
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\8\ The Exchange notes that, depending upon the industry group
of the listed company, other SEC rules and regulations may govern
this concept. For example, real estate operations would be guided by
SEC Rule 3-14 of Regulation S-X.
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The second step of the analysis is to review the historical
financials of the company included in the registration statement and
record the acquisition as if it was consummated on the first day of the
earliest fiscal year included in the acquiree's financial statements
presented in the filing. The requisite document preparation entails
combining the historical results of the company with the historical
results of the acquiree and reflects the purchase accounting of the
acquisition for the periods presented. Specifically, the adjustments
would be limited to the combination, as well as (1) the allocation of
the purchase price including adjusting assets and liabilities of the
acquiree to fair value recognizing any intangibles (and associated
amortization and depreciation) and (2) the effects of any additional
financing to complete the acquisition.
The Exchange notes that the heading ``acquisitions'' encompasses
the purchase of complete companies, divisions, subsidiaries, and
underlying equity interests. For instance, if company A intends to use
proceeds from an offering to acquire company B, and company B has a
division that will not be part of the transaction, then company B's
financial statements excluding that division would be relevant
financials of the acquiree. In
[[Page 23719]]
sum, if an acquisition includes only a portion of a company or if, as
part of a transaction, the acquiror simultaneously discontinues a
portion of the acquiree, the net purchase effect would be deemed to be
the acquisition component applicable to the Exchange's financial review
during the full applicable review period (i.e., for all periods
presented in the SEC filing).
As in the deleveraging analysis described above, to ensure
reliability and accuracy of the adjusted data provided, the Exchange
proposes to require that these adjustments, if not set forth in the SEC
filing, be accompanied by an agreed upon procedures letter provided by
the company's outside audit firm at the request of the company. The
auditor's letter would state the procedures performed with respect to
showing the effect of the relevant acquisition on the applicant
company.
In conclusion, the proposed process of giving effect to the use of
proceeds of an offering to fund an acquisition or pay down existing
debt differs from current practice in four respects: (1) all historic
annual financial statements used in the analysis will be included in
the SEC filing, (2) the Manual will contain a concise, transparent
guideline as to both when and for how many periods adjustments will be
made, (3) the financial data and related adjustments used in the
eligibility analysis will be limited to the four corners of the SEC
filing, and (4) an agreed upon procedures letter will be required with
respect to use of proceeds and acquisitions.
Acquisitions and Dispositions. In instances other than those
associated with the use of proceeds, the Exchange proposes to limit its
analysis to those acquisitions and dispositions that are disclosed as
such in a company's financial statements in accordance with Rule 3-05
and Article 11-01(b)(2) of Regulation S-X. Unlike the use of proceeds
to fund an acquisition, in this instance, the adjustment for the
acquisition or disposition will be limited to those periods for which
pro forma financial data are presented in the SEC filing. The analysis
again begins with the pro forma presentation prepared in accordance
with Article 11 of Regulation S-X and included in the company's SEC
filing. Depending upon the significance test of Rule 3-05, the
company's SEC filing will have a number of periods of historical
financial statements of the acquiree. The filing also will have certain
pro forma presentations that vary in their specificity depending upon
the significance test of Rule 3-05.
For purposes of conducting the financial eligibility review, if
there is a pro forma presentation included in the company's SEC filing
that does not specify pre-tax earnings from continuing operations,
minority interest, and equity in the earnings or losses of investees,
the company must prepare the relevant data. As with the use of proceeds
in the context of an acquisition, the presentation of the adjusted data
will need to be accompanied by an agreed upon procedures letter
provided by the company's outside audit firm at the request of the
company. The auditor's letter will state the procedures performed with
respect to showing the effect of the expansion of the pro forma
presentation from the SEC filing into a more comprehensive income
statement that contains the itemizations necessary for the Exchange to
conduct its analysis (i.e., pre-tax earnings from continuing operations
after minority interest and equity in the earnings or losses of
investees). If no detailed disclosure is provided for a particular
acquisition or disposition, and the acquisition or disposition is only
a factual, non-material, un-quantified reference, then the acquisition
or disposition will not be given effect because it cannot be
substantiated within the four corners of the company's SEC filing.
In the event that the applicant company has less than three years
of operating history and is acquiring (either completed or committed)
an entity with the requisite operating history, the Exchange will
consider the combined operating history of the acquiror and acquiree
for the preceding period(s) in conducting its financial eligibility
review. If it is necessary to combine historical financial statements
of the acquiree and aquiror in order to enable the Exchange to conduct
its analysis (e.g., overlapping fiscal years), then the combined data
would need to be accompanied by an agreed upon procedures letter
provided by the company's outside audit firm at the request of the
company. The auditor's letter will state the procedures performed with
respect to any necessary combination of historical data.
The Exchange notes that, in conducting a financial eligibility
review for a company with an acquisition or disposition (either
completed or committed), the agreed upon procedures letter will not be
required if the SEC filing under review makes it self-evident that the
company would qualify for listing on the Exchange irrespective of the
acquisition or disposition. Thus, if the filing on its face shows that
the company would qualify both before and after using proceeds to
consummate the acquisition (e.g., a de minimus acquisition or an
acquisition where both entities independently qualify for listing), an
agreed upon procedures letter would not be required. Similarly, for
other acquisitions or dispositions, if the filing on its face shows
that the company would qualify on both a stand-alone and combined
basis, an agreed upon procedures letter would not be required. For
instance, if the combined entity resulting from two major companies,
each of which have several hundred million dollars in market
capitalization and no losses over the past three years, was to be
subject to an original listing eligibility review, the Exchange would
be unnecessarily imposing a cost and burden upon the applicant entity
by requiring the company to provide an agreed upon procedures letter to
the Exchange, provided there was no other information that would lead
the Exchange to another conclusion.
Merger or Acquisition Related Costs Recorded under Pooling of
Interests. The Exchange proposes to exclude legal and accounting fees
and other costs incurred by a company in effecting a merger or
acquiring another entity accounted for as a pooling of interests
(whether or not the transaction is consummated). When the transaction
is accounted for under the pooling of interests method, merger and
acquisition costs are recorded on the company's income statement. To
remove the effect of this transaction from the company's financial
statements, the company will make the requisite adjustment. For
business combinations requiring purchase accounting, there is no need
to separately address this issue as the cost does not affect the
company's current income (the cost is considered part of the purchase
price and any goodwill is amortized prospectively over the appropriate
amoritization period).
Certain Charges or Income Specifically Disclosed in the Filing.
Consistent with past practice, the Exchange proposes to exclude several
items in assessing the applicant company's earnings strength or its
cash flow. These items have been excluded either because they are
associated with a company's adopted exit plan as defined in the
accounting literature or, based on the Exchange's experience in
assessing ongoing earnings strength, they are not necessarily
recurring. Thus, the Exchange has found that making adjustments for
these items presents a more accurate picture of the applicant company's
earnings strength on a going forward basis. The items subject to
adjustment are somewhat more limited
[[Page 23720]]
than those previously considered by the Exchange. In the interest of
enhancing the transparency of the listing standards, the list of
adjustments has been limited to those that can be objectively defined.
--Charges or Income Related to an Adopted Exit Plan
When a company adopts a specified exit plan, the charges or income
of four items, if disclosed in the company's SEC filing, recorded in
the company's financial statements in accordance with GAAP, and
associated with the implementation of that plan, would be excluded by
the Exchange in its proposed financial analysis: first, the costs of
severance and termination benefits that are incurred as part of an exit
plan (e.g., involuntary termination of employees associated with a
corporate down-sizing); second, costs and associated revenues and
expenses associated with the elimination or reduction of product lines
for which an exit plan has been adopted; third, costs incurred to
consolidate, close, or re-locate plant or office facilities associated
with an exit plan; and fourth, loss or gain on disposal of long-lived
assets, which, by its definition, relates to assets that will no longer
be held by the company.
--Environmental Clean-Up Costs
Environmental clean-up costs incurred in the remediation of
environmental problems would be removed from the company's historical
financial results. However, companies may not make adjustments for
annual maintenance or on-going costs of compliance with environmental
laws.
--Litigation Settlements
Litigation settlement costs, including any settlement amounts,
interest payments and penalties so disclosed in a company's filings
would be removed from the company's historic financial results.
Companies may not make an adjustment for on-going, customary legal
fees.
Impairment Charges on Long-lived Assets. Asset write downs that
reflect the net realizable value of a long-lived asset (e.g., property,
plant and equipment, and goodwill) would be excluded from historic
financial results. For instance, company A previously acquires company
B and, at that time, establishes goodwill of $100 million. Two years
later, company B's business significantly deteriorates. The
recoverability of the previously recorded $100 million in goodwill can
no longer be fully realized and the company determines that the net
realizable amount is $60 million. The $40 million difference would
represent the impairment charge (less any amortization to date).
Because current assets are more likely to be operating assets, and thus
akin to the day-to-day working capital of the company, no adjustment is
made for any loss in their value. For instance, a company may not take
write-downs on inventory or loans.
Gains or Losses Associated with Sales of a Subsidiary's or
Investee's Stock. If a company has an ownership interest in another
entity, or has a wholly-owned subsidiary, any gain or loss associated
with the sale of all or part of the company's interest would be
excluded from the company's historic results. For instance, if an
applicant company owns 30 percent of another entity, for which it paid
$1 million, the company has a cost basis of $1 million representing the
purchase price of the acquisition. Were the company to sell that
interest for $2 million, it would not be permitted to include that $1
million gain in the adjusted earnings submitted to the Exchange for
evaluation of the company's financial eligibility status. These types
of gains or losses would be reported separately by the company as non-
operating items.
In Process Purchased Research and Development Charges. Purchased
in-process research and development represents the value assigned in a
purchase business combination to research and development projects of
the acquired business that were commenced, but not yet completed, at
the date of acquisition, and which, if unsuccessful, have no
alternative future use in research and development activities or
otherwise. Amounts assigned to purchased in-process research and
development meeting this description must be charged to expense at the
date of consummation of the business purchase combination. The Exchange
will exclude this charge from a company's historical financial results.
Regulation S-X Article 11 Adjustments. Pro forma adjustments
contained in a company's pro forma financial presentation provided in a
current filing with the SEC are required to be made in accordance with
SEC rules and regulations governing Article 11 ``Pro forma information
of Regulation S-X Part 210--Form and Content of and Requirements for
Financial Statements.'' The Exchange will review the company's
financial statements in the context of any such adjustments, which are
subject to SEC review. These adjustments would be limited to the
current registration statement as to types of adjustments, amounts and
years disclosed (except for use of proceeds as discussed above).
Adoption of New Accounting Standard. When an accounting rule is
changed, a company may adopt it prospectively or record the cumulative
effect of the adjustment. Typically, when the new rule is announced, it
is either specifically indicated that the implementation must be
cumulative or companies are given the option regarding implementation.
When the adoption of a new standard results in a cumulative effect of
the accounting standard, the company will take a charge in the current
year to make up for all past years as if the change had been previously
in place. The effect of change in accounting principle disclosed in
accordance with APB 20 is excluded from the company's financial
statement for purposes of the Exchange's review.
b. Standard 2--``Adjusted Cash Flow''. In
addition to the Pre-Tax Adjusted Earnings standard discussed above, a
second standard is available to companies with at least $500 million of
market capitalization and $200 million of revenues in the most recent
12 month period. Companies that meet the size criteria may, in the
current Manual, use an ``adjusted net income'' test, as that term is
defined in the current accompanying footnote, of an aggregate for the
last three years of at least $25 million with all years being positive.
The Exchange proposes to restate the standard applicable to the
companies meeting the above-stated $500 million/$200 million threshold
to make the standard more transparent by incorporating the fundamental
aspects of the footnote in the current Manual into the standard itself.
In addition, the standard will explicitly indicate that the test
includes adjustments for two purposes: the use of proceeds and
acquisitions. Both of these categories of adjustments are discussed in
detail in the discussion of the ``Pre-Tax Adjusted Earnings'' standard
discussed above. The Exchange is proposing to limit the adjustments
incorporated into this standard because the remaining adjustments may
or may not have cash-flow implications for a particular company. Those
that do have a cash flow effect will already have been accounted for in
the operating activity section of the company's cash flow statement.
Policy Clarifications. The Exchange is also proposing to adopt
several policies clarifying the use of the adjustments enumerated
above, requiring the issuance of a press release by companies whose
adjusted financial data were relied upon by the Exchange in granting
[[Page 23721]]
eligibility clearance, and delineating the consequences of restated
financial statements.
First, all adjustments must be disclosed as such in the SEC filing
of the applicant company--the amount must be within the four corners of
the SEC filing or subject to an agreed upon procedures letter as
discussed above. For example, if a company reports a consolidated line
item for all losses or gains on disposal of assets without something in
the filing providing specificity as to what portion of that number
accounts for long-lived assets, the Exchange will not venture outside
of the SEC filing to attempt to ascertain the appropriate amount for
purposes of applying the test. This is because the cumulative number
could include items such as inventory write-downs, which are not
subject to adjustment.
Second, as noted above, as a general rule, the Exchange will only
accept the application of an adjustment in the year in which the event
giving rise to the adjustment occurred. Thus, no event can give rise to
an adjustment in the financial statements for any prior year. The two
exceptions are (1) the use of proceeds for deleveraging and
acquisitions and dispositions (for companies currently in registration
for an equity offering) and (2) acquisitions and dispositions. The
reason for a proposed longer scope of application for the two
exceptions is detailed in the discussion above.
Third, any company for which the Exchange relies on adjustments to
historical financial figures in granting financial eligibility
clearance must take steps to ensure full public disclosure of how it
qualified. The Exchange recognizes that, although listing applications
are a matter of public record, many investors may not be aware that
they are available and may believe that only the most recent publicly
available SEC document is relied upon in evaluating a company. Thus,
the Exchange proposes to impose two requirements on issuers. First, the
Exchange proposes to codify its requirement that any adjusted financial
data relied upon by the Exchange in granting financial clearance to the
company must be included in the company's listing application. Second,
the Exchange proposes to require these issuers to issue a press release
stating that (1) pro forma financial adjustments were used to qualify
the company and (2) all relevant additional information is available to
the public upon request.
With respect to companies that restate financial statements due to
a change from unacceptable to acceptable accounting principles and/or
correction of errors, the Exchange proposes to codify its policy of
reviewing the company's status at the time of the restatement. Once a
company issues a restatement that affects one of the years used by the
Exchange to qualify the company for listing, the Exchange will
determine whether or not the company would have qualified at the time
of its original financial clearance with the restated numbers. If not,
the company will be subject to suspension and delisting procedures
unless the company meets the original listing standards at the time of
the restatement using the most recent three fiscal years of financial
statements as restated. The Exchange is adopting this policy because it
would be unnecessarily disruptive to delist a company for its failure
to meet the standards of the Exchange at some point in the past, when
the company could immediately reapply for listing and qualify for
listing the very next day.
Non-U.S. Standards. The Exchange is proposing several changes to
Section 103 of the Manual pertaining to non-U.S. companies (1) to carry
forward relevant items from the revisions pertaining to domestic
companies, and (2) to clarify the drafting of this section. Four
aspects of these changes deserve mention:
The non-U.S. public market value requirement is already
$100 million worldwide; thus, no change is required.
Replacement of NTAs with stockholders' equity as an
alternate measure of size is the same except that the threshold for
non-U.S. companies will remain at $100 million.
The definition of IPOs is the same as for domestic
issuers, but the representation of market value to be received in
connection with a spin-off may also come from the parent company's
transfer agent.
Adjustments for foreign currency are appropriate for non-
U.S. companies because their operations are inherently tied to the
underlying fundamentals of their respective national economies. Thus,
the Exchange does not consider their effect to be a part of the
company's on-going operations if it is due to a significant economic
devaluation. For purposes of this adjustment, the Exchange deems a
currency devaluation of more than ten percent as against the U.S.
dollar to be significant.
A domestic issuer with foreign operations would not be able to make
this adjustment because the Exchange deems currency losses to be a cost
of doing business in a foreign country.
Real Estate Investment Trusts. The Exchange is also proposing to
codify a policy it has applied regarding the original listing criteria
for real estate investment trusts (REITs). The Exchange generally lists
REITs either in connection with an IPO or shortly thereafter, when the
REIT does not have a three-year operating history. Specifically, the
standard proposed for such newly-formed REITs, similar conceptually to
that recently adopted for Funds, \9\ is:
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\9\ Securities Exchange Act Release No. 40979 (January 26,
1999), 64 FR 5332 (February 3, 1999).
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If the REIT has at least $60 million in stockholders'
equity, the Exchange will generally authorize the listing of the REIT.
For those REITs listing in conjunction with an offering,
this requirement would need to be evidenced by a written commitment
from the underwriter (or, in the case of a spin-off or carve-out, from
the parent company's investment banker or other financial advisor). In
this regard, the Exchange notes that this is the minimum stockholders'
equity requirement for listing.
The Exchange retains the discretion to deny listing to a
REIT if it determines that, based upon a comprehensive financial
analysis, it is unlikely to be able to maintain its financial status.
Any newly-formed REIT with less than $60 million in
stockholders' equity will not be considered for listing.
Continued Listing Procedures. The Exchange is proposing two
amendments regarding the continued listing of a company. The first is a
codification of existing practice with respect to companies that
qualify for listing based, at least in part, upon adjusted historical
data.
Specifically, the Exchange's continued listing criteria subjects a
company to delisting if it had NTAs or an aggregate market value of its
common stock of less than $12 million and average net income of less
than $600,000 for the past three years. In calculating average net
income for a company during the initial three years following its
listing, the Exchange takes into consideration those specific
adjustments made to the company's historical financial data for the
relevant year in the original listing application. This consideration
is limited both as to the specific adjustment made during the initial
clearance as well as to the year in which the adjustment was made.
Otherwise, companies often would be subject to suspension and delisting
immediately upon listing--an inconsistent outcome.
The second amendment proposed by the Exchange is a revision and
codification of the procedures to be
[[Page 23722]]
instituted when a company is identified by Exchange staff as being
below the continued listing criteria. The Exchange is proposing to
impose specific time frames with respect to the notification,
monitoring, and suspension and delisting, where appropriate, of these
companies' securities. In addition, the Exchange proposes to change its
current practice of requiring companies to return to original listing
standards within 36 months of falling below continued listing
standards. Instead, the Exchange proposes to require these companies to
return to good standing by emerging from the below continued listing
standards status within six quarters of being notified of this status,
as described in more detail below. Specifically, the changes are as
follows:
Once the Exchange identifies a company as being below
the continued listing criteria, the Exchange will notify the company
by letter within 10 business days;
The notification letter will provide the company with
an opportunity to provide the Exchange with a plan to return to
compliance within 18 months of receipt of the letter (the ``Plan),
identify quarterly (semi-annual for non-U.S. issuers) milestones
against which the company's progress would be measured by Exchange
staff, and allow 45 days (90 days for non-U.S. issuers) for the
submission of such a Plan;
The company will be required to contact the Exchange
within 10 business days (30 business days for non-U.S. issuers) of
receipt of the letter, or be subject to suspension and delisting, to
confirm receipt of the notification, discuss any possible financial
data of which the Exchange may be unaware, and indicate whether or
not it intends to submit a Plan;
The Exchange's procedures for evaluating the
qualification of non-U.S. companies for continued listing are
substantively identical to those for domestic issuers, but makes
allowances for somewhat longer time zone and communication
differences and the absence of a quarterly filing requirement;
Failure to submit a Plan within the allotted 45 days
(90 days for non-U.S. issuers) will subject the company to
suspension and delisting procedures;
Upon receipt of a Plan, Exchange staff will evaluate
the Plan and make a determination within 45 days of receipt of the
Plan as to whether or not to accept the Plan;
If the Exchange does not accept the Plan, the company
will be subject to suspension and delisting procedures;
If the Exchange does accept the Plan, the company will
be subject to quarterly (semi-annual for non-U.S. issuers)
monitoring against the Plan's milestones. If the company fails to
meet the material aspects of the Plan, any of the quarterly (semi-
annual for non-U.S. issuers) milestones, or the 18-month deadline,
the Exchange will review the circumstances and variance, and take
appropriate action that may include the initiation of suspension and
delisting procedures. Should the Exchange determine to proceed with
suspension and delisting procedures, it may do so regardless of the
company's continued listing status at that time (in any event, if
the company does not meet continued listing standards at the end of
the 18-month period, the Exchange promptly will initiate suspension
and delisting procedures); and
Within the aforementioned 45-day (90-day for non-U.S.
issuers) period, the company must issue a press release disclosing the
fact that it has fallen below the continued listing standards of the
Exchange; if it fails to do so, then the Exchange will issue the
requisite press release.
2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirement under Section 6(b)(5) \10\ that an Exchange have rules that
are designed to promote just and equitable principles of trade, to
remove impediments to, and perfect the mechanism of a free and open
market and, in general, to protect investors and the public interest.
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\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange represents that the proposed rule change will impose
no burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-NYSE-99-13 and
should be submitted by May 24, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-10984 Filed 4-30-99; 8:45 am]
BILLING CODE 8010-01-U
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.