Stock Option Backdating and Practices Conference Presented by: Barry H. Genkin, Esquire September 21, 2006

Page 2 IT’S THAT TIME AGAIN  Every several years “Corporate America” experiences an integrity gut check:  Foreign Corrupt Practices Act  Insider trading  Enron, WorldCom, Adelphia  Sarbanes-Oxley Act of 2002  *Option Backdating*

Page 3 The Harsh Reality  Governmental investigations of over 100 companies  Average loss in market value of companies implicated in scandal is 8%, or $500 million per company  Investors wary because of unanswered questions:  major disruption (including possible delisting)  restatement of financials  cash overlays for taxes  prospect of executives being forced out  significant unknowns

Page 4 What is Option Backdating?  Centers around timing of option grants  Did grants occur on the dates stated, or before or after?  Was exercise price of stock options retroactively set to correspond with market prices on date stock price was low, claiming these dates as the grant dates?  Do patterns suggest discrepancies between stated and actual grant dates?

Page 5 Types of Option Backdating  Open and notorious backdating – (Intentional)  Backdating with a reason  Sloppy backdating  Unintended backdating – (unanimous consent)  Lack of documentation  Springloading (grant option in advance of good news)  Bullet dodging (delay grant because of expected bad news)

Page 6 Was Backdating Intended or Not?  Was there an intentional or unintentional incorrect recording of stock option grants (e.g. unanimous consent and “as of” dates)?  In either case – result is understatement of stock option expense in financial statements

Page 7 What are the Hallmarks of Option Backdating?  Opportunity for SEC to flex its muscle  1,050,000 Google hits (and growing)  Display poster children  Shelf life  Commissioner Campos Speech (8/15/06)  “How to be an Effective Board Member”  Option backdating matters are like icebergs  Part above water  Change grant date of option to a date when stock trading at a low level  Part below water

Page 8 The Part Below the Water  Possible false financial statements (restatements)  9/19/06 letter from office of Chief Accountant of SEC  Possible adverse tax consequences  Possible internal control weaknesses (404 of SOX)  SEC investigation  U.S. Attorney investigation  Incorrect Section 16 reports Page 8

Page 9  Inaccurate 34 Act disclosure – 10Qs and 8Ks (financials)  Current registration statements (33 Act) inaccurate  §11 and 12(a)  Violations of plan documents  Possible voiding of option grants  Class action suits The Part Below the Water Page 9

Page 10  Scalps of officers/directors (who dropped the ball)  Governance failures  Violate Exchange rules  Rating agency (Moody’s and S&P) downgrades  CEO and CFO certifications problematic  302 certifications - financial statement accurately reflect financial condition  Investor confidence  Stock price hit The Part Below the Water Page 10

Page 11  DON’T ASK/DON’T TELL POLICY (put on the blinders) Wait for SEC to come knocking OR  Be proactive and make inquiry  Director oversight obligations (fiduciary duties)  Climate demands it  If not, management must be proactive and raise issue with directors Do You Have a Problem or Not?

Page 12 Who Manages the Inquiry?  full board  audit committee - preference  governance committee  compensation committee  Fact gathering  role of officers  what was role of existing inside and outside counsel?

Page 13 Who Manages the Inquiry?  What was role of existing outside auditors?  Tension between independent auditors and management  What is role of in-house/outside counsel?  What is role of outside auditors?

Page 14 What Gets Reviewed in Inquiry?  Match grant dates to stock price information  Review governing plan documents, employment agreements and option grant agreements providing for stock option grants  Board of committee minutes  Unanimous consents and process  Examine the grant process

Page 15 What Gets Reviewed in Inquiry?  Analysis of accounting treatment  Analysis of tax treatment  Review of Section 16 reports  Review of communications to optionees  Public disclosure  Proxy statement disclosure

Page 16 What Gets Reviewed in Inquiry?  Interview management, board committee members and administrators  Preservation of documents  review – Smoking Gun  Identification of issues  Securities law ramifications  FD issues – re: inquiries  Regulatory, tax and accounting ramifications  Assess litigation risks  Loan documents and debt instruments  Director and Officer Policy - Restatement

Page 17 What You Do Depends Upon What You Find  Clean bill of health – nothing  Report to Board  Still evaluate best practices – (always room for improvement)  If find something:  Analyze what went wrong and why – fix it  Adopt best practices (avoid future issues)

Page 18 What You Do Depends Upon What You Find  Focus on:  Financials (restatement)  Item 4.02 of Form 8-K – Non–reliance on previously issued financial statements and press release  Corrective disclosure  Amend 33 and 34 Act documents  Shelf and other registration statements, securities offerings  Tax return amendments  Enhanced governance processes  Internal controls enhancement  Notification of regulators (SEC and Exchange)  Revising practices

Page 19 Best Practices  Correctly date option grants  Grant options at in person or telephonic meetings, as opposed to by unanimous written consent  Consider granting options on a pre- established fixed grant date schedule (quarterly, annually, etc.)

Page 20 Best Practices  Avoid grant delegations  Fully document all grants contemporaneously with the actual grant  Do not grant “discounted” options that have an exercise price less than the fair market value of the underlying common stock

Page 21 Best Practices  Identify lines of responsibility among those involved in administering option grants – (Manual)  Consider designating one or two employees (in the finance area) with responsibility for overseeing and monitoring the documentation and grant process

Page 22 Best Practices  Know and adhere to the requirements of the option plans, board and committee charters, employment agreements and procedural requirements  Avoid committees of one!  Keep current on the technical requirements applicable to options, including accounting, tax, disclosure, SEC and exchange rules  Full and complete disclosure – transparency - Key

Page 23 Final Word  Take Ownership – Instill comfort that something like this will not happen again – Restore Confidence