Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Item 503 -- Prospectus Summary, Risk Factors, and Ratio of Earnings to Fixed Charges

---

1. Prospectus summary. Provide a summary of the information in the prospectus where the length or complexity of the prospectus makes a summary useful. The summary should be brief. The summary should not contain, and is not required to contain, all of the detailed information in the prospectus. If you provide summary business or financial information, even if you do not caption it as a summary, you still must provide that information in plain English.
   
   

   ---

   Instruction to paragraph 503(a):
   
   The summary should not merely repeat the text of the prospectus but should provide a brief overview of the key aspects of the offering. Carefully consider and identify those aspects of the offering that are the most significant and determine how best to highlight those points in clear, plain language.
   

   ---

   
   
   
2. Address and telephone number. Include, either on the cover page or in the summary section of the prospectus, the complete mailing address and telephone number of your principal executive offices.
   
   
3. Risk factors. Where appropriate, provide under the caption "Risk Factors" a discussion of the most significant factors that make the offering speculative or risky. This discussion must be concise and organized logically. Do not present risks that could apply to any issuer or any offering. Explain how the risk affects the issuer or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk. The risk factor discussion must immediately follow the summary section. If you do not include a summary section, the risk factor section must immediately follow the cover page of the prospectus or the pricing information section that immediately follows the cover page. Pricing information means price and price-related information that you may omit from the prospectus in an effective registration statement based on Rule 430A(a) of this chapter. The risk factors may include, among other things, the following:
   
   
   1. Your lack of an operating history;
      
      
   2. Your lack of profitable operations in recent periods;
      
      
   3. Your financial position;
      
      
   4. Your business or proposed business; or
      
      
   5. The lack of a market for your common equity securities or securities convertible into or exercisable for common equity securities.
      
      
4. Ratio of earnings to fixed charges. If you register debt securities, show a ratio of earnings to fixed charges. If you register preference equity securities, show the ratio of combined fixed charges and preference dividends to earnings. Present the ratio for each of the last five fiscal years and the latest interim period for which financial statements are presented in the document. If you will use the proceeds from the sale of debt or preference securities to repay any of your outstanding debt or to retire other securities and the change in the ratio would be ten percent or greater, you must include a ratio showing the application of the proceeds, commonly referred to as the pro forma ratio.
   
   
   

   ---

   Instructions to paragraph 503(d):
   
   
   
   1. Definitions. In calculating the ratio of earnings to fixed charges, you must use the following definitions:
      
      
      1. Fixed charges. The term "fixed charges" means the sum of the following: (a) interest expensed and capitalized, (b) amortized premiums, discounts and capitalized expenses related to indebtedness, (c) an estimate of the interest within rental expense, and (d) preference security dividend requirements of consolidated subsidiaries.
         
         
      2. Preference security dividend. The term "preference security dividend" is the amount of pre-tax earnings that is required to pay the dividends on outstanding preference securities. The dividend requirement must be computed as the amount of the dividend divided by (1 minus the effective income tax rate applicable to continuing operations).
         
         
      3. Earnings. The term "earnings" is the amount resulting from adding and subtracting the following items. Add the following: (a) Pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees, (b) fixed charges, (c) amortization of capitalized interest, (d) distributed income of equity investees, and (e) your share of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges. From the total of the added items, subtract the following: (a) interest capitalized, (b) preference security dividend requirements of consolidated subsidiaries, and (c) the minority interest in pre-tax income of subsidiaries that have not incurred fixed charges. Equity investees are investments that you account for using the equity method of accounting. Public utilities following SFAS 71 should not add amortization of capitalized interest in determining earnings, nor reduce fixed charges by any allowance for funds used during construction.
         
         
   2. Disclosure. Disclose the following information when showing the ratio of earnings to fixed charges:
      
      
      1. Deficiency. If a ratio indicates less than one-to-one coverage, disclose the dollar amount of the deficiency.
         
         
      2. Pro forma ratio. You may show the pro forma ratio only for the most recent fiscal year and the latest interim period. Use the net change in interest or dividends from the refinancing to calculate the pro forma ratio.
         
         
      3. Foreign private issuers. A foreign private issuer must show the ratio based on the figures in the primary financial statement. A foreign private issuer must show the ratio based on the figures resulting from the reconciliation to U.S. generally accepted accounting principles if this ratio is materially different.
         
         
      4. Summary Section. If you provide a summary or similar section in the prospectus, show the ratios in that section.
         
         
   3. Exhibit. File an exhibit to the registration statement to show the figures used to calculate the ratios. See paragraph (b)(12) of Item 601 of Regulation S-K.
      

      ---

      
      
      
5. Smaller reporting companies. A registrant that qualifies as a smaller reporting company, as defined by Rule 229.10(f), need not comply with paragraph (d) of this Item.
   
   

	Notice to Users: The Deskbook is made available with the understanding that the University of Cincinnati College of Law is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. See Terms and Conditions of Use.   © Copyright 1998-2008, University of Cincinnati, All Rights Reserved  Contact: joseph.hodnicki@uc.edu