Restate Financial Statements by izh13569

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									Restatement of Financial Statements
                RR Donnelley
           SEC Hot Topics Institute
               Atlanta, Georgia
                May 22, 2007



                                           Jeffrey M. Stein
                                      King & Spalding LLP
                             Index

Introduction

The Requirement to Restate / Triggers to Restatement

Managing a Restatement

Effects of a Restatement




                                                       (2)
                                    Introduction
 "Restatements" covered in this presentation
     • Correcting errors in previously-issued financial statements, as described in
       SFAS 154. For example:
          Mistakes in the application of GAAP
          Mathematical mistakes
          Oversight or misuse of historical facts
     • Some restatements may arise from fraudulent financial reporting - intentional
       misstatements or omissions of amounts or disclosures in financial statements
       designed to deceive users where the effect causes the financial statements not
       to be presented, in all material respects, in conformity with GAAP (SAS 99)
          Manipulation, falsification or alteration of accounting records or supporting documents
          Misrepresentation in or intentional omission from financial statements of events,
           transactions or other significant information
          Intentional misapplication of accounting principles
 Not the "benign" restatements (for example, restatements involving stock
  splits, pro forma financial statements to reflect acquisitions, changes in
  accounting principles, etc.)
                                                                                                     (3)
                          Introduction (cont'd)
 Recent trends in restatements (Study conducted by Government
   Accountability Office ("GAO"), July 2006)
     • 1,390 restatements from July 1, 2002 to September 30, 2005
      (approximately 16% of listed companies)
     • 67% increase in restatements from 2002 to 2005
     • Result of greater focus by company management, Audit Committees,
      external auditors and regulators
     • Median size of companies that restated went from $282 million in 2002
      to $672 million in 2005
 Source of litigation and investigations / enforcement actions
 Impacts on investor confidence and capital markets


                                                                               (4)
                          Introduction (cont'd)

 We will view restatements as an example of other types of
  corporate crisis
    • Similar series of events in other crisis situations: for example, press
      release, conference call, Form 8-K, communications plan, delisting,
      indenture covenants, litigation, investigations, etc.
    • Lessons learned in managing a restatement are valuable in many other
      situations




                                                                                (5)
            The Taxonomy of Accounting Trouble
 As non-accountants, it is important to know what type of accounting
   event we are dealing with:
        • Reclassifications                    • Material weakness

        • Change in accounting estimate        • Significant deficiency

        • Change in accounting principle       • Retrospective application
        • Errors                               • Illegal acts
        • Corrections                          • Fraud

        • Adjustment                           • Restatement

 How an event is classified for accounting purposes may determine
    how it will be treated under applicable legal requirements
 Important for the non-accountants to understand the nature of the
    event and to be able to review the applicable accounting literature      (6)
                              Part I

The Requirement to Restate / Triggers to Restatement  Overview
 SFAS 154  Accounting Changes and Error Corrections
 SAB 99  Materiality
 SAB 108  Effects of Prior Year Misstatements




                                                                  (7)
      SFAS 154 - Restatements to Correct Errors in
        Previously-Issued Financial Statements

 Error in previously-issued financial statements
     • An error in recognition, measurement, presentation or disclosure in
      financial statements
     • Resulting from mathematical mistakes, mistakes in the application of
      GAAP, or oversight of facts that existed at the time the financial
      statements were prepared
 Change from an accounting principle that is not generally accepted
   to one that is generally accepted is a correction of an error




                                                                              (8)
       SFAS 154 - Restatements to Correct Errors in
       Previously-Issued Financial Statements (cont'd)

 Any error in financial statements of a prior period, discovered
  subsequent to their issuance, must be reported as a prior-period
  restatement by restating the prior-period financial statements
  (Paragraph 25)
 Financial statements for each individual prior-period must be
  adjusted to reflect corrections of the period-specific effects of the
  error
 Company must disclose that its previously-issued financial
  statements have been restated, along with a description of the
  nature of the error (Paragraph 26). Company must also disclose:
     • The effect of each correction on each financial statement line item and
       any per-share amounts affected for each prior-period presented
     • Cumulative effect of the change on retained earnings (or other
       components of equity or net assets) as of each prior-period presented
                                                                                 (9)
      SFAS 154 - Restatements to Correct Errors in
      Previously-Issued Financial Statements (cont'd)
Restatement consists of three steps:
   Step One:    Adjust the carrying amounts of assets and liabilities at
                the beginning of the first period presented in the
                financial statements for the cumulative effect of
                correcting the error on periods prior to those presented
                in the financial statements
   Step Two:    Offset the effect of Step One (if any) by adjusting the
                opening balance of retained earnings (or other
                components of equity or net assets)
   Step Three: Adjust the financial statements of prior-periods for the
                effects of correcting the error on that specific period

                                                                           (10)
                        What is "Material"?

 Relevant accounting literature provides that corrections of
   misstatements are only required where misstatements are material
     • For example, the provisions of SFAS 154 need not be applied to
       "immaterial items"
 Materiality has been defined by the courts, accounting literature and
   the SEC staff




                                                                        (11)
                     What is "Material"? (cont’d)

 Using the definition adopted by the Supreme Court in TSC
  Industries v. Northway, Inc. (U.S. 1976), a misstatement would be
  material if:
    • "There is a substantial likelihood that the . . . [misstated] fact would
      have been viewed by the reasonable investor as having significantly
      altered the 'total mix' of information made available."
 The FASB stated in SFAS Concepts No. 2, the essence of the
  concept of materiality as follows:
    • "The omission or misstatement of an item in a financial report is
      material if, in the light of surrounding circumstances, the magnitude of
      the item is such that it is probable that the judgment of a reasonable
      person relying upon the report would have been changed or influenced
      by the inclusion or correction of the item."
                                                                                 (12)
               What is "Material"?  SAB 99 (cont’d)

 SEC Staff Accounting Bulletin 99 (“SAB 99”) synthesizes long-standing
  audit practices and addresses the application of materiality thresholds to
   the preparation and audit of financial statements
 SAB 99 states that the Supreme Court's "total mix of information" test
  includes a quantitative and qualitative analysis
 The quantitative element covers the size of the misstatement in numerical
   and percentage terms
 The qualitative element covers the factual context in which the user would
  view the financial statements
 Note that the SEC is reviewing SAB 99 and may be updating or
   supplementing the Bulletin


                                                                               (13)
              What is "Material"?  SAB 99 (cont’d)

 Qualitative factors that may cause misstatements of quantitatively
   small amounts to be material include circumstances in which the
   misstatement:
     • Marks a change in earnings or other trends
     • Hides a failure to meet analysts' consensus expectations
     • Changes a loss into income or vice versa
     • Concerns a segment or operation that has been identified as playing a
      significant role in company’s operations or profitability




                                                                               (14)
              What is "Material"?  SAB 99 (cont’d)

 Qualitative factors that may cause misstatements of quantitatively
   small amounts to be material include circumstances in which the
   misstatement (cont'd):
     • Affects the company's compliance with regulatory requirements
     • Has the effect of increasing management's compensation
     • Involves concealment of an unlawful transaction
     • Is likely to result in a significant positive or negative market reaction




                                                                                   (15)
             What is "Material"?  SAB 99 (cont’d)
   In SAB 99, the SEC staff noted that while the intent of management does
    not render a misstatement material, it may provide significant evidence of
    materiality
   Companies should not assume that even small intentional misstatements
    in financial statements, such as those pursuant to actions to "manage"
    earnings, are immaterial
   SAB 99 provides examples of what is acceptable in regard to materiality:
     •    A quantitative threshold (such as 5%) is OK to use as an initial step in
          assessing materiality
     •    Insignificant misstatements resulting from the normal course of business do
          not require restatement
     •    Cost-benefit considerations are a factor in correcting small restatements
     •    The aggregate effect of a series of individually immaterial misstatements
          may result in the financial statements as a whole being materially
          misleading

                                                                                        (16)
             What is "Material"?  SAB 99 (cont’d)

 SAB 99 also provides examples of what is unacceptable in regard
  to materiality:
    • Not appropriate to rely exclusively on quantitative tests
    • Intentional misstatements (such as to manage earnings) are
      unacceptable, regardless of materiality
    • Each misstatement must be considered separately and in the
      aggregate; the aggregate effect of multiple misstatements cannot be
      justified by offsetting material misstatements with immaterial ones




                                                                            (17)
              What is "Material"?  SAB 99 (cont'd)

Step One: If an item is quantitatively material, it will generally be
            material whether or not one or more qualitative factors
            apply
Step Two: Even if an item is quantitatively immaterial, it may still be
            material if one or more qualitative factors apply
Step Three: Intent can be viewed as constituting evidence of
            materiality




                                                                          (18)
     Effects of Prior Year Misstatements  SAB 108

 Published September 13, 2006
 SAB 108 provides guidance as to the consideration of the effects of
  prior year misstatements in quantifying current year misstatements
  for the purpose of a materiality assessment:
    • Prior year misstatements should be considered in quantifying
      misstatements in current year financial statements
    • Two commonly used techniques to accumulate and quantify
      misstatements: the "rollover" approach and the "iron curtain" approach



                                                                               (19)
  Effects of Prior Year Misstatements  SAB 108 (cont'd)

 Example: During the course of preparing annual financial
  statements, a company is evaluating the materiality of an improper
  expense accrual (e.g., overstated liability) in the amount of $100,
  which has built up over 5 years, at $20 per year. The company
  previously evaluated the misstatement as being immaterial to each
  of the prior year financial statements.


                   2002     2003      2004     2005     2006
         Errors    $20       $20      $20      $20       $20


                                                                        (20)
  Effects of Prior Year Misstatements  SAB 108 (cont'd)

 "Rollover" approach (focuses on income statement):
    • Quantifies a misstatement based on the amount of the error originating
      in the current year income statement; ignores the effects of correcting
      the portion of the current year balance sheet misstatement that
      originated in prior years (ignores the carryover effects of prior year
      misstatements)
• "Iron Curtain" approach (focuses on balance sheet):
    • Quantifies a misstatement based on the effects of correcting the
      misstatement existing on the balance sheet at the end of the current
      year, irrespective of the misstatement's year of origination; does not
      consider the correction of prior year misstatements in the current year
      to be errors
                                                                                (21)
  Effects of Prior Year Misstatements  SAB 108 (cont'd)

 Considering the previous example:
    • "Rollover" approach: in year 5, the company quantifies the error as a
      $20 overstatement of expenses; ignores effects of correcting the
      portion of the current year balance sheet that originated in prior years;
      results in accumulation of significant misstatements that are deemed
      immaterial
    • "Iron curtain" approach: in year 5, the company quantifies the
      misstatement as a $100 misstatement based on the balance sheet
      misstatement; reduce balance sheet liabilities by $100 and current year
      expense by $100; may result in misstatement in current year income
      statement


                                                                                  (22)
  Effects of Prior Year Misstatements  SAB 108 (cont'd)

 SEC staff does not believe that exclusive reliance on either the "rollover" or
  "iron curtain" approach quantifies all misstatements that could be material;
  materiality evaluation of an identified unadjusted error should quantify the
  effects of the identified unadjusted error on each financial statement and
  related disclosure
 Registrants must quantify the impact of correcting all misstatements,
  including both the carryover and reversing effects of prior year
  misstatements, on the current year financial statements; financial
  statements must be adjusted when either the "rollover" approach or the
  "iron curtain" approach results in quantifying a misstatement that is material
 In our example, if a $100 misstatement (found under the "iron curtain"
  approach) is considered material, the company would need to adjust its
  financial statements
                                                                               (23)
  Effects of Prior Year Misstatements  SAB 108 (cont'd)

 Correcting the $100 misstatement in the current year will: (1) correct the
   $20 originating in the current year; (2) correct the $80 balance sheet
   carryover error that originated in years 1 through 4; but also (3) misstate
   the current year income statement by $80
 If the $80 understatement of current year expense is material to the current
   year, the prior year financial statements should be corrected, even though
   such revision previously was and continues to be immaterial to the prior
   year financial statements. Correcting prior year financial statements for
   immaterial errors would not require previously filed reports to be amended;
   such correction may be made the next time the registrant files the prior
   year financial statements

                                                                                 (24)
    Effects of Prior Year Misstatements  SAB 108 (cont'd)

 SAB 108 has been described as giving companies a "pass" on full-
   scale restatement; they will adjust financial statements in future filings,
   but these will not be labeled as "restatements."
 If the company’s materiality analysis indicates that the prior year
   financial statements are materially misstated, they would need to be
   restated in accordance with SFAS No. 154.




                                                                             (25)
                              Part II
Managing a Restatement  Overview

 Press Release / Conference Call / Other Communications

 Current Report on Form 8-K (Item 4.02)
 Prepare Amended SEC Periodic Reports
 Disclosure Controls / Internal Controls Review
 Exchange Act Section 10A
 Sarbanes-Oxley Section 304
 Other Company Disclosures
 Black-Outs and Other Restrictions
 Don’t Forget
                                                           (26)
           Press Release / Conference Call / Other
                     Communications

 Overview: As in any emergency / triage situation, the first few
   minutes will be the most important
     • Must react quickly
         To stop the bleeding
         Restore calm and confidence

     • Must avoid further mistakes
         errors can compound the problem
         early mistakes may have long-term impacts

     • Must balance the need to respond (speed) against the need for
      completeness; must ensure accuracy


                                                                       (27)
          Press Release / Conference Call / Other
                  Communications (cont'd)

 Timing of the Press Release
    • Company has determined that it will need to restate financial statements
      (or that there are errors in its published financial statements). When will
      it issue press release announcing the restatement (or errors)?
    • Key: ability describe the situation, while also putting some “fences”
      (limits) around the restatement; company will never want to announce,
      “We have discovered errors in our financial statements and will need to
      restate, but we can’t tell you anything more about the restatement.”




                                                                                (28)
             Press Release / Conference Call / Other
                     Communications (cont'd)

“Fences” Around the Restatement
   Most Important “Fences” to Describe Errors / Restatement
      • First fence: dollar amount of the restatement; how large?
      • Second fence: breadth of the restatement; how widespread?
      • Third fence: periods affected by the restatement; distant past, recent past or future periods?
      • Fourth fence: what caused the errors?
      • Fifth fence: who was responsible for the errors?
   First Press Release cannot be expected to establish all these fences; it may take
    weeks and even months to answer these questions. Consider how quickly company
    can establish the first three fences: how much? how widespread? what periods?
   Must consider the benefits and risks of establishing these “fences” at an early stage
    (and being wrong).



                                                                                                     (29)
          Press Release / Conference Call / Other
                  Communications (cont'd)

The First Fence – Magnitude of the Errors
 Consider Five Different Formulations
     • Additional pre-tax charges are expected to be approximately $X
     • Adjustments will be less than $X
     • Additional expenses are likely to be in excess of $X
     • Adjustments are expected to be in the range of $X to $Y per year
     • Amount of adjustments cannot currently be determined, but are likely to
       be material
 Notice different approaches and different levels of certainty
 Typical to describe as being “cash” or “non-cash” adjustments

                                                                             (30)
         Press Release / Conference Call / Other
                 Communications (cont'd)


The Second Fence – Breadth of the Errors
    • One type of error or numerous types of errors, across different
      accounts?
    • One operation or widespread across the company?



The Third Fence – Time Periods in Which the Errors Occurred / Impact
  will be Reflected
    • Distant past or recent past?
    • Any impact on future periods?


                                                                        (31)
         Press Release / Conference Call / Other
                 Communications (cont'd)


The Fourth Fence – What caused the errors? Why did this happen?
    • Negligence / administrative errors or willful misconduct / fraud?
    • Determination of accounting principles or errors in applying correct
      principles?
    • What explanation:
        Recent acquisition?
        Rapid growth?
        Loss of Personnel?
        Inadequate infrastructure / systems?
        Lack of Internal Controls?

                                                                             (32)
             Press Release / Conference Call / Other
                     Communications (cont'd)

The Fifth Fence – Who was responsible for the errors?
     • What level of personnel: clerical personnel; management – financial or
       operational; Audit Committee; Board of Directors?
     • What timeframe: current personnel or persons no longer with the company?
     • Attributable to company personnel or outside auditors or advisors?
     • Who knew or should have known?
     • What remediation or personnel actions?
Investors may be less concerned about the financial restatement and more
   concerned about any taint on current management
Auditors will have similar concerns, as they rely on representations from
   current management.


                                                                                  (33)
           Press Release / Conference Call / Other
                   Communications (cont'd)
 Other topics to be addressed in the initial press release:
     • Expected timing of the restatement
     • Ability to remain timely with SEC filings
     • Impacts on company's business, contracts, customers, etc.
     • Internal review or investigation
     • Anticipated remediation
     • Changes in personnel (resignation; administrative leave; termination)
     • Status of internal controls
     • Timing of next communication
     • Risk factors and forward-looking statements relating to the restatement

                                                                                 (34)
          Press Release / Conference Call / Other
                 Communications (cont’d)

 NYSE Listing Standards

    • Generally require prompt press release disclosure of events which
      could materially affect stock price

    • Consider communication with listing representative regarding the
      restatement

 NASDAQ Listing Requirements

    • Generally require prompt disclosure to the public of any material
      information that would reasonably be expected to affect the value of a
      company’s securities or influence investors' decisions

    • Companies are required to notify NASDAQ of the release of material
      information (including any event that requires the filing of a Form 8-K)
      prior to the release of such information to the public
                                                                                 (35)
          Press Release / Conference Call / Other
                 Communications (cont’d)

 Must prepare comprehensive communications plan for
  announcement of the restatement
    • Talking points
    • Questions and answers
    • Letters to stakeholders (employees, customers, vendors, franchisees,
      joint venture partners, etc.)

 Must have plan for communications while the restatement is
  pending
    • Disclosure of operating data
    • Updates regarding status of the restatement
    • Updates regarding impact of the restatement (litigation, de-listing, etc)
                                                                                  (36)
            Current Report on Form 8-K (Item 4.02)
 Company must file a Form 8-K under Item 4.02 (entitled “Non-Reliance on
   Previously Issued Financial Statements”) if the company concludes that
   previously-issued financial statements should no longer be relied upon
   because of an “error” in such financial statements
     • Does not specifically refer to restatements or include any test of materiality
     • Origins / meaning of Item 4.02 are difficult; SAS No. 1, Section 561 (subsequent
       discovery of facts existing at date of auditor’s report); may be limited to material
       events

 The “Stealth Restatement”
     • Some companies have been filing Form 10-Q/As and Form 10-K/As without filing
       a Form 8-K under Item 4.02 (one type of ”stealth restatement”)
     • SEC has been issuing comment letters to companies engaging in stealth
       restatements, to ask why a Form 8-K was not filed

 GAO takes the position that every restatement triggers a Form 8-K filing
  under Item 4.02                                                                             (37)
       Current Report on Form 8-K (Item 4.02)(cont’d)

 Note recent Item 4.02 Form 8-Ks filed in connection with
  restatements.
 Consider situations in which company could argue that restatement
  is not material (so that Form 8-K would not be required):
    • What if a company restated its financial statements to revise its
      segment footnotes, but did not change any numbers on the face of its
      financial statements?
    • What if a company restated its financial statements to reflect
      reclassifications in the financial statements of equity investee; again,
      footnotes changed, but not any numbers on the face of the financial
      statements?


                                                                                 (38)
      Current Report on Form 8-K (Item 4.02) (cont’d)

 Current Trend
    • File the Form 8-K under Item 4.02
    • Provide explanation / make the case that restatement is not material

 Reasoning
    • Currently, less stigma to the Form 8-K filing
    • Do not jeopardize eligibility to use Form S-3
    • May be in the middle of SEC comment / review process

 Practical Impact
    • Audit Committee determination to restate financial statements will
      trigger the filing of Form 8-K
                                                                             (39)
          Prepare Amended SEC Periodic Reports

 File Form 10-K/A and/or Form 10-Q/A
     • Only Items affected by the restatement need to be included in filing
     • Explanatory Note immediately following the cover page should briefly
      describe the restatement

 Appropriately label columns as "restated" in the financial statements
 Add new note to the financial statements that describes the
   restatement




                                                                              (40)
      Prepare Amended SEC Periodic Reports (cont’d)

 Typically, restate MD&A and include new lead-in paragraph
 Auditors will “dual date” their audit opinion in an Annual Report

 Disclose any material weaknesses in internal controls discovered as part of
   the restatement process
     • Restatement-driven changes will undergo significant review from auditors

     • Describe status of any remediation

 Update risk factors, as appropriate

 New certifications from CEO and CFO
     • Certifications are given without exceptions or qualifications

     • If appropriate disclosures are included in the reports, certifications will be “clean”

                                                                                            (41)
    Disclosure Controls / Internal Controls Review and
                         Process
   Management and the Audit Committee will need to reevaluate the effectiveness of
    the company's internal controls and whether the company has one or more material
    weaknesses as a result of the restatement (Item 308 of Regulation S-K)
      • SEC has confirmed that a company’s determination to restate its financial
        statements does not automatically mean that there was a material weakness in
        its internal controls
      • Company must discuss changes to its internal controls that occurred during the
        fiscal period
   Management, including CEO and CFO, must evaluate effectiveness of disclosure
    controls and procedures as of the end of the period covered by the report
      • Disclosure controls process for the filing of amended Exchange Act reports may
        be appropriately tailored. It may not be necessary to repeat the company's full
        period-end disclosure controls committee / sub-certification process



                                                                                          (42)
                          Exchange Act Section 10A
   Section 10A of the Exchange Act establishes a sequence of events that, in the worst
    case scenario, would include:
      • Auditor’s determination that it is likely that an "illegal act" has occurred,
      • Auditor informing management and the Audit Committee of the illegal act,
      • Auditor assessing effect of the illegal act and remedial steps taken by the company,
      • Auditor reporting conclusions to the board of directors,
      • Company providing notice to the SEC, and
      • Auditor resigning and providing report to SEC.
   In the real world, reports and resignations under Section 10A are rare. Management,
    the Board of Directors (and Audit Committee) and auditors determine how auditors
    will get comfortable about alleged "illegal acts" and remediation. Audit Committee
    may engage counsel or other firms to review underlying facts and report to Audit
    Committee and the auditors.
      • Review or investigation
      • Independent counsel or regular outside counsel
      • Forensic accountants
                                                                                               (43)
                     Sarbanes-Oxley Section 304
 If company is required to restate financial statements due to material non-
   compliance of the company as a result of misconduct, CEO and CFO must
   reimburse company for:
     • Certain bonuses or incentive-based or equity-based compensation received
       during the 12-month period following the filing that was required to be restated;
       and

     • Any profits realized from the sale of company securities during the 12-month
       period.

 Numerous ambiguities in the statute (as highlighted by underscored words)

 No private right of action (Neer v. Pelino, E.D. Pa., Sept 27, 2005); no SEC
   enforcement activity

 Consider the type of analysis that management and the Board of Directors
   (or Audit Committee) should undertake following a restatement                           (44)
                 Other Company Disclosures

 Consider need to update or correct other company disclosures
    • Press releases

    • Investor conferences

    • Website information

    • Printed Annual Reports

    • Other forums




                                                                 (45)
              Black-Outs and Other Restrictions

 As soon as the company begins to consider restatement, the
  company should consider:
    • Closing its trading window for insiders
    • Suspending company stock repurchases (and its comfort with
      purchases under Rule 10b5-1)
    • Suspending use of active registration statements (secondary sales,
      Form S-8, etc.) or other issuances of securities
    • Suspending or extending open exchange offers
    • Possible impact on other corporate transactions and relationships (for
      example, pending acquisition discussions or franchise offerings)



                                                                               (46)
         Black-Outs and Other Restrictions (cont’d)

 If company stock is an investment alternative in a 401(k) or similar
   plan, consider whether a black-out is appropriate. Black-outs
   require compliance with Regulation BTR.




                                                                         (47)
                              Don’t Forget
 Status of D&O insurance

     • Review policies

     • Determine status of any pending applications

 Consider communications with rating agencies

 Confer and consult with securities litigator as to all of the above

     • Press release, SEC filings and other communications

     • Prepare for inquiry from SEC, shareholder litigation and derivative suits

     • Reinforce document retention policy



                                                                               (48)
                            Part III

Implications of a Restatement  Overview
 SEC Consequences
 NYSE / NASDAQ Considerations
 Lenders and Noteholders




                                           (49)
                         SEC Consequences

 Form 12b-25
    • Form 12b-25 required if late Form 10-Q or Form 10-K; Form 12b-25 due
     no later than one business day after due date
    • Form 12b-25 "extension period":
        15 calendar days for Form 10-K
        5 calendar days for Form 10-Q

    • If periodic report filed in extension period, it is considered to be "timely
     filed"
    • A periodic report filed after the extension period is considered "late"


                                                                                     (50)
                       SEC Consequences                  (cont’d)


 Form 12b-25 (cont'd)
     • Prerequisite to availability of extension period: good faith
      representations regarding
         Inability to avoid late filing, and
         Filing of periodic report prior to end of extension period

 Form S-1
     • Requires current financial statements as contemplated by
      Regulation S-X
     • Form S-1 generally not available until Form 10-K is filed due to financial

      statement "staleness" rules
                                                                                    (51)
                     SEC Consequences                   (cont’d)


 Form S-3
    • Requires timely filing of Exchange Act reports (other than certain Form
      8-Ks) during preceding 12 calendar months and any portion of a month
      preceding filing
    • Available after filing of periodic report during extension period
    • Not available for registrants that fail to file periodic report by end of
      extension period
    • Using existing Form S-3s:
        Extension period: a previously effective Form S-3 registration statement is
         available for primary offerings and ongoing secondary offerings
        Late filing period: lose eligibility to use effective Form S-3s until periodic
         report actually filed (but only until filing of Form 10-K for subsequent year)
                                                                                          (52)
                    SEC Consequences              (cont’d)


 Form S-4
    • Not predicated on timely Exchange Act reports
    • However, if a company loses Form S-3 eligibility, it is not permitted to
     incorporate by reference into Form S-4
    • Financial statement "staleness" rules could preclude use of Form S-4




                                                                                 (53)
                    SEC Consequences               (cont’d)


 Form S-8
    • Registrant must have filed all Exchange Act reports during preceding 12
      months; not a "timely filed" requirement
    • Until periodic report is filed, issuances under currently effective Form S-
      8 registration statements appear to be disallowed
 Rule 144 Resales
    • Issuer must have filed all Exchange Act reports during the 12 months
      preceding the sale; not a "timely" filed requirement
    • SEC staff: seller "at risk" relying on Rule 144 during extension period
    • At all times, non-affiliates can continue to use Rule 144(k) for shares
      held for two years; no current "public information" requirement under
      Rule 144(k)                                                                   (54)
                     SEC Consequences                (cont’d)


 Annual Report, Proxy, and Annual Meeting

    • SEC-compliant Annual Report (including the same audited financial
      statements as in a Form 10-K) must precede or accompany proxy
      statement for Annual Meeting of shareholders
    • Any delay in financial statement availability will delay Annual Report
      preparation, proxy statement mailing, and Annual Meeting
    • Significant delay in Annual Meeting will trigger notice to NYSE / NASDAQ
      and likely require a waiver of rules mandating timely filing of Annual Report
      and proxy statements to shareholders
    • If significant delay, state law may compel an Annual Meeting to be held
      even if Annual Report is not available

                                                                                      (55)
                    SEC Consequences              (cont’d)


 Potential Form 8-Ks:
    • Item 1.01: Material amendments to material definitive agreement (e.g.,
      waiver of debt covenants)
    • Item 2.04: Default and acceleration of indebtedness
    • Item 3.01: Notice of delisting from NYSE or NASDAQ
    • Item 4.02: Non-reliance on previously issued financial statements
      (discussed above)
    • Item 7.01: Regulation FD disclosure
    • Item 8.01: Other events (e.g., press releases)



                                                                               (56)
               NYSE / NASDAQ Considerations

 NYSE
   • NYSE deals with late filers on a case-by-case basis
   • NYSE has stepped up scrutiny; may begin delisting procedures if there
    has been a protracted delay in filing
   • Rule 203.01
       Requires distribution of Annual Report (including audited financials) within
         120 days after year-end
       If unable to timely file on Form 10-K, must notify NYSE prior to due date,
         explain reasons and indicate anticipated filing date
       Requires press release indicating delay of Form 10-K, reasons and
         anticipated filing date

                                                                                       (57)
          NYSE / NASDAQ Considerations                      (cont’d)

 NYSE (cont'd)
    • Rule 203.02 -- NYSE has no specific time limit for publication of interim
     financials; assumed to be as soon as available consistent with industry
     and prior practices
 NASDAQ
    • NASDAQ begins delisting procedures soon after a company misses a
     deadline for a periodic report
    • Rule 4310(c)(14)  Reports or other documents required to be filed with
     the SEC must be filed with NASDAQ on or before SEC due date
    • Rule 4350(b)(1) (A)  Requires an Annual Report to shareholders
     delivered a reasonable time before shareholder meeting
                                                                                  (58)
          NYSE / NASDAQ Considerations                    (cont’d)


 NASDAQ (cont'd)
    • Rule 4815(b)  Requires prompt disclosure (at least within 7 calendar
      days) of NASDAQ delisting proceedings
    • NASDAQ rule (4800 series)  Contemplate process for delisting hearing
      and appeal




                                                                              (59)
                    Lenders and Noteholders

 Credit facilities / debt indentures typically contain covenants
   regarding timely provision of Exchange Act reports
     • Common to find ambiguous drafting in these provisions

 "Default" does not usually become an "Event of Default," unless
   Default continues for specified grace period after receipt of written
   notice
 Consider communications with lenders / trustee to best manage
   through the process



                                                                           (60)

								
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