Enron, Worldcom and Recent Developments in Corporate Governance in the U.S.

1. Enron, Worldcom and Recent Developments in Corporate Governance in the U.S. William L. Meyer Smith, Gambrell & Russell, LLP Atlanta, Georgia U.S.A. Presented by November 19, 2002

3. Overview • Sarbanes-Oxley Act of 2002 – Current and Proposed Rulemaking • Board of Directors/Committee Requirements • SEC Proposed Rulemaking • Enhanced Criminal Penalties

4. Enron, Worldcom and Recent Developments in Corporate Governance in the U.S. Presented by: Willilam L. Meyer, Esq. Smith, Gambrell & Russell, LLP Atlanta, Georgia U.S.A.

5. I. Sarbanes-Oxley Act of 2002 A. CEO and CFO Certifications in SEC Reports • Arguably most significant requirement of Sarbanes-Oxley • Two certifications required by CEO and CFO • Section 906 (short) • Required in 10-Ks and 10-Qs and may be required in 8-Ks containing financial statements • Specific criminal penalties apply • Enforced by DOJ

6. Section 302 (detailed) • Required in 10-Ks and 10-Qs • No specific criminal penalties, but still potential criminal liability • Enforced by SEC

7. Section 906 Certifications: • The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and • The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the company • “Knowledge” qualifiers • Certification must “accompany” periodic report

8. Section 302 Certifications: • CEO/CFO have reviewed the report • Based on their knowledge, no untrue statement of material fact and no omission to state a material fact necessary to make statements not misleading • Based on their knowledge, the report fairly presents, in all material respects, the financial condition and results of operations for the periods presented

9. The CEO/CFO • are responsible for establishing and maintaining disclosure controls and procedures (distinguished from internal accounting controls); • have designed disclosure controls to ensure that material information is made known to them; • have evaluated the effectiveness of the disclosure controls within 90 days of report; and • have presented in the report their conclusions about the effectiveness of the disclosure controls based on their evaluation

10. They have disclosed to the auditors and the audit committee: • all significant deficiencies in the design or operation of internal accounting controls (places burden on management); and • any fraud that involves management or other employees who have a significant role in the company’s internal controls. • They have indicated any significant changes in the internal controls.

11. B. Accelerated filing of periodic reports (Final rule effective as of August 29, 2002) • Form 10-K historically filed within 90 days of fiscal year end • Form 10-Q historically filed within 45 days of end of first three fiscal quarters • 3-year phase-in • Current fiscal year: 10-Q/10-K filing deadlines remain the same

12. Accelerated deadlines apply to domestic companies that have: • at least $75 million of public float; • filed periodic reports for at least one year; and • filed at least one Form 10-K • Applies to foreign issuers who voluntarily file 10Ks and 10Qs • Beginning with fiscal years ending after December 15, 2003: • 1st year: 10-K, 10-KSB due within 75 days 10-Q, 10-QSB due within 40 days • Thereafter: 10-K, 10-KSB due within 60 days 10-Q, 10-QSB due within 35 days

13. C. Two-day Section 16 filing deadline (effective) • Insiders now required to report on Form 4 changes in beneficial ownership within 2 business days of date of change • Limited exemptions for delayed filings (gifts, de minimis) • Electronic filing of all beneficial ownership reports required within one year • Companies should review insider trading policies/pre-clearance procedures • Power of Attorney (CFO or attorney, etc.)

14. D. Trading prohibition during employee benefit plan blackout periods (pending) • Directors and executive officers may not trade in company securities acquired as compensation during any employee benefit plan blackout period • Company must notify plan participants, directors, officers and the SEC in advance of any blackout period • Profits made in violation of this rule are recoverable by company

15. E. Ban on loans to executive officers and directors (effective) • Sarbanes-Oxley prohibits loans or extensions of credit to executive officers and directors • Existing loans need not be canceled, but cannot be materially modified or renewed There is uncertainty whether the ban would include: • Company credit cards for personal use • Cashless exercises • Indemnification – advancement of expenses • Split Dollar Life Insurance Arrangements

16. F. Disgorgement from CEO/CFO upon restatement of financial statements (effective) • If a company is required to restate its financials as a result of misconduct, the CEO and CFO must reimburse company for any: • bonus • other incentive or equity-based compensation • profits from stock sales received in 12 month period following first public release or filing of financial statements that are restated

17. II. Board of Directors/Committees A. Board/Committee Independence (pending) • Majority of board must be “independent” • Audit and compensation committees (and nominating committee for NYSE) also must consist solely of independent directors

18. New independence tests: • Nasdaq • a director may not: • receive any payments in excess of $60,000 other than for board service • be an executive officer of an entity (including a charity) to which the company makes or receives payments in excess of the greater of $200,000 or 5% of either the company’s or entity’s gross revenue • own or control more than 20% of company’s voting securities • be a relative of an executive officer of company or any affiliate • have been employed by company or any affiliate or company’s outside auditor’s during the prior three years

19. New independence tests (cont): • NYSE • Board affirmative determination of independence • Five-year cooling off period for former employees of the company, outside auditor, or director with compensation committee interlocks • Directors with immediate family members in the above categories also subject to five-year cooling off period • Significant ownership of stock does not automatically result in non-independence

20. B. Codes of Conduct and Ethics (pending) • Code of Conduct • Proposed Nasdaq rules would require company to establish and make public a Code of Conduct • Must address at a minimum: • conflicts of interest • compliance with applicable laws, rules and regulations • compliance mechanism and disclosure of any waiver to executive officers and directors • waivers can only be granted by independent directors • Proposed NYSE rules will require • Corporate governance guidelines (director qualifications and responsibilities) • Code of Business Conduct and Ethics (similar to above) • Publication on Web site

21. Code of Ethics • Sarbanes-Oxley requires SEC to issue final rules by January 26, 2003 requiring company to disclose Code of Ethics for senior financial officers or, if none exists, the reasons why • Code of Ethics should address: • Conflicts of interest/corporate opportunities • Confidentiality • Compliance with laws (including insider trading laws) • Reporting of illegal or unethical behavior

22. C. Audit Committees • Audit Committee Composition • Independence • All committee members must be independent • independence determined by NYSE or Nasdaq listing rules • audit committee member will not be considered independent if: • accepts any consulting, advisory or other compensatory fee from company (other than director’s fees) • is affiliated person of the company

23. b. Financial Literacy • Under current standards, each member must be able to read and understand fundamental financial statements or be able to do so within a reasonable time after appointment • New standard requires members to have ability to read and understand financial statements at time of appointment

24. c. Designation of Financial Expert • Sarbanes-Oxley requires SEC to issue rules requiring company to disclose whether audit committee includes “financial expert” or, if not, reason why • Financial expert definition will consider whether person has this expertise through education and experience as: • public accountant or auditor • principal financial or accounting officer of a public company • position involving similar functions

25. 2. Audit Committee Responsibilities and Requirements • SEC to implement rules to require NYSE or Nasdaq to prohibit listing any company that does not comply with the following: • audit committee must be directly responsible for appointment, compensation and oversight of outside auditors • auditors must report directly to audit committee

26. audit committee must establish and maintain procedures to receive and respond to any complaints/concerns regarding company’s accounting, controls and auditing matters • audit committee must have authority to engage independent legal counsel and other advisors • all audit and non-audit services must be pre-approved by audit committee • Nasdaq will require that all related party transactions be approved by audit committee or similar body of Board (independent directors)

27. D.Compensation/Nominating Committees (pending) • Should committees be comprised solely of independent directors? • NYSE – Yes • Nasdaq – not required • Nasdaq – Independent director approval of CEO/executive officer compensation and director nominations is required • New rules also require regular executive session meetings of non-management (NYSE)or independent (Nasdaq) directors

28. III. SEC Proposals • New Form 8-K disclosure of certain management and other significant transactions “real time” disclosure • 2-day filing deadline for all reportable events • Proposal still pending • Transactions subject to new disclosure requirements include: • Director’s and executive officer’s transactions in company securities (covered by new §16 rules)

29. Adoption, modification or termination of a Rule 10b5-1 plan • Execution or termination of material agreement not made in ordinary course of business • Termination or reduction of a business relationship with a customer that constitutes a specified amount of company’s revenues • Creation of a material direct or contingent financial obligation • Events triggering a material direct or contingent financial obligation, including any default or acceleration of an obligation

30. Exit activities including material write-offs and restructuring charges • Any material impairment • A change in rating agency decision, issuance of credit watch or change in company outlook • Movement of company’s securities from one exchange to another, delisting or notice of noncompliance with a listing standard • Conclusion or notice that security holders no longer should rely on the company’s previously issued financial statements or a related audit report

31. Any material limitation on company’s benefit plans, including beginning and end of black-out periods • Additional disclosures about: • unregistered sales of equity securities • material modifications to rights of securityholders • reasons for departure of directors • appointment or departure of executive officers • election of directors • material amendment to company’s Articles of Incorporation or Bylaws

32. Additional disclosure required in SEC Reports • Off-Balance Sheet Items (the “Enron rule”) • SEC required by January 26, 2003 to issue final rules requiring disclosure in each Form 10-K and 10-Q of all material off-balance sheet transactions and other relationships • Disclosure required if it may have a material current or future effect on financial condition or results of operations

33. Pro Forma Information • SEC required by January 26, 2003 to issue final rules providing that any pro forma financial information included in any periodic report, public disclosure or press release be presented so that it: • does not contain any untrue statement of a material fact or omit a material fact • reconciles with comparable financial information prepared under GAAP • Not limited to formally prepared pro forma financial statements; applies to any pro forma or adjusted presentation (e.g., one-time charges)

34. Internal Control Reports • SEC required to adopt rules (at some unspecified future date) requiring that each Form 10-K contain an “Internal Control Report” • Report must: • state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting • contain an assessment by management of the effectiveness of internal control structure and procedures • Company’s auditor must attest to and report on management’s assessment

35. 4. MD&A disclosure of application of critical accounting policies • Requires disclosure of: • critical accounting estimates made in applying accounting policies; and • initial adoption of an accounting policy that has a material impact on financial presentation • SEC has issued guidance

36. IV. Enhanced Criminal Penalties and Statute of Limitations • Criminal Penalties • New crimes include securities fraud (prison term of up to 25 years) and destruction of documents with intent to obstruct or impede federal investigation (prison term of up to 20 years)

37. Non-compliance with Section 906 certification of periodic reports requirements • prison term of 10 to 20 years • fines of $1 million to $5 million • Statute of limitations increased to earlier of two years from discovery or five years after alleged violation (up from one and three years)