The Act and Your Annual Report

Items Required to be Disclosed in the Annual Report

• Audit Committee Financial Expert. Annual reports for fiscal years ended on or after July 15, 2003 must disclose whether the company's audit committee includes at least one “audit committee financial expert” and if not, why not. The determination is required to be made by the company's board of directors in accordance with the detailed definition set forth in Regulation S-K 401(h). If the board determines that a member of the committee meets the definition, the annual report must disclose the identity of that person and also whether that person is “independent,” using the definition adopted by the applicable stock exchange or Nasdaq, depending where the company's securities are listed. Although some commentators have anticipated that companies would strive to designate such an expert, it is a permitted alternative to explain the expertise of one or more of the members of the committee, even if none of them meets the SEC's narrow definition of such an expert. This may be a suitable alternative for smaller companies that cannot readily change the composition of their audit committees, especially if the committee includes a member with significant expertise but does not quite meet the SEC's definition. (See the discussion below concerning disclosure of audit committee members.)
• Code of Financial Ethics. For fiscal years ended on or after July 15, 2003, a company must 1) disclose in its annual report whether company has adopted a code of ethics complying with S-K 406 applicable to its CEO and principal accounting and financial officers; and 2) include the code as an exhibit to the report, post it on the company's Web site or commit to providing it free of charge to persons requesting a copy of it. If the company has not adopted such a code, it must explain why it has not done so. In view of the brief and general nature of the required code, as well as the more expansive code requirements adopted by the stock exchanges and Nasdaq, it is anticipated that virtually all companies will adopt some version of this code.
• Auditor-Related Disclosure. For fiscal years ended on or after Dec. 15, 2003, a company's annual report (Item 14) and proxy statement for annual meetings or special meeting at which the auditor is approved (Schedule 14A, Item 9(e)) must disclose 1) fees paid for audit, tax and other services for each of the last 2 fiscal years; and 2) the terms of the audit committee's audit and non-audit services pre-approval policies and procedures.
• Off-Balance Sheet Arrangements. For fiscal years ended on or after June 15, 2003, an annual report's “Management's Discussion and Analysis” (S-K 303(a)(4)) must include, in a separately captioned section, a discussion of the company's off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
• Table of Contractual Obligations. For fiscal years ended on or after Dec. 15, 2003, filings including financial statements must include a table summarizing long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations and other long-term liabilities reflected on the company's balance sheet (S-K 303(a)(5)).
• Non-GAAP Financial Measures. Forms 10-K and 10-Q for fiscal periods ending after March 2003 are subject to new S-K Item 10 if they include non-GAAP financial measures. These requirements include 1) a presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with GAAP; 2) a reconciliation (by schedule or other clearly understandable method) of the differences between the non-GAAP financial measure disclosed with the most directly comparable financial measure or measures calculated and presented in accordance with GAAP; 3) a statement disclosing the reasons why the company's management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the company's financial condition and results of operations; and 4) to the extent material, a statement disclosing the additional purposes, if any, for which the company's management uses the non-GAAP financial measure.
• Revised 302 Certifications. Effective Aug. 14, 2003, the recently adopted certification requirements under Section 302 of the Act were modified with respect to periodic reviews of internal controls. Most companies were first required to include at least part of these revised certifications in their quarterly reports on Form 10-Q, and calendar year reporting companies are now first required to include these changes in the certifications in their annual reports. The remainder of the changes will be required in connection with the effectiveness of the requirement to report on the evaluation of internal controls next year. See the discussion below concerning reports on internal controls.
• Accelerated Filing. Although not specifically required by the Act, the SEC has shortened the deadlines for filing annual and quarterly reports. Effective for fiscal years ended on or after Dec. 15, 2003, companies fitting the definition of an “accelerated filer” must file their annual reports within 75 days of their fiscal year end (a deadline of March 15, 2004 for calendar year companies). The filing dates for the next three quarterly reports on Form 10-Q have also been accelerated to 40 days after quarter end, and next year's annual report will be due within 60 days after fiscal year end. A company is an “accelerated filer” after it first meets the following conditions as of the end of its fiscal year: 1) the aggregate market value of the voting and non-voting common equity held by non-affiliates of the company is $75 million or more; 2) the company has been subject to the reporting requirements of the Securities Exchange Act for a period of at least 12 calendar months; 3) the company has filed at least one annual report pursuant to the reporting requirements of the Securities Exchange Act; and 4) the issuer is not a small business eligible to use Forms 10-KSB and 10-QSB for its annual and quarterly reports.

Items Required in Connection with Preparation of Annual Report

• Auditors Report to Audit Committee. Auditor, pursuant to Regulation S-X 2-07, must report certain matters to the audit committee prior to filings the auditor's report with the SEC, including company's critical accounting policies, alternative methods for treating material financial items discussed with management, and material written communications with management.

Previously Effective Items

• Disclosure of Electronic Availability of Filings. Starting with annual reports for fiscal years ended on or after Dec. 15, 2002, “accelerated filers” have been required, pursuant to S-K 101(e), to disclose 1) the company's Web site address; 2) whether the company makes its reports on Form 10-K, 10-Q and 8-K available free of charge on its Web site; 3) if not, the reasons why not (which may be that the company does not maintain a Web site); and 4) whether paper or electronic copies are available free of charge upon request.
• Earnings Release Filing. Effective for earnings releases made after March 28, 2003, Form 8-K Item 12 has required that releases disclosing material non-public financial data for a completed quarter or year be “furnished” to the SEC within 5 business days after making the release by filing a copy of the release as an exhibit to a Form 8-K filed with the SEC.

Significant Items Not Yet Effective

• Audit Committee Members. Companies listed on a stock exchange or Nasdaq are required to comply with new listing rules by the time of their first annual stockholders meeting occurring after Jan. 15, 2004, but no later than Oct. 31, 2004. Annual reports and proxy statements with respect to the election of directors covering periods ending on or after these compliance dates must disclose whether the company has an audit committee and, if so, identify the members of the committee. Alternatively, if the full board of directors acts as the company's audit committee for the purposes of the provisions of the Securities Exchange Act that require action by an audit committee (such as S-X 2-01(c)(7) requiring the audit committee's approval of the engagement of the company's auditor for audit or non-audit services), that fact must be disclosed.
• Internal Controls Evaluation and Report. For fiscal years ending on or after June 15, 2004, management will be required to make a report on its assessment of internal controls over financial reporting (S-K 308), and this report will be required to be attested by the company's auditors. Compliance will require the identification and assessment of risks associated with the company's operations and financial reporting, the preparation of written controls for collecting and internal reporting of information, and procedures for monitoring and testing the performance of controls over time. Given the complexity of these requirements, it is anticipated that companies will need to use much of 2004 to prepare to comply with these requirements.

As widely reported, the Sarbanes-Oxley Act of 2002 (the Act) and rules adopted by the Securities and Exchange Commission pursuant to the requirements of the Act have added numerous requirements to the obligations of companies filing periodic reports pursuant to the Securities Exchange Act. A number of significant provisions are first effective with respect to annual reports filed with the SEC for fiscal years ended Dec. 31, 2003. This article provides a checklist and brief summary of each of these new requirements.

Items Required to be Disclosed in the Annual Report

• Audit Committee Financial Expert. Annual reports for fiscal years ended on or after July 15, 2003 must disclose whether the company's audit committee includes at least one “audit committee financial expert” and if not, why not. The determination is required to be made by the company's board of directors in accordance with the detailed definition set forth in Regulation S-K 401(h). If the board determines that a member of the committee meets the definition, the annual report must disclose the identity of that person and also whether that person is “independent,” using the definition adopted by the applicable stock exchange or Nasdaq, depending where the company's securities are listed. Although some commentators have anticipated that companies would strive to designate such an expert, it is a permitted alternative to explain the expertise of one or more of the members of the committee, even if none of them meets the SEC's narrow definition of such an expert. This may be a suitable alternative for smaller companies that cannot readily change the composition of their audit committees, especially if the committee includes a member with significant expertise but does not quite meet the SEC's definition. (See the discussion below concerning disclosure of audit committee members.)
• Code of Financial Ethics. For fiscal years ended on or after July 15, 2003, a company must 1) disclose in its annual report whether company has adopted a code of ethics complying with S-K 406 applicable to its CEO and principal accounting and financial officers; and 2) include the code as an exhibit to the report, post it on the company's Web site or commit to providing it free of charge to persons requesting a copy of it. If the company has not adopted such a code, it must explain why it has not done so. In view of the brief and general nature of the required code, as well as the more expansive code requirements adopted by the stock exchanges and Nasdaq, it is anticipated that virtually all companies will adopt some version of this code.
• Auditor-Related Disclosure. For fiscal years ended on or after Dec. 15, 2003, a company's annual report (Item 14) and proxy statement for annual meetings or special meeting at which the auditor is approved (Schedule 14A, Item 9(e)) must disclose 1) fees paid for audit, tax and other services for each of the last 2 fiscal years; and 2) the terms of the audit committee's audit and non-audit services pre-approval policies and procedures.
• Off-Balance Sheet Arrangements. For fiscal years ended on or after June 15, 2003, an annual report's “Management's Discussion and Analysis” (S-K 303(a)(4)) must include, in a separately captioned section, a discussion of the company's off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
• Table of Contractual Obligations. For fiscal years ended on or after Dec. 15, 2003, filings including financial statements must include a table summarizing long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations and other long-term liabilities reflected on the company's balance sheet (S-K 303(a)(5)).
• Non-GAAP Financial Measures. Forms 10-K and 10-Q for fiscal periods ending after March 2003 are subject to new S-K Item 10 if they include non-GAAP financial measures. These requirements include 1) a presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with GAAP; 2) a reconciliation (by schedule or other clearly understandable method) of the differences between the non-GAAP financial measure disclosed with the most directly comparable financial measure or measures calculated and presented in accordance with GAAP; 3) a statement disclosing the reasons why the company's management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the company's financial condition and results of operations; and 4) to the extent material, a statement disclosing the additional purposes, if any, for which the company's management uses the non-GAAP financial measure.
• Revised 302 Certifications. Effective Aug. 14, 2003, the recently adopted certification requirements under Section 302 of the Act were modified with respect to periodic reviews of internal controls. Most companies were first required to include at least part of these revised certifications in their quarterly reports on Form 10-Q, and calendar year reporting companies are now first required to include these changes in the certifications in their annual reports. The remainder of the changes will be required in connection with the effectiveness of the requirement to report on the evaluation of internal controls next year. See the discussion below concerning reports on internal controls.
• Accelerated Filing. Although not specifically required by the Act, the SEC has shortened the deadlines for filing annual and quarterly reports. Effective for fiscal years ended on or after Dec. 15, 2003, companies fitting the definition of an “accelerated filer” must file their annual reports within 75 days of their fiscal year end (a deadline of March 15, 2004 for calendar year companies). The filing dates for the next three quarterly reports on Form 10-Q have also been accelerated to 40 days after quarter end, and next year's annual report will be due within 60 days after fiscal year end. A company is an “accelerated filer” after it first meets the following conditions as of the end of its fiscal year: 1) the aggregate market value of the voting and non-voting common equity held by non-affiliates of the company is $75 million or more; 2) the company has been subject to the reporting requirements of the Securities Exchange Act for a period of at least 12 calendar months; 3) the company has filed at least one annual report pursuant to the reporting requirements of the Securities Exchange Act; and 4) the issuer is not a small business eligible to use Forms 10-KSB and 10-QSB for its annual and quarterly reports.

Items Required in Connection with Preparation of Annual Report

• Auditors Report to Audit Committee. Auditor, pursuant to Regulation S-X 2-07, must report certain matters to the audit committee prior to filings the auditor's report with the SEC, including company's critical accounting policies, alternative methods for treating material financial items discussed with management, and material written communications with management.

Previously Effective Items

• Disclosure of Electronic Availability of Filings. Starting with annual reports for fiscal years ended on or after Dec. 15, 2002, “accelerated filers” have been required, pursuant to S-K 101(e), to disclose 1) the company's Web site address; 2) whether the company makes its reports on Form 10-K, 10-Q and 8-K available free of charge on its Web site; 3) if not, the reasons why not (which may be that the company does not maintain a Web site); and 4) whether paper or electronic copies are available free of charge upon request.
• Earnings Release Filing. Effective for earnings releases made after March 28, 2003, Form 8-K Item 12 has required that releases disclosing material non-public financial data for a completed quarter or year be “furnished” to the SEC within 5 business days after making the release by filing a copy of the release as an exhibit to a Form 8-K filed with the SEC.

Significant Items Not Yet Effective

• Audit Committee Members. Companies listed on a stock exchange or Nasdaq are required to comply with new listing rules by the time of their first annual stockholders meeting occurring after Jan. 15, 2004, but no later than Oct. 31, 2004. Annual reports and proxy statements with respect to the election of directors covering periods ending on or after these compliance dates must disclose whether the company has an audit committee and, if so, identify the members of the committee. Alternatively, if the full board of directors acts as the company's audit committee for the purposes of the provisions of the Securities Exchange Act that require action by an audit committee (such as S-X 2-01(c)(7) requiring the audit committee's approval of the engagement of the company's auditor for audit or non-audit services), that fact must be disclosed.
• Internal Controls Evaluation and Report. For fiscal years ending on or after June 15, 2004, management will be required to make a report on its assessment of internal controls over financial reporting (S-K 308), and this report will be required to be attested by the company's auditors. Compliance will require the identification and assessment of risks associated with the company's operations and financial reporting, the preparation of written controls for collecting and internal reporting of information, and procedures for monitoring and testing the performance of controls over time. Given the complexity of these requirements, it is anticipated that companies will need to use much of 2004 to prepare to comply with these requirements.