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Description
Restate Financial Statements document sample
Document Sample
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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