TheCorporateCounsel.net

Bob Dow of Arnall Golden Gregory has been tracking the progress of non-accelerated filers who – for the first time this year – are required to furnish their management’s assessment of internal control over financial reporting. Bob says that about half of the Form 10-KSBs that he has seen filed so far don’t include management’s assessment and don’t have any required explanation for excluding it, such as if a company fits under the new public company exception (see, e.g., this filing by Infinera Corporation). [Most of those now filing on Form 10-K under the new smaller company reporting requirements seem to include the required management report.]

Here are some examples that Bob noted where companies more or less got it right with respect to the disclosure about management’s assessment:

– Sensata Technologies
– Netlist, Inc.
– International Cellular Accessories
– OrganiTech USA, Inc.
– Znomics, Inc. (doesn’t reference the exclusion of the audit report)
– Pet Express Supply, Inc.
– SteelCloud, Inc. (complying early)

It will be interesting to see how the SEC reacts to those smaller issuers that don’t include the required report. In the first year of implementation for the Section 404 rules, the Staff tried to be pretty flexible with issuers who – for one reason or another – omitted the report or filed with a qualified auditor’s attestation. For the most part, the Staff tried to work with the issuers to remedy the situation. It is possible that the Staff will take the same approach again with the non-accelerated filers, particularly given that the report is only “furnished” this year as opposed to “filed” – we will have to just wait and see.

Non-Accelerated Filers: Watch Your Section 302 Certification Language!

A number of the filings referenced above did not include the complete Section 302 certification language required under Item 601(b)(31) of Regulation S-K. Remember that under the transition rules for non-accelerated filers, the introductory language in paragraph 4 and the language in paragraph 4(b) of the certification referring to internal control over financial reporting may only be omitted until the company files its first annual report required to contain management’s internal control report – the full certification is required in that report and in all periodic reports filed thereafter.

Typically, when officers have mistakenly omitted this language from their certification after the end of the transition period, the Staff has permitted the company to file a stripped-down amendment to the periodic report including just a cover page, an explanatory note about the purpose of the amendment, a signature page and the required Section 302 certifications – including the complete text of paragraphs 1, 2, 4, and 5 (paragraph 3 may be omitted because no financial statements are included in the amendment).

Turning Around Troubled Companies

Jim Thornton, CEO of Provo Craft and Novelty, saved this company from bankruptcy by growing revenue to $200 million, a 38% increase in two years with an improvement of 227% in EBITDA. For example, he turned over the entire original management team and took over the roles of CEO, CFO and COO personally, until he discovered the company’s bugs. He then personally recruited five Fortune 50 executives to come to come join the company.

In this podcast, Jim provides some insight into how to handle turning around a company, including:

– How is your turnaround style unique?
– What do you find to be the greatest challenges in a typical turnaround situation?
– What are your feelings about incumbent managers who seek retention bonuses after they have caused a company to become troubled?

– Dave Lynn