Disclosure Relating to Issuer Reports to the SC

1. Disclosure Relating to Issuer Reports to the SC Presentation to the ROA Securities Commission

2. Agenda • Purpose of Disclosure • Categories of Disclosure • Primary offerings and the registration process • Secondary trading markets • What is Important to Investors? • Role of the SC Regarding Disclosure • Techniques for reviewing prospectuses • Techniques for reviewing financial statements

3. Purpose of Disclosure • Disclosure promotes market transparency • Disclosure ensures investors have information to make informed investment decisions • Information regarding the issuer • Information regarding the securities • Issuers must disclose any known risks connected with the securities being offered or the issuer itself • Documents should not contain any untrue statement of a material fact • Documents should not omit any material fact to mislead investor

4. Material Fact • Material fact is one that could be expected to have an impact on the market price of the shares of an issuer (see Article 4-- fact...“considered important in making decision on the purchase or sale of security”) • Test of materiality: Would a reasonable person attach importance to the information in determining his or her choice of investment action? • Any facts that affect the probable future of the company and that may affect the desire of investors to buy, sell, or hold the stock of an issuer are material

5. Categories of Disclosure • Primary offerings • Registration requirements for initial public offerings (IPOs) and seasoned offerings • Secondary trading markets • Periodic information • Proxy solicitations • Insider trading reports • Disclosure of material events

6. Securities Exempt from Registration • Government securities • Private placements of securities

7. Disclosure for Secondary Trading Markets • Periodic information • Annual report • Quarterly reports • Material events • Mergers and acquisitions • Stock splits/dividends • Earnings/dividends of unusual nature • Acquisition or loss of significant contract • Significant new product or discovery • Change in control/management • Purchase, sale, or loss of significant asset • Significant labor dispute • Significant lawsuit against company and/or management/supervisors • Offer to purchase securities of another company • Change of company’s auditor • Change of fiscal year

8. Information about the issuer What does it do? Financial status Management Business plan Company’s obligations Competitive position Suppliers and market Dependency on particular customers Legal rights to properties Rights of securities (good title, readily transferable) Purpose of offering Risk factors Who controls blocks of stock? How are minority shareholders protected? Dilution Mergers Extraordinary transactions Preemptive rights What is Important to Investors?

9. Liability for Failure to Disclose • Primary responsibility for disclosure rests with the issuer ( see Article 4, A Reporting Issuer definition) • However, lawyers, accountants, underwriters, and other professionals can also be held responsible for failure to disclose material facts (also see Article 142) • These groups need to perform “due diligence” of the issuer and its disclosure statements to ascertain that all material facts are disclosed properly

10. Role of the SC Regarding Disclosure • Ensure the applicable standards of disclosure are satisfied • Does NOT evaluate relative merits of the issuer or its securities • Can impose penalties on issuers that do not adequately disclose all material facts

11. Techniques for Reviewing Financial Statements • Balance Sheet • Income Statement • Cash Flow Statement

12. Assets Cash Accounts Receivable Inventory Total Current Assets TOTAL ASSETS Liabilities and Equity Liabilities Accounts Payable Short-Term Debt Total Current Liabilities Long-Term Debt TOTAL LIABILITIES Shareholders’ Equity Paid in Capital Retained Earnings TOTAL LIABILITIES AND EQUITY Total Liabilities Total Assets Owners’ Equity Balance Sheet Structure A = L +OE

13. Example Balance Sheet (IAS) (as of December 31, 1998) ASSETS LIABILITIES & EQUITY LIABILITIES Cash 25 Accounts Payable 20 Accounts Receivable 30 Short-term Debt 30 Inventories 35 Total Current Assets 90 Total Current Liabilities 50 Total Long-term Debt 47 Gross Fixed Assets 115 Less Accum Depreciation 47 Net Fixed Assets 68 TOTAL LIABILITIES 97 SHAREHOLDER'S EQUITY Paid in Capital 30 Retained Earnings 31 TOTAL EQUITY 61 TOTAL ASSETS 158 TOTAL LIABILITY & EQUITY 158

14. Example Income Statement (IAS) (January 1- December 31, 1998) REVENUES 220 Materials 54 Direct Labor 44 Depreciation 12 Cost of Goods Sold 110 GROSS PROFIT 110 Sales Expenses 30 General & Administrative 30 Subtotal60 OPERATING PROFIT 50 Interest Expense 15 PROFIT BEFORE TAX 35 Tax (@40%) 14 NET INCOME 21

15. Accrual vs. Cash Basis of Accounting Cash Basis - recognizes revenues when cash is received and reports expenses when paid Accrual Basis - recognizes revenues when they are earned and matches expenses to those revenues in the period accrued - Basis for IAS • Adjusting Entries - made at end of accounting period recognizing earned revenues or incurred expenses while updating the related liability and asset accounts • Expenses - accrue salary expenses, recognize depreciation expenses and prepaid expenses etc. • Revenues - accrue interest income, prepaid rental income etc.

16. R - E = NI Expenses Revenues Net Income Income Statement Structure Revenues - Cost of goods sold = Gross Profit - Operating Expenses = Operating Profit - Interest Expense = Income Before Taxes - Corporate Tax = Net Income

17. Balance Sheet at the beginning of the year Balance Sheet at the end of the year Liabilities Liabilities Assets Capital Stock Assets Capital Stock Retained Earnings Retained Earnings Income Statement Revenues Expenses Net Income Dividends Change in retained earnings Relationship Between Balance Sheet and Income Statement

18. Balance Sheet Limitations • Items are listed at historical costs, NOT market value • Effects of inflation are not accurately reflected • Non-quantifiable assets are not reflected • Strong management • Established reputation • Community involvement

19. Income Statement Limitations • Does NOT indicate which products or divisions are generating profit • Does NOT indicate how much cash was generated • Does NOT look at how much cash was invested to generate the profit • Does NOT identify the flow of cash in the business

20. Cash Flow • Cash flow provides resources for • paying suppliers • paying employees • making capital expenditures • repaying debts and paying dividends • Lack of cash • illiquidity - company unable to meet financial commitments as they come due (chronic or temporary?) • insolvency - liabilities are greater than the realizable value of the assets • bankruptcy - a legal term

21. Why Cash Flow Information is Important • Can help creditors determine ability to pay debts and interest • Evaluate company’s ability to meet unexpected obligations • Cash flow information is used by decision makers outside as well as inside the firm to evaluate a company’s ability to take advantage of new business opportunities • Managers within a company use cash flow information to plan day-to-day operating activities and make long-term investment decisions

22. Definition of Cash Flow Net Income + Depreciation - Capital Investment + Change in Working Capital = Cash Flow Working Capital = Current Assets - Current Liabilities Cash Flow is calculated over a period of time using balance sheets and income statement

23. Example Cash Flow Statement (Direct Method) FROM OPERATIONS Cash received from customers 43 Cash paid for raw materials (10) Cash paid for salaries (10) Cash paid for interest & taxes (5) Cash Flow from Operating Activities 18 FROM INVESTMENT Purchase of New Assets (15) Cash Flow from Investing Activities (15) FROM FINANCING Cash received from issuing stock 10 Cash paid to retire bonds (5) Cash Flow from Financing Activities 5_ NET CHANGE IN CASH 8 Cash balance at beginning of 1999 10 Cash balance at end of 1999 18

24. Example Cash Flow Statement (Indirect Method) FROM OPERATIONS Net Income 21 Adjustments to reconcile Net Income to net cash provided by operating activities: Depreciation 12 Increase in Accounts Receivable (10) Increase in Inventories (10) Decrease in Accounts Payable 5 Cash Flow from Operating Activities 18 FROM INVESTMENT Purchase of New Assets (15) Cash Flow from Investing Activities (15) FROM FINANCING Cash received from issuing stock 10 Cash paid to retire bonds (5) Cash Flow from Financing Activities 5_ NET CHANGE IN CASH 8 Cash balance at beginning of 1999 10 Cash balance at end of 1999 18

25. Uses of the Statement of Cash Flow • Helps understand sources and uses of cash • Cash from operations is the key • Helps understand investing and financing activities of the company • Does the company generate enough cash to sustain growth?

26. Notes to Financial Statements • Significant Accounting Policies • Accounting Standards (IAS, GAAP) • Accounting for Inventories • Accounting for Depreciation • Investing Activities • Leases • Foreign Exchange • Consolidation • Details of Loans • Unusual Charges and Impact of Accounting Changes • Change in Accounting for Inventories (LIFO - FIFO) • Change in Accounting for Depreciation • Lawsuits

27. Summary • Disclosure helps foster transparent and effective markets by providing investors the information necessary to make informed decisions • Disclosure is essential both at the offering stage, through periodic reporting, and when material events occur • Issuers are responsible for disclosure, but others are also accountable • The SC reviews disclosure statements to ensure the adequacy of the disclosure