Preparation For 2006 Fiscal Year SEC Filings And 2007 Annual Shareholder Meetings

As our clients and friends know, each year Mintz Levin provides a summary of the regulatory developments that impact public companies as they prepare for their fiscal year-end filings and annual shareholder meetings. This Memorandum discusses key considerations to keep in mind as you embark upon the year-end reporting process in 2007.1

Executive compensation disclosure is the focus of most of the changes for this reporting season. The SEC's new disclosure requirements for executive compensation are in effect for annual reports and proxy statements covering fiscal years ending on or after December 15, 2006, and certain changes in the Form 8-K requirements for executive compensation disclosures took effect on November 7, 2006.2 The new requirements, including in particular the new Compensation Discussion and Analysis ("CD&A"), have shifted the time frame for preparation of executive compensation disclosures to earlier in the year-end reporting process than ever before, due in part to the increasing number of individuals within and outside companies whose input is required to draft the new disclosures. In addition, the SEC has emphasized repeatedly that principles matter in the preparation of executive compensation disclosures: meaning that, as companies prepare the descriptions of their executive compensation arrangements in the CD&A and in the narratives accompanying the tables, they should keep in mind that all material aspects of their compensation programs need to be discussed, even if there may appear to be no specific rule or table that requires the disclosure.

In addition, companies continue to cope with the rigorous disclosure requirements that accompany internal control reporting obligations under Section 404 of the Sarbanes- Oxley Act of 2002 ("Sarbanes-Oxley"). The SEC has recently stated that it has heard the requests of smaller issuers for some relief with respect to Section 404 reporting, and has issued proposed interpretive guidance on internal control reporting for those smaller companies, including an approach that will permit a more "scalable and flexible" approach to internal control reviews.3 This guidance will replace Accounting Standard No. 2 as issued by the Public Company Accounting Oversight Board in June 2004. As noted by the SEC in its press release regarding the interpretive guidance, "smaller public companies often have less complex internal control systems than larger public companies, [and] this proposed approach would enable smaller public companies in particular to scale and tailor their evaluation methods and procedures to fit their own facts and circumstances."4

We look forward to working with you to make this year's annual reporting process as smooth as possible.

Final (For Now) Phase-In of Accelerated Periodic Report Filing Deadlines

For companies that qualify as large accelerated filers as of their fiscal years ending on or after December 15, 2006, annual reports on Form 10-K are now due 60 days after fiscal year-end (Thursday, March 1, 2007 for December 31 year-end companies).5 Form 10-K reports continue to be due 75 days following fiscal year-end for accelerated filers6 (Friday, March 16, 2007 for December 31 yearend companies) and 90 days after fiscal year-end for non-accelerated filers (Monday, April 2, 2007 for December 31 year-end companies).

In addition, Form 10-Q reports filed by accelerated filers and large accelerated filers will continue to be due 40 days after the close of the fiscal quarter. The Form 10-Q due date for such filers will not be accelerated to 35 days as originally planned. The deadline for Form 10-Q reports for non-accelerated filers continues to be 45 days after the close of the fiscal quarter.

These changes do not affect the existing proxy statement filing deadline of 120 days after fiscal year-end for companies that choose to incorporate by reference from their definitive proxy statements the disclosure required by Part III of the Form 10-K.

The SEC has also made it significantly easier for companies that have had declines in the market value of their public float to exit accelerated filer status. An accelerated filer whose public float had dropped below $50 million as of the last business day of its second fiscal quarter may cease to report as an accelerated filer at the end of the fiscal year in which its public float fell below $50 million, and may therefore file its annual report for that year and subsequent periodic reports on a non-accelerated basis. The rules also contain similar requirements for exiting large accelerated filer status, permitting a large accelerated filer whose public float dropped below $500 million as of the last business day of its second fiscal quarter to cease reporting as a large accelerated filer as of the end of the fiscal year in which its public float fell below $500 million, and to file its annual report for that year and subsequent periodic reports as an accelerated filer, or a non-accelerated filer, as appropriate. Prior to these changes, companies that had become accelerated filers could only cease to report as accelerated filers if they became eligible to report as small business issuers.

Internal Control Over Financial Reporting

Companies that qualify as large accelerated filers and accelerated filers have now experienced two years of compliance with the requirements of Section 404 of Sarbanes-Oxley concerning internal control over financial reporting. As a reminder, those filers are required to include in their annual reports:

an evaluation by management of the effectiveness of the company's internal control over financial reporting, and

an attestation report from the company's independent accountants with respect to management's assessment of the company's internal control over financial reporting.

Management must also evaluate any change in a company's internal control over financial reporting that occurs during a fiscal quarter and that has materially affected, or is reasonably likely to materially affect, the company's internal control.

The SEC has provided some additional relief regarding internal control reporting for non-accelerated filers and newly public companies. 7 Non-accelerated filers had been scheduled to begin compliance with Section 404 reporting starting with fiscal years ending on or after July 15, 2007. In rule amendments adopted in December 2006, the SEC pushed back the compliance deadline for non-accelerated filers again, and now will require the management's report on internal control over financial reporting to be filed with the first annual report due on or after December 15, 2007, and the auditor's attestation report on internal control over financial reporting to be filed with the first annual report due on or after December 15, 2008. However, if a former non-accelerated filer becomes an accelerated filer during this extension period, the company would no longer be able to take advantage of this postponement, and the Section 404 reports would be required in the annual report that is filed for the fiscal year in which the company becomes an accelerated filer.

For companies that are newly public, the SEC has granted a transition period that will allow those companies not to have to include Section 404 reports in the first annual report that they file after becoming subject to the reporting requirements of the Exchange Act. This is a significant benefit for newly public companies that otherwise would have been required to prepare for Section 404 reporting immediately after going public. For our clients that are planning to go public in 2007, this revision will allow them to wait to include required Section 404 disclosures until their second annual report filed post-IPO.

Please note that if a company goes public early in a year (before February 15 for domestic issuers; before April 30 for foreign private issuers), using nine-month interim financial statements, that company's first annual report, in which the Section 404 reports will not be required, will be the one that is filed shortly after going public. The company would then become subject to Section 404 reporting in the next annual report, due the following year.

Management's annual report on internal control over financial reporting and the attestation report provided by your auditors, which are required pursuant to Item 308 of Regulation S-K, should appear either in close proximity to the Management's Discussion and Analysis section of the Form 10-K or immediately preceding the company's financial statements. In addition, the SEC has indicated that companies should include both management's report on internal control over financial reporting and the auditors' report on management's assessment of those controls in the annual report to shareholders when audited financial statements are included. The SEC has also noted that, if management states in the report that the company's internal controls are ineffective, or the auditors' report includes anything other than an unqualified opinion, and those reports are not included in the annual report to shareholders, the company would have to consider whether the failure to include those reports constitutes an omission of a material fact, rendering the annual report misleading.

If you receive any indication from your accountants that a qualified report will be issued, or that there are material weaknesses or significant deficiencies in your internal controls, you should consult with your counsel as soon as possible to determine any disclosure ramifications.

Compensation Disclosures More Detail, More Scrutiny

In response to widespread demand from institutional and retail stockholder groups, on August 29, 2006 the SEC adopted new rules that require extensive additional detail on issuers' compensation practices, and require that this disclosure be presented in "plain English."8 The rules were further amended, on December 29, 2006, to make certain revisions to the...