Notes

Outline

The ABC’s of FD & G Boris Feldman NIRI San Francisco Chapter September 16, 2003 www.borisfeldman.com

Topics Sarbanes-Oxley in Infancy FD Hits Adolescence Reg. G and the Death of Pro Forma’s

Sarbanes-Oxley in Infancy Quality of disclosure Process vs. content Board backbone Really outside auditors Ich bin ein Whistleblower

FD Hits Adolescence From controversy to American pie I/R’s success in adapting Illustrative enforcement actions in November 2002 Simultaneous actions against Raytheon, Secure Computing, Siebel Systems Investigative report on Motorola

FD Hits Adolescence (cont.) Schering-Plough $1 million fine against Company; $50,000 fine against CEO  "Providing guidance to a select few through a combination of spoken language, tone, emphasis, and demeanor, is precisely the kind of unfair advantage that the SEC wants to prevent." Conduct Individual meetings with several fund managers/buy-side analysts Non-webcast meeting with sell-side analysts Improper disclosures Negative tone on Q3-02 and FY 2003 – but no specific numbers Prior disclosures said trends “could” happen; comments said “would”

FD Hits Adolescence (cont.) Lessons Current quarter guidance especially sensitive SEC focusing on nudge and a wink High risk if an analyst changes his projections after a private call Don’t move the stock at a conference unless it’s webcast FD applies to good news or bad news Correct mistakes quickly, don’t compound them Good faith/reliance on counsel is defense if prerequisites are met

FD Hits Adolescence (cont.) FD best practices Don’t reaffirm guidance unless you really mean to Webcast everything Beware one-on-one’s No follow-up calls to make sure they “get it” Always check with counsel

Reg. G and the Death of Pro Forma’s What got us here? Manipulating results to filter out bad news Non-comparability across periods and companies Qwest:  “pro forma normalized recurring EBITDA” Required by Sarbanes-Oxley Section 401(b) Distinct from Item 10 of Reg S-K More stringent requirements for SEC filings

Key Provisions of Reg. G Governs use of non-GAAP financials in public statements and releases “Non-GAAP financial measure” Numerical measure of a company’s historical or future financial performance, financial position, or cash flows, which includes or excludes item differently from most directly comparable GAAP measure Two principal requirements May not mislead or omit Must accompany with GAAP information and reconcile

Key Provisions of Reg. G (cont.) Non-GAAP financial information must be accompanied by Most directly comparable financial measure calculated and presented in accordance with GAAP Quantitative reconciliation of differences between non-GAAP financial measures presented and most directly comparable GAAP financial measure For historical information and, if reasonably doable, forward-looking information For “oral” disclosures, can “accompany” by referring to Reg. G information already posted on website

Reg G. in Practice Fewer blatant abuses/manipulations Boilerplate explanations for why pro forma’s are useful More companies are moving away from pro forma’s Some companies forget about Reg. G requirements