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Economy Government & Policy Tax Basics for Investors Asset placement and tax-loss harvesting can reduce the tax burden Neil O'Hara Neil O’Hara has 28+ years of experience in the financial services sector. He is the author of The Fundamentals of Municipal Bonds. Michael J Boyle Reviewed by Michael J Boyle Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics. Katrina Munichiello Fact checked by Katrina Munichiello Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications. In 2011, she became editor of World Tea News, a weekly newsletter for the U.S. tea trade. In 2013, she was hired as senior editor to assist in the transformation of Tea Magazine from a small quarterly publication to a nationally distributed monthly magazine. Katrina also served as a copy editor at Cloth, Paper, Scissors and as a proofreader for Applewood Books. Since 2015 she has worked as a fact-checker for America's Test Kitchen's Cook's Illustrated and Cook's Country magazines. She has published articles in The Boston Globe, Yankee Magazine, and more. In 2011, she published her first book, A Tea Reader: Living Life One Cup at a Time (Tuttle). Before working as an editor, she earned a Master of Public Health degree in health services and worked in non-profit administration. Tax-Efficient Investing: A Beginner's Guide Explore The Guide Investment Tax Basics Tax Tips for the Investor Capital Gains and Taxes Long and Short Tax Rates Tax Considerations By Account How Is a Roth 401(k) Taxed? 401(k) Rollovers Taxes on Mutual Funds Converting to a Roth IRA Tax-Deferred vs. Tax-Exempt Tax-Deferred Savings Plan Non Tax-Deferred Retirement Accounts Tax-Exempt Sector Smart Investing Strategies Tax-Savvy Investment Strategies Tax-Loss Harvesting Annual Tax-Loss Harvesting Withdrawal Considerations Maximize Retirement Plan Withdrawals Avoid Overpaying Taxes IRA Withdrawal Taxes Tax on Dividends Tax on Interest Tax on Capital Gains Tax Losses and Wash Sales Investors need to understand that the federal government taxes not only investment income—dividends, interest, and rent on real estate—but also realized capital gains. When calculating capital gains taxes, the holding period matters. Long-term investments are subject to lower tax rates. The tax rate on long-term (more than one year) gains is 0%, 15%, or 20%, depending on taxable income and filing status. Interest income from investments is usually treated like ordinary income for federal tax purposes. Companies pay dividends out of after-tax profits, which means the taxman has already taken a cut. That’s why shareholders get a break—a preferential maximum tax rate of 20% on “qualified dividends” if the company is domiciled in the U.S. or in a country that has a double-taxation treaty with the U.S. acceptable to the IRS. Non-qualified dividends paid by other foreign companies or entities that receive non-qualified income (a dividend paid from interest on bonds held by a mutual fund, for instance) are taxed at regular income tax rates, which are typically higher. Shareholders benefit from the preferential tax rate only if they have held shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date, according to the Internal Revenue Service. In addition, any days on which the shareholder's risk of loss is diminished (through a put option, a sale of the same stock short against the box, or the sale of most in-the-money call options, for example) do not count toward the minimum holding period. For instance, an investor who pays federal income tax at a marginal 35% rate and receives a qualified $500 dividend on a stock owned in a taxable account for several years owes up to $100 in tax. If the dividend is non-qualified or the investor did not meet the minimum holding period, the tax is $175. Investors can reduce the tax bite if they hold assets, such as foreign stocks and taxable bond mutual funds, in a tax-deferred account like an IRA or 401(k) and keep domestic stocks in their regular brokerage account. What Are Qualified Dividends? The federal government treats most interest as ordinary income subject to tax at whatever marginal rate the investor pays. Even zero-coupon bonds don’t escape: Although investors do not receive any cash until maturity with zero-coupon bonds, they must pay tax on the annual interest accrual on these securities, calculated at the yield to maturity at the date of issuance. The exception is interest on bonds issued by U.S. states and municipalities, most of which are exempt from federal income tax. Investors may get a break from state income taxes on interest, too. U.S. Treasury securities, for example, are exempt from state income taxes, while most states do not tax interest on municipal bonds issued by in-state entities. Investors subject to higher tax brackets often prefer to hold municipal bonds rather than other bonds in their taxable accounts. Even though municipalities pay lower nominal interest rates than corporations of equivalent credit quality, the after-tax return to these investors is usually higher on tax-exempt bonds. Let's say an investor who pays federal income tax at a marginal 32% rate and receives $1,000 semi-annual interest on $40,000 principal amount of a 5% corporate bond owes $320 in tax. If that investor receives $800 interest on $40,000 principal amount of a 4% tax-exempt municipal bond, no federal tax is due, leaving the $800 intact. Investors cannot escape taxes by investing indirectly through mutual funds, exchange-traded funds, real estate investment trusts, or limited partnerships. The tax character of their distributions flows through to investors, who are still liable for tax on capital gains when they sell. Uncle Sam’s levy on realized capital gains depends on how long an investor held the security. The tax rate on long-term (more than one year) gains is 0%, 15%, or 20% depending on taxable income and filing status. Just like the holding period for qualified dividends, days do not count if the investor has diminished the risk using options or short sales. Short-term (less than one year of valid holding period) capital gains are taxed at regular income tax rates, which are typically higher. For instance, an investor in the 24% tax bracket sells 100 shares of XYZ stock, purchased at $50 per share, for $80 per share. If they owned the stock more than one year and they fall into the 15% capital gains bracket, the tax owed would be $450 (15% of ($80 - $50) x 100), compared with $720 tax if the holding period is a year or less. Investors can minimize their capital gains tax liability by harvesting tax losses. That is, if one or more stocks in a portfolio drop below an investor’s cost basis, the investor can sell and realize a capital loss for tax purposes. Investors may offset capital gains against capital losses realized either in the same tax year or carried forward from previous years. Individuals may deduct up to $3,000 of net capital losses against other taxable income each year, too. Any losses in excess of the allowance can be used to offset gains in future years. The federal income tax brackets for 2020 and 2021, depending on annual income: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There’s a catch. The IRS treats the sale and repurchase of a “substantially identical” security within 30 days as a “wash sale," for which the capital loss is disallowed in the current tax year. The loss increases the tax basis of the new position instead, deferring the tax consequence until the stock is sold in a transaction that isn’t a wash sale. A substantially identical security includes the same stock, in-the-money call options, or short put options on the same stock—but not stock in another company in the same industry. An investor in the 35% tax bracket, for example, sells 100 shares of XYZ stock, purchased at $60 per share, for $40 per share, realizing a $2,000 loss; that investor also sells 100 shares of ABC stock purchased at $30 per share for $100 per share, realizing a $7,000 gain. Tax is owed on the $5,000 net gain. The rate depends on the holding period for ABC—$750 for a long-term gain (if taxed at 15%) or $1,750 for a short-term gain. If the investor buys back 100 shares of XYZ within 30 days of the original sale, the capital loss on the wash sale is disallowed and the investor owes tax on the full $7,000 gain. Taxes are always changing and can have a significant impact on the net return to investors. Detailed tax rules for dividends—and for capital gains and wash sales—are on the IRS website. Given the complicated nature of these rules, investors should consult their own financial and tax advisors to determine the optimum strategy consistent with their investment objectives and to make sure they are filing their taxes in accordance with regulations. Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 2. Accessed Sept. 24, 2020. Internal Revenue Service. "Publication 550: Investment Income and Expenses," Pages 19-20. Accessed Sept. 24, 2020. Internal Revenue Service. "Topic No. 403: Interest Received." Accessed Sept. 24, 2020. Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 13. Accessed Sept. 24, 2020. Internal Revenue Service. "Topic No. 409: Capital Gains and Losses." Accessed March 25, 2020. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020." Accessed Sept. 24, 2020. Tax-Efficient Investing: A Beginner's Guide Guide Tax Tips for the Individual Investor What You Need to Know About Capital Gains and Taxes Long-Term vs. Short-Term Capital Gains: What's the Difference? 401(k) Rollovers: The Tax Implications Our Best Tips for Determining Taxes on Mutual Funds How Converting to a Roth IRA Can Affect Your Taxes What Is a Tax-Deferred Savings Plan? Not All Retirement Accounts Should Be Tax-Deferred What Is the Tax-Exempt Sector? Tax-Savvy Investment Strategies for Retirement Accounts Minimize Taxes With Asset Location How to Use Tax-Loss Harvesting to Improve Your Returns The Pros and Cons of Annual Tax-Loss Harvesting Top Tips for Maximizing Retirement Withdrawals Are 401(k) Withdrawals Considered Income? How Much Are Taxes on an IRA Withdrawal? How Tax Lots Help You Pay Less to the IRS Tax Laws & Regulations Capital Gains Tax 101 Strategies for Protecting Your Income From Taxes How Capital Gains and Dividends Are Taxed Differently How ETF Dividends Are Taxed What Is a Qualified Dividend? A qualified dividend is a type of dividend subject to capital gains tax rates that are lower than the income tax rates applied to ordinary dividends. How Your Tax Rate Really Works A tax rate is the percentage at which an individual or corporation is taxed. A progressive tax rate imposes higher payments as income increases. What Is Capital Gain? A capital gain refers to the increase in a capital asset's value and is considered to be realized when the asset is sold. The Capital Gains Tax and How to Calculate It A capital gains tax is a levy on the profit that an investor makes from the sale of an investment such as stock shares. Here's how to calculate it. Wash-Sale Rule: Stopping Taxpayers From Claiming Artificial Losses The wash-sale rule is a regulation that prohibits a taxpayer from claiming a loss on the sale and repurchase of identical stock. Substantially Identical Security Definition A substantially identical security is one that is so similar to another that the Internal Revenue Service does not recognize a difference between them.

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professional_accounting

-1,325.69 (-3.69%) Harsco Corporation Reports Third Quarter 2020 Results Harsco Corporation November 3, 2020, 7:00 AM ·20 min read Third Quarter Revenues Increased 14 Percent From The Second Quarter To $509 Million As COVID-19 Business Impacts Began To Ease; Revenues Increased 20 Percent From Prior Year Third Quarter Due Mainly To ESOL Acquisition Third Quarter GAAP Operating Income Of $5 Million And GAAP Diluted Loss Per Share Of $0.10 Including Planned ESOL Integration Expenditures Q3 Adjusted Earnings Per Share of $0.08 Adjusted Q3 EBITDA Of $59 Million Net Cash Provided By Operating Activities Of $21 Million And Free Cash Flow Increased To $18 Million In Q3 As A Result Of Capital Spending Discipline And Working Capital Initiatives Q4 Adjusted EBITDA Anticipated To Be Between $58 Million To $63 Million; Q4 Free Cash Flow Expected To Be Between $20 Million And $25 Million CAMP HILL, Pa., Nov. 03, 2020 (GLOBE NEWSWIRE) -- Harsco Corporation (NYSE: HSC) today reported third quarter 2020 results. On a U.S. GAAP ("GAAP") basis, third quarter of 2020 diluted loss per share from continuing operations was $0.10 including acquisition integration costs. Adjusted diluted earnings per share from continuing operations in the third quarter of 2020 was $0.08. These figures compare with third quarter of 2019 GAAP diluted earnings per share from continuing operations of $0.22 and adjusted diluted earnings per share from continuing operations of $0.36. GAAP operating income from continuing operations for the third quarter of 2020 was $5 million, while adjusted EBITDA excluding unusual items totaled $59 million in the quarter. Underlying market fundamentals within Harsco Environmental and Clean Earth steadily improved during the quarter and our businesses continued to execute well, said Chairman and CEO Nick Grasberger. In recent months, we also have made strong progress on our key initiatives, including our focus on preserving financial flexibility and integrating ESOL. With respect to ESOL, during the third quarter we began executing on major improvement initiatives to strengthen operational and commercial performance, after spending our initial 100-days focused on foundation-building integration. We're confident these actions will enable us to achieve our long-term financial goals at ESOL. Looking forward, while we expect business conditions to continue improving in the fourth quarter, our visibility remains limited and the economic environment remains fluid. In this context, we continue to focus on factors within our control, including the safety and well-being of our employees and operational excellence in all functions of our business, as well as ongoing cost and capital-spending management to preserve our financial flexibility. We believe these actions will position us to continue our progress towards becoming a single-thesis environmental solutions company and to capitalize on growth opportunities as the global economy recovers. Harsco CorporationSelected Third Quarter Results ($ in millions, except per share amounts) Operating income from continuing operations - GAAP Diluted EPS from continuing operations - GAAP Adjusted EBITDA - excluding unusual items Adjusted EBITDA margin - excluding unusual items Adjusted diluted EPS from continuing operations - excluding unusual items Note: Adjusted earnings per share and adjusted EBITDA details presented throughout this release are adjusted for unusual items; in addition, adjusted earnings per share details are adjusted for acquisition-related amortization expense. Consolidated Third Quarter Operating Results Consolidated total revenues from continuing operations were $509 million, an increase of 20 percent compared with the prior-year quarter due to the acquisition of ESOL in April, 2020 and higher revenues in the Rail segment. Foreign currency translation impacts on third quarter 2020 revenues were nominal compared with the prior-year period. GAAP operating income from continuing operations was $5 million for the third quarter of 2020, compared with $47 million in the same quarter of last year. Meanwhile, adjusted EBITDA totaled $59 million in the third quarter of 2020 versus $87 million in the third quarter of 2019. This EBITDA change is attributable to COVID-19 impacts in each business segment, partially offset by ESOL contributions following its acquisition earlier in 2020. Third Quarter Business Review ($ in millions) Operating income - GAAP Environmental revenues totaled $223 million in the third quarter of 2020, compared with $261 million in the prior-year quarter. The segment's GAAP operating income and adjusted EBITDA totaled $12 million and $40 million, respectively, in the third quarter of 2020. These figures compare with GAAP operating income of $33 million and adjusted EBITDA of $60 million in the prior-year period. The change in the segment's adjusted EBITDA relative to the prior-year quarter is principally attributable to lower demand for environmental services and applied products as a result of COVID-19. Environmental's adjusted EBITDA margin was 17.9 percent in the third quarter of 2020. Clean Earth Note: The 2019 financial information provided above and discussed below for Clean Earth does not include a corporate cost allocation and does not include ESOL. Clean Earth revenues totaled $194 million in the third quarter of 2020, compared with $88 million in the prior-year quarter. Segment operating income was $9 million and adjusted EBITDA totaled $20 million in the third quarter of 2020. These figures compare with $11 million and $19 million, respectively, in the prior-year period. The increase in revenues and adjusted EBITDA is attributable to the ESOL acquisition in the second quarter of 2020 and higher contributions from dredged material processing, partially offset by lower demand for hazardous and contaminated materials services as a result of the COVID-19 pandemic. Rail revenues increased 24 percent compared with the prior-year quarter to $93 million. This change reflects higher equipment sales including revenues from long-duration supply contracts. The segment's operating income and adjusted EBITDA totaled $4 million and $5 million, respectively, in the third quarter of 2020. These figures compare with operating income of $12 million and adjusted EBITDA of $14 million in the prior-year quarter. The EBITDA change year-on-year is attributable to a less favorable product mix and lower aftermarket parts and technology product volumes. Net cash provided by operating activities totaled $21 million in the third quarter of 2020, compared with net cash provided by operating activities of $45 million in the prior-year period. Free cash flow was $18 million (before transaction expenses) in the third quarter of 2020, compared with $5 million in the prior-year period. The improvement in free cash flow compared with the prior-year quarter is attributable to changes in net cash from operating activities, including cash generated from working capital, and lower capital expenditures. Fourth Quarter Outlook Underlying business conditions improved during the third quarter. However, the improvement realized was uneven and the pace of recovery varied within relevant end-markets. Fundamental improvement was most apparent within Harsco Environmental and Clean Earth and we expect these positive trends to continue in the fourth quarter. Meanwhile, Rail has yet to see a positive inflection as customers, particularly in North America, continue to defer capital spending as a result of pandemic-related pressures within the freight and passenger rail market. In total, the Company anticipates that its adjusted EBITDA in the fourth quarter will modestly improve, at the mid-point of guidance, versus the just-completed quarter. Specifically, Harsco expects its Q4 EBITDA to be within a range of $58 million to $63 million. This outlook also assumes that Corporate spending will be modestly higher in the fourth quarter compared with Q3 due to the timing of certain expenses. Additionally, measures implemented earlier in 2020 to control costs remain in place and the Company is mindful that further cost actions may be necessary if the pace of economic recovery slows. The Company is also maintaining its capital spending and working capital discipline to support positive free cash flow. These ongoing actions are expected to enable Harsco to generate free cash flow of $20 million to $25 million in the final quarter of the year. Lastly, this outlook is subject to certain risks related to COVID-19 and other factors and it assumes that any such factors will not alter the ongoing recovery in the fourth quarter. The Company will hold a conference call today at 9:00 a.m. Eastern Time to discuss its results and respond to questions from the investment community. The conference call will be broadcast live through the Harsco Corporation website at www.harsco.com . The Company will refer to a slide presentation that accompanies its formal remarks. The slide presentation will be available on the Companys website. The call can also be accessed by telephone by dialing (844) 467-8153 or (270) 855-8732. Enter Conference ID number 7674605. Listeners are advised to dial in at least five minutes prior to the call. The nature of the Company's business, together with the number of countries in which it operates, subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In accordance with the "safe harbor" provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, the Company provides the following cautionary remarks regarding important factors that, among others, could cause future results to differ materially from the results contemplated by forward-looking statements, including the expectations and assumptions expressed or implied herein. Forward-looking statements contained herein could include, among other things, statements about management's confidence in and strategies for performance; expectations for new and existing products, technologies and opportunities; and expectations regarding growth, sales, cash flows, and earnings. Forward-looking statements can be identified by the use of such terms as "may," "could," "expect," "anticipate," "intend," "believe," "likely," "estimate," "plan" or other comparable terms. Factors that could cause actual results to differ, perhaps materially, from those implied by forward-looking statements include, but are not limited to: (1) changes in the worldwide business environment in which the Company operates, including changes in general economic conditions or changes due to COVID-19 and governmental and market reactions to COVID-19; (2) changes in currency exchange rates, interest rates, commodity and fuel costs and capital costs; (3) changes in the performance of equity and bond markets that could affect, among other things, the valuation of the assets in the Company's pension plans and the accounting for pension assets, liabilities and expenses; (4) changes in governmental laws and regulations, including environmental, occupational health and safety, tax and import tariff standards and amounts; (5) market and competitive changes, including pricing pressures, market demand and acceptance for new products, services and technologies; (6) the Company's inability or failure to protect its intellectual property rights from infringement in one or more of the many countries in which the Company operates; (7) failure to effectively prevent, detect or recover from breaches in the Company's cybersecurity infrastructure; (8) unforeseen business disruptions in one or more of the many countries in which the Company operates due to political instability, civil disobedience, armed hostilities, public health issues or other calamities; (9) disruptions associated with labor disputes and increased operating costs associated with union organization; (10) the seasonal nature of the Company's business; (11) the Company's ability to successfully enter into new contracts and complete new acquisitions or strategic ventures in the time-frame contemplated, or at all; (12) the integration of the Company's strategic acquisitions; (13) potential severe volatility in the capital markets; (14) failure to retain key management and employees; (15) the amount and timing of repurchases of the Company's common stock, if any; (16) the outcome of any disputes with customers, contractors and subcontractors; (17) the financial condition of the Company's customers, including the ability of customers (especially those that may be highly leveraged, have inadequate liquidity or whose business is significantly impacted by COVID-19) to maintain their credit availability; (18) implementation of environmental remediation matters; (19) risk and uncertainty associated with intangible assets and (20) other risk factors listed from time to time in the Company's SEC reports. A further discussion of these, along with other potential risk factors, can be found in Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, together with those described in Item 1A, "Risk Factors," of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2020. The Company cautions that these factors may not be exhaustive and that many of these factors are beyond the Company's ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty to update forward-looking statements except as may be required by law. About Harsco Harsco Corporation is a global market leader providing environmental solutions for industrial and specialty waste streams and innovative technologies for the rail sector. Based in Camp Hill, PA, the 13,000-employee company operates in more than 30 countries. Harscos common stock is a component of the S&P SmallCap 600 Index and the Russell 2000 Index. Additional information can be found at www.harsco.com CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Revenues from continuing operations: Service revenues Product revenues Costs and expenses from continuing operations: Cost of services sold Cost of products sold Other expenses, net Total costs and expenses Operating income from continuing operations Unused debt commitment and amendment fees Defined benefit pension income (expense) Income (loss) from continuing operations before income taxes and equity income Income tax benefit (expense) Equity income of unconsolidated entities, net Income (loss) from continuing operations Discontinued operations: Gain on sale of discontinued business Income (loss) from discontinued businesses Income tax expense related to discontinued businesses Income (loss) from discontinued operations Less: Net income attributable to noncontrolling interests Net income (loss) attributable to Harsco Corporation Amounts attributable to Harsco Corporation common stockholders: Income (loss) from continuing operations, net of tax Income (loss) from discontinued operations, net of tax Net income (loss) attributable to Harsco Corporation common stockholders Weighted-average shares of common stock outstanding Basic earnings (loss) per common share attributable to Harsco Corporation common stockholders: Continuing operations Basic earnings (loss) per share attributable to Harsco Corporation common stockholders Diluted weighted-average shares of common stock outstanding Diluted earnings (loss) per common share attributable to Harsco Corporation common stockholders: Diluted earnings (loss) per share attributable to Harsco Corporation common stockholders (a) Does not total due to rounding. CONSOLIDATED BALANCE SHEETS (Unaudited ) Trade accounts receivable, net Other receivables Current portion of contract assets Current portion of assets held-for-sale Right-of-use assets, net Deferred income tax assets Assets held-for-sale Current maturities of long-term debt Accrued compensation Insurance liabilities Current portion of advances on contracts Current portion of operating lease liabilities Current portion of liabilities of assets held-for-sale Retirement plan liabilities Advances on contracts Operating lease liabilities Liabilities of assets held-for-sale HARSCO CORPORATION STOCKHOLDERS EQUITY Total Harsco Corporation stockholders equity Noncontrolling interests Total liabilities and equity CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited ) Three Months Ended September 30 Nine Months Ended September 30 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in income of unconsolidated entities, net Dividends from unconsolidated entities Gain on sale from discontinued business Loss on early extinguishment of debt Changes in assets and liabilities, net of acquisitions and dispositions of businesses: Income tax refunds receivable Contract assets Right-of-use assets Accrued interest payable Retirement plan liabilities, net Income taxes payable - Gain on sale of discontinued businesses Other assets and liabilities Purchase of businesses, net of cash acquired Proceeds from sale of business, net Proceeds from sales of assets Expenditures for intangible assets Net proceeds (payments) from settlement of foreign currency forward exchange contracts Payments for interest rate swap terminations Other investing activities, net Short-term borrowings, net Current maturities and long-term debt: Dividends paid to noncontrolling interests Sale of noncontrolling interests Common stock acquired for treasury Stock-based compensation - Employee taxes paid Payment of contingent consideration Other financing activities, net Effect of exchange rate changes on cash and cash equivalents, including restricted cash Net increase (decrease) in cash and cash equivalents, including restricted cash Cash and cash equivalents, including restricted cash, at beginning of period Cash and cash equivalents, including restricted cash, at end of period REVIEW OF OPERATIONS BY SEGMENT (Unaudited) September 30, 2020 (b) Income (Loss) Operating Income (Loss) Harsco Environmental Harsco Clean Earth (a) Harsco Rail Consolidated Totals Harsco Rail 252,974 19,162 224,783 26,947 Corporate — (58,694 ) — (38,755 ) Consolidated Totals $ 1,355,520 $ 9,813 $ 1,103,955 $ 84,368 The Company's acquisition of ESOL closed on April 6, 2020 and the Company's acquisition of Clean Earth closed on June 28, 2019. The operating results of the former Harsco Industrial Segment have been reflected as discontinued operations in the Company's Consolidated Statement of Operations for all periods presented. RECONCILIATION OF ADJUSTED DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS TO DILUTED EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS AS REPORTED (Unaudited) Diluted earnings (loss) per share from continuing operations as reported Corporate acquisition and integration costs (a) Harsco Environmental Segment severance costs (b) Corporate contingent consideration adjustments (c) Corporate unused debt commitment and amendment fees (d) Harsco Clean Earth Segment integration costs (e) Harsco Environmental Segment provision for doubtful accounts (f) Harsco Rail Segment improvement initiative costs (g) Harsco Environmental Segment contingent consideration adjustments (h) Harsco Environmental Segment site exit related (i) Harsco Clean Earth Segment severance costs (j) Deferred tax asset valuation allowance adjustment (k) Corporate acquisition related tax benefit (l) Taxes on above unusual items (m) Adjusted diluted earnings per share from continuing operations, including acquisition amortization expense Acquisition amortization expense, net of tax (n) Adjusted diluted earnings per share from continuing operations Costs at Corporate associated with supporting and executing the Company's growth strategy (Q3 2020 $10.6 million pre-tax; nine months 2020 $41.6 million pre-tax; Q3 2019 $2.7 million pre-tax; nine months 2019 $17.9 million pre-tax). Harsco Environmental Segment severance costs (nine months 2020 $5.2 million pre-tax). Adjustment to contingent consideration related to the acquisition of Clean Earth recorded on Corporate (Q3 and nine months 2020 $2.4 million pre-tax). The Company adjusts operating income and Diluted earnings per share from continuing operations to exclude the impact of the change in fair value to the acquisition-related contingent consideration liability for acquisitions because it believes that the adjustment for this item more closely correlates the reported financial measures with the ordinary and ongoing course of the Company's operations. Costs at Corporate associated with amending the Company's existing Senior Secured Credit Facilities to increase the net debt to consolidated adjusted EBITDA ratio covenant (nine months 2020 $1.9 million pre-tax) and costs at Corporate related to the unused bridge financing commitment and Term Loan B amendment (nine months 2019 $7.4 million pre-tax). Costs incurred in the Harsco Clean Earth Segment related to the integration of ESOL (Q3 and nine months 2020 $0.1 million, pre-tax). Harsco Environmental Segment provision for doubtful accounts related to a customer in the U.K. entering administration (Q3 2019 $0.8 million and nine months 2019 $6.2 million pre-tax). Costs associated with a productivity improvement initiative in the Harsco Rail Segment (Q3 2019 $0.8 million pre-tax; nine months 2019 $4.6 million pre-tax). Fair value adjustment to contingent consideration liability related to the acquisition of Altek (Q3 2019 $0.9 million pre-tax; nine months $4.4 million pre-tax). The Company adjusts operating income and Diluted earnings per share from continuing operations to exclude the impact of the change in fair value to the acquisition-related contingent consideration liability for acquisitions because it believes that the adjustment for this item more closely correlates the reported financial measures with the ordinary and ongoing course of the Company's operations. Harsco Environmental Segment site exit related (Q3 2019 $0.2 million pre-tax; nine months 2019 $2.4 million pre-tax). Harsco Clean Earth Segment severance recognized (Q3 and nine month 2019 $1.3 million pre-tax). Adjustment of certain existing deferred tax asset valuation allowances as a result of a site exit in a certain jurisdiction in 2019 (Q3 and nine months 2019 $2.8 million). Acquisition related tax benefit recorded on Corporate assumed as part of the Clean Earth Acquisition (Q3 and nine months 2020 $2.8 million). Unusual items are tax-effected at the global effective tax rate, before discrete items, in effect at the time the unusual item is recorded, except for unusual items from countries where no tax benefit can be realized, in which case a zero percent tax rate is used. Acquisition amortization expense was $8.3 million pre-tax and $22.5 million pre-tax for Q3 and nine months 2020, respectively; and $5.7 million pre-tax and $9.5 million pre-tax for Q3 and nine months 2019, respectively. Does not total due to rounding. The Company’s management believes Adjusted diluted earnings per share from continuing operations, which is a non-GAAP financial measure, is useful to investors because it provides an overall understanding of the Company’s historical and future prospects. Exclusion of unusual items permits evaluation and comparison of results for the Company’s core business operations, and it is on this basis that management internally assesses the Company’s performance. Exclusion of acquisition-related intangible asset amortization expense, the amount of which can vary by the timing, size and nature of the Company’s acquisitions, facilitates more consistent internal comparisons of operating results over time between the Company’s newly acquired and long-held businesses, and comparisons with both acquisitive and non-acquisitive peer companies. It is important to note that such intangible assets contribute to revenue generation and that intangible asset amortization related to past acquisitions will recur in future periods until such intangible assets have been fully amortized. This measure should be considered in addition to, rather than as a substitute for, other information provided in accordance with GAAP. RECONCILIATION OF ADJUSTED DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS TO DILUTED LOSS PER SHARE FROM CONTINUING OPERATIONS AS REPORTED (Unaudited) Diluted loss per share from continuing operations as reported Corporate unused debt commitment and amendment fees (b) Taxes on above unusual items (c) Acquisition amortization expense, net of tax (d) Costs at Corporate associated with supporting and executing the Company's growth strategy (Q2 2020 $17.2 million pre-tax). Costs at Corporate associated with amending the Company's existing Senior Secured Credit Facilities to increase the net debt to consolidated adjusted EBITDA ratio covenant (Q2 2020 $1.4 million pre-tax). Acquisition amortization expense was $8.4 million pre-tax for Q2 2020. RECONCILIATION OF ADJUSTED EBITDA BY SEGMENT TO OPERATING INCOME (LOSS) AS REPORTED BY SEGMENT (Unaudited) Harsco Harsco Clean Earth (a) Three Months Ended September 30, 2020: Operating income (loss) as reported Corporate acquisition and integration costs Corporate contingent consideration adjustments Harsco Clean Earth Segment integration costs Operating income (loss) excluding unusual items Revenues as reported Adjusted EBITDA margin (%) Harsco Clean Earth Segment severance costs Harsco Environmental Segment contingent consideration adjustments Harsco Rail Segment improvement initiative costs Harsco Environmental Segment provision for doubtful accounts Harsco Environmental Segment site exit related (a) The Company's acquisition of ESOL closed on April 6, 2020 and the Company's acquisition of Clean Earth closed on June 28, 2019. Consolidated Adjusted EBITDA is a non-GAAP financial measure and consists of income from continuing operations adjusted to add back income tax expense; equity income of unconsolidated entities, net; net interest; defined benefit pension income (expense); unused debt commitment and amendment fees; and depreciation and amortization (excluding amortization of deferred financing costs); and excludes unusual items. Segment Adjusted EBITDA consists of operating income from continuing operations adjusted to exclude unusual items and add back depreciation and amortization (excluding amortization of deferred financing costs). The sum of the Segments’ Adjusted EBITDA equals consolidated Adjusted EBITDA. The Company‘s management believes Adjusted EBITDA is meaningful to investors because management reviews Adjusted EBITDA in assessing and evaluating performance. However, this measure should be considered in addition to, rather than as a substitute for, net income from continuing operations, operating income from continuing operations and other information provided in accordance with GAAP. The Company's method of calculating Adjusted EBITDA may differ from methods used by other companies and, as a result, Adjusted EBITDA may not be comparable to other similarly titled measures disclosed by other companies. Nine Months Ended September 30, 2020: Harsco Environmental Segment severance costs Three Months Ended June 30, 2020: RECONCILIATION OF CONSOLIDATED ADJUSTED EBITDA TO CONSOLIDATED LOSS FROM CONTINUING OPERATIONS AS REPORTED (Unaudited) Consolidated loss from continuing operations Add back (deduct): Defined benefit pension income Unusual items: Clean Earth Segment integration costs Consolidated Adjusted EBITDA RECONCILIATION OF PROJECTED CONSOLIDATED ADJUSTED EBITDA TO PROJECTED CONSOLIDATED INCOME FROM CONTINUING OPERATIONS Three Months Ending Consolidated income from continuing operations Add back: Net interest RECONCILIATION OF FREE CASH FLOW TO NET CASH PROVIDED BY OPERATING ACTIVITIES (Unaudited) Less capital expenditures Less expenditures for intangible assets Plus capital expenditures for strategic ventures (a) Plus total proceeds from sales of assets (b) Plus transaction-related expenditures (c) Plus taxes paid on sale of divested businesses (d) Capital expenditures for strategic ventures represent the partner’s share of capital expenditures in certain ventures consolidated in the Company’s financial statements. Asset sales are a normal part of the business model, primarily for the Harsco Environmental Segment. Expenditures directly related to the Company's acquisition and divestiture transactions. Income taxes paid on gains on the sale of discontinued businesses. The Company's management believes that Free cash flow, which is a non-GAAP financial measure, is meaningful to investors because management reviews cash flows generated from operations less capital expenditures net of asset sales proceeds and transaction-related expenditures and income taxes for planning and performance evaluation purposes. It is important to note that free cash flow does not represent the total residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements and settlements of foreign currency forward exchange contracts, are not deducted from this measure. This measure should be considered in addition to, rather than as a substitute for, other information provided in accordance with GAAP. RECONCILIATION OF PROJECTED FREE CASH FLOW TO PROJECTED NET CASH PROVIDED BY OPERATING ACTIVITIES (Unaudited) Plus total proceeds from asset sales and capital expenditures for strategic ventures [email protected] Jay Cooney [email protected] Global Stock Fund With 41% Gain Makes Climate Top Priority (Bloomberg) -- Wealthy investo

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professional_accounting

NuVasive Announces Third Quarter 2020 Financial Results SAN DIEGO, Oct. 29, 2020 /PRNewswire/ -- NuVasive, Inc. (NASDAQ: NUVA), the leader in spine technology innovation, focused on transforming spine surgery with minimally disruptive, procedurally integrated solutions, today announced financial results for the quarter ended September 30, 2020. Third Quarter 2020 Highlights Net sales increased 1.5% to $295.3 million, or 1.2% on a constant currency basis; GAAP operating margin of 9.2%; Non-GAAP operating margin of 15.8%; and "In the third quarter, NuVasive experienced faster-than-anticipated recovery from the impact of COVID-19 with net sales increasing year over year driven by high-single digit growth in our International business and further stability of the US spine market," said J. Christopher Barry, chief executive officer of NuVasive. "The Company remains focused in the fourth quarter on executing against its innovation roadmap, including the launch of our re-designed cervical portfolio, the furthering of our Advanced Materials Science implant portfolio with multiple new implants and executing on key Pulse milestones." A full reconciliation of GAAP to non-GAAP financial measures can be found in the tables of this news release. NuVasive announced in April 2020 that it had withdrawn its annual financial guidance due to the uncertainty related to COVID-19, and is not reinstituting its annual financial guidance for the remainder of the year. Third Quarter 2020 Results NuVasive reported third quarter 2020 total net sales of $295.3 million, a 1.5% increase compared to $290.8 million for the third quarter 2019. On a constant currency basis, third quarter 2020 total net sales increased 1.2% compared to the same period last year. For the third quarter 2020, both GAAP and non-GAAP gross profit was $210.6 million and GAAP and non-GAAP gross margin was 71.3%. These results compared to GAAP and non-GAAP gross profit of $213.8 million and GAAP and non-GAAP gross margin of 73.5%, for the third quarter 2019. The Company reported GAAP net income of $5.9 million, or diluted earnings per share of $0.11, for the third quarter 2020, compared to GAAP net income of $11.0 million, or diluted earnings per share of $0.21, for the third quarter 2019. On a non-GAAP basis, the Company reported net income of $28.3 million, or diluted earnings per share of $0.55, for the third quarter 2020, compared to non-GAAP net income of $30.9 million, or diluted earnings per share of $0.59, for the third quarter 2019. The Company ended the quarter with $982.1 million in cash and cash equivalents, and short term investments. Management uses certain non-GAAP financial measures such as non-GAAP diluted earnings per share, non-GAAP net income, non-GAAP operating expenses and non-GAAP operating margin, which exclude amortization of intangible assets, business transition costs, purchased in-process research and development, one-time restructuring and related items in connection with acquisitions, investments and divestitures, non-recurring consulting fees, certain litigation expenses and settlements, certain European medical device regulation costs, gains and losses from strategic investments, gains and losses from changes in fair value of derivatives and non-cash interest expense (excluding debt issuance cost). Management also uses certain non-GAAP measures which are intended to exclude the impact of foreign exchange currency fluctuations. The measure constant currency utilizes an exchange rate that eliminates fluctuations when calculating financial performance numbers. The Company also uses measures such as free cash flow, which represents cash flow from operations less cash used in the acquisition and disposition of capital. Additionally, the Company uses an adjusted EBITDA measure which represents earnings before interest, taxes, depreciation and amortization and excludes the impact of stock-based compensation, business transition costs, purchased in-process research and development, one-time restructuring and related items in connection with acquisitions, investments and divestitures, non-recurring consulting fees, certain litigation expenses and settlements, certain European medical device regulation costs, gains and losses on strategic investments, gains and losses from changes in fair value of derivatives and other significant one-time items. For the Three Months Ended September 30, 2020 WASO5 Litigation related expenses and settlements1 Business transition costs2 European medical device regulation3 Tax effect of adjustments4 Non-cash stock-based compensation Adjusted non-GAAP diluted WASO excludes the impact of all dilutive securities, including convertible notes for which the Company is economically hedged through its anti-dilutive bond hedge arrangements. For the Nine Months Ended September 30, 2020 Net (Loss) Net (Loss) to $ (38,845) $ (0.76) Purchase of in-process research and development3 Net loss recognized on change in fair value of derivatives5 Represents the net change in fair value of the Company's derivative asset and liability associated with the 2023 Notes. Represents the impact from tax affecting the adjustments above at their statutory tax rate. As of October 30, 2019, the Company estimated an annual tax rate of ~26% on a GAAP basis and ~23% on a non-GAAP basis. NuVasive will hold a conference call today at 4:30 p.m. ET / 1:30 p.m. PT to discuss the results of its financial performance for the third quarter 2020. The dial-in numbers are 1-877-407-9039 for domestic callers and 1-201-689-8470 for international callers. A live webcast of the conference call will be available online from the Investor Relations page of the Company's website at www.nuvasive.com. After the live webcast, the call will remain available on NuVasive's website through November 29, 2020. In addition, a telephone replay of the call will be available until November 5, 2020. The replay dial-in numbers are 1-844-512-2921 for domestic callers and 1-412-317-6671 for international callers. Please use pin number: 13708396. NuVasive, Inc. (NASDAQ: NUVA) is the leader in spine technology innovation, with a mission to transform surgery, advance care and change lives. The Company's less invasive, procedurally integrated surgical solutions are designed to deliver reproducible and clinically proven outcomes. The Company's comprehensive procedural portfolio includes access, implants and fixation systems, biologics, software for surgical planning, navigation and imaging solutions, magnetically adjustable implant systems for spine and orthopedics, and intraoperative monitoring service offerings. With more than $1 billion in net sales, NuVasive has approximately 2,800 employees and operates in more than 50 countries serving surgeons, hospitals and patients. For more information, please visit www.nuvasive.com. NuVasive cautions you that statements included in this news release or made on the investor conference call referenced herein that are not a description of historical facts are forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause NuVasive's results to differ materially from historical results or those expressed or implied by such forward-looking statements. In addition, this news release contains selected financial results from the third quarter 2020. The Company's results for the third quarter 2020 are prior to the completion of review and audit procedures by the Company's external auditors and are subject to adjustment. The potential risks and uncertainties which contribute to the uncertain nature of these statements include, among others, the impact of the COVID-19 pandemic on the Company's business and financial results; the Company's ability to maintain operations to support its customers and patients in the near-term and to capitalize on future growth opportunities; risks associated with acceptance of the Company's surgical products and procedures by spine surgeons and hospitals, development and acceptance of new products or product enhancements, clinical and statistical verification of the benefits achieved via the use of NuVasive's products, the Company's ability to adequately manage inventory as it continues to release new products, its ability to recruit and retain management and key personnel, and the other risks and uncertainties more fully described in the Company's news releases and periodic filings with the Securities and Exchange Commission. NuVasive's public filings with the Securities and Exchange Commission are available at www.sec.gov. NuVasive assumes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made. Three Months Ended September 30, Total net sales Cost of sales (excluding below amortization of intangible assets): Total cost of sales Other income (expense), net Consolidated net income (loss) Net income (loss) per share: Short-term marketable securities Long-term senior convertible notes Redeemable equity component of senior convertible notes Common stock, $0.001 par value; 150,000,000 and 120,000,000 shares authorized at September 30, 2020 and December 31, 2019, respectively; 57,813,261 and 57,524,658 issued and outstanding at September 30, 2020 and December 31, 2019, respectively Treasury stock at cost; 6,540,526 shares and 5,379,536 shares at September 30, 2020 and December 31, 2019, respectively Consolidated net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Net loss recognized on change in fair value of derivatives Purchases of treasury stock Proceeds from issuance of convertible debt, net of issuance costs Proceeds from sale of warrants Purchases of convertible note hedges Increase in cash, cash equivalents and restricted cash View original content to download multimedia:http://www.prnewswire.com/news-releases/nuvasive-announces-third-quarter-2020-financial-results-301163281.html Investors, Suzanne Hatcher, NuVasive, Inc., 858-458-2240, [email protected] or Media, Jessica Tieszen, NuVasive, Inc., 858-736-0364, [email protected]

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professional_accounting

BRAINSTORM CELL THERAPEUTICS INC. - FORM 10-Q - October 17, 2017 EX-32.2 - EXHIBIT 32.2 - BRAINSTORM CELL THERAPEUTICS INC. v475447_ex32-2.htm x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2017 ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number 001-36641 Delaware 20-7273918 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 University Plaza Drive, Suite 320 (Address of principal executive offices) (Zip Code) (Registrant’s telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x As of October 13, 2017, the number of shares outstanding of the registrant’s Common Stock, $0.00005 par value per share, was 18,842,726. Item 1. Financial Statements 3 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Item 4. Controls and Procedures 30 PART II 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31 Item 5. Other Information 31 Item 6. Exhibits 31 EXHIBIT INDEX 32 Item 1. Financial Statements BRAINSTORM CELL THERAPEUTICS INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS U.S. DOLLARS IN THOUSANDS (Except share data and exercise prices) Interim Condensed Consolidated Balance Sheets 5 Interim Condensed Consolidated Statements of Operations 6 Interim Condensed Statements of Changes in Stockholders' Equity 7-8 Interim Condensed Consolidated Statements of Cash Flows 9-10 Notes to Interim Condensed Consolidated Financial Statements 11-23 INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (Except share data) September 30, December 31, U.S. $ in thousands Unaudited Audited Cash and cash equivalents $ 2,464 $ 547 Short-term deposit (Note 4) 8,083 9,443 Account receivable 318 306 Prepaid expenses and other current assets 86 148 Total current assets 10,951 10,444 Long-Term Assets: Prepaid expenses and other long-term assets 26 25 Property and Equipment, Net 358 297 Total Long-Term Assets 384 322 Total assets $ 11,335 $ 10,766 Accounts payables $ 275 $ 345 Accrued expenses 204 152 Deferred grant income (Note 5) 5,250 - Other accounts payable 411 367 Total current liabilities 6,140 864 Stock capital: (Note 6) 11 11 Common stock of $0.00005 par value - Authorized: 100,000,000 shares at September 30, 2017 and December 31, 2016 respectively; Issued and outstanding: 18,842,726 and 18,687,987 shares at September 30, 2017 and December 31, 2016 respectively. Additional paid-in-capital 85,535 85,014 Total stockholders' equity 5,195 9,902 Total liabilities and stockholders' equity $ 11,335 $ 10,766 The accompanying notes are an integral part of the consolidated financial statements. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Nine months ended Three months ended September 30, September 30, Unaudited Unaudited Research and development, net $ 2,544 $ 1,927 $ 1,168 $ 790 General and administrative 2,693 2,506 1,224 848 Operating loss (5,237 ) (4,433 ) (2,392 ) (1,638 ) Financial expense (income), net (9 ) (75 ) 11 (32 ) Net loss $ (5,228 ) $ (4,358 ) $ (2,403 ) $ (1,606 ) Basic and diluted net profit (loss) per share $ (0.28 ) $ (0.23 ) $ (0.13 ) $ (0.09 ) Weighted average number of shares outstanding used in computing basic and diluted net loss per share 18,737,307 18,654,826 18,783,997 18,656,615 INTERIM CONDENSED STATEMENTS OF CHANGES IN EQUITY (AUDITED) Common stock Additional paid-in Accumulated Total stockholders' Number Amount capital deficit equity Balance as of January 1, 2016 18,643,288 $ 11 $ 84,258 $ (70,141 ) $ 14,128 Stock-based compensation related to warrants and stock granted to service providers 36,033 (*) 121 - 121 Stock-based compensation related to stock and options granted to directors and employees 8,666 - 635 - 635 Net loss - - - (4,982 ) (4,982 ) Balance as of December 31, 2016 18,687,987 $ 11 $ 85,014 $ (75,123 ) $ 9,902 * Represents an amount less than $1. INTERIM CONDENSED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) Balance as of January 1, 2017 18,687,987 $ 11 $ 85,014 $ (75,123 ) $ 9,902 Stock-based compensation related to stock and options granted to directors and employees 105,301 (*) 398 - 398 Stock-based compensation related to warrants and stock granted to service providers 4,327 (*) 18 18 Exercise of options 11,777 (*) 30 30 Exercise of warrants 33,334 (*) 75 75 Balance as of September 30, 2017 18,842,726 $ 11 $ 85,535 $ (80,351 ) $ 5,195 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Depreciation 57 55 23 17 Expenses related to shares and options granted to service providers 18 121 18 90 Amortization of deferred stock-based compensation related to options granted to employees and directors 398 636 215 171 Decrease (increase) in accounts receivable and prepaid expenses 50 641 561 1,140 Increase (decrease) in trade payables (70 ) (817 ) 48 (3 ) Deferred grant income 5,250 - 5,250 - Increase (decrease) in other accounts payable and accrued expenses 96 (940 ) 131 (84 ) Total net cash provided by (used in) operating activities $ 571 $ (4,662 ) $ 3,843 $ (275 ) Purchase of property and equipment (118 ) (96 ) (86 ) (11 ) Changes in short-term deposit 1,360 5,289 (7,150 ) 299 Investment in lease deposit (1 ) (4 ) (2 ) (2 ) Total net cash provided by (used in) investing activities $ 1,241 $ 5,189 $ (7,238 ) $ 286 Proceeds from exercise of options 105 - 75 - Total net cash provided by financing activities $ 105 $ - $ 75 $ - Increase (decrease) in cash and cash equivalents 1,917 527 (3,320 ) 11 Cash and cash equivalents at the beginning of the period $ 547 $ 428 5,784 944 Cash and cash equivalents at end of the period $ 2,464 $ 955 $ 2,464 $ 955 Notes to the Interim Condensed Consolidated Financial Statements NOTE 1 - GENERAL A. Brainstorm Cell Therapeutics Inc. (formerly: Golden Hand Resources Inc. - the "Company") was incorporated in the State of Washington on September 22, 2000. The Company currently holds two wholly owned subsidiaries; Brainstorm Cell Therapeutics Ltd. ("BCT"), an Israeli Company which currently conducts all of the research and development activities of the Company, and Brainstorm Cell Therapeutics UK Ltd. (“Brainstorm UK”). Brainstorm UK acts on behalf of the parent Company in the EU. Brainstorm UK is currently inactive. The Common Stock is publicly traded on the NASDAQ Capital Market under the symbol “BCLI”. B. The Company, through BCT, holds rights to commercialize certain stem cell technology developed by Ramot of Tel Aviv University Ltd. ("Ramot") (see Note 3). Using this technology the Company has been developing novel adult stem cell therapies for debilitating neurodegenerative disorders such as Amytrophic Lateral Scelorosis (ALS, also known as Lou Gherig Disease), Multiple Sclerosis (MS) and Parkinson’s disease. The Company developed a proprietary process, called NurOwn, for the propagation of Mesenchymal Stem Cells and their differentiation into neurotrophic factor secreting cells. These cells are then transplanted at or near the site of damage, offering the hope of more effectively treating neurodegenerative diseases. The process is currently autologous, or self-transplanted. C. NurOwn is in clinical development for the treatment of ALS. The Company has completed two single dose clinical trials of NurOwn in Israel, a Phase 1/2 trial with 12 patients and a Phase 2a trial with additional 12 patients. In July 2016 the Company announced the results of its Phase 2 trial which was conducted in three major medical centers in the US. This single dose trial included 48 patients randomized in a 3:1 ratio to receive NuOwn or placebo. Future development of NurOwn for ALS will require additional clinical trials typically required to provide an adequate basis for regulatory approval and product labeling. These additional trials will include the administration of repeated doses to ALS patients enrolled in these trials. D. On September 15, 2014 the Company completed a reverse stock split of the Company’s shares of Common Stock by a ratio 1-for-15. The Company adjusted all ordinary shares, options, warrants, per share data and exercise prices included in these financial statements for all periods presented to reflect the reverse stock split. On August 26, 2015 the shareholders of the Company approved a reduction of the number of authorized shares of Common Stock of the Company from 800,000,000 to 100,000,000. GOING CONCERN: To date the Company has not generated revenues from its activities and has incurred substantial operating losses. Management expects the Company to continue to generate substantial operating losses and to continue to fund its operations primarily through utilization of its current financial resources and through additional raises of capital. Such conditions raise substantial doubts about the Company's ability to continue as a going concern. Management’s plan includes raising funds from outside potential investors. However, there is no assurance such funding will be available to the Company or that it will be obtained on terms favorable to the Company or will provide the Company with sufficient funds to meet its objectives. These financial statements do not include any adjustments relating to the recoverability and classification of assets, carrying amounts or the amount and classification of liabilities that may be required should the Company be unable to continue as a going concern. NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES A. Unaudited Interim Financial Statements The accompanying unaudited interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of U.S. Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included (consisting only of normal recurring adjustments except as otherwise discussed). For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for the three months ended September 30, 2017, are not necessarily indicative of the results that may be expected for the year ended December 31, 2017. B. Significant Accounting Policies Non royalty bearing Grants from the California Institute for Regenerative Medicine (CIRM) for funding research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the costs incurred and applied as a deduction from research and development expenses. The other significant accounting policies followed in the preparation of these unaudited interim condensed consolidated financial statements are identical to those applied in the preparation of the latest annual financial statements. C. Recent Accounting Standards In May 2014, the Financial Accounting Standards Board issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for us beginning in the first quarter of 2018; early adoption is prohibited. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. As the Company has not incurred revenues to date, it is unable to determine to expected impact of the new standard on its consolidated financial statements. In January 2016, the FASB issued an amended standard requiring change to recognition and measurement of certain financial assets and liabilities. The standard primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This standard is effective beginning in the first quarter of 2018. Certain provisions allow for early adoption. The Company do not expect that the adoption of this standard will have a significant impact on the financial position or results of operations. In February 2016, the FASB issued a new lease accounting standard requiring that the Company recognize lease assets and liabilities on the balance sheet. This standard is effective beginning in the first quarter of 2019; early adoption is permitted. The Company has not yet determined the impact of the new standard on its consolidated financial statements. NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Cont.): C. Recent Accounting Standards (Cont.): In June 2016, the FASB issued a new standard requiring measurement and recognition of expected credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This standard is effective for us in the first quarter of 2020; early adoption is permitted beginning in the first quarter of 2019 and we are evaluating whether we will early adopt. It is required to be applied on a modified-retrospective approach with certain elements being adopted prospectively. The Company does not expect that the adoption of this standard will have a significant impact on the financial position or results of operations. In May 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when a change to terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the vesting condition, fair value or the award classification is not the same both before and after a change to the terms and conditions of the award. The new guidance is effective on a prospective basis beginning on January 1, 2018 and early adoption is permitted. The Company does not expect the adoption of this standard to have an impact on its consolidated financial statements. D. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 3 - RESEARCH AND LICENSE AGREEMENT The Company has a Research and License Agreement, as amended and restated, with Ramot. The Company obtained a waiver and release from Ramot pursuant to which Ramot agreed to an amended payment schedule regarding the Company's payment obligations under the Research and License Agreement and waived all claims against the Company resulting from the Company's previous defaults and non-payment under the Research and License Agreement. The waiver and release amended and restated the original payment schedule under the original agreement providing for payments during the initial research period and additional payments for any extended research period. The Company is to pay Ramot royalties on Net Sales on a Licensed Product by Licensed Product and jurisdiction by jurisdiction basis as follows: a) So long as the making, producing, manufacturing, using, marketing, selling, importing or exporting of such Licensed Product is covered by a Valid Claim or is covered by Orphan Drug Status in such jurisdiction – 5% of all Net Sales. b) In the event the making, producing, manufacturing, using, marketing, selling, importing or exporting of such Licensed Product is not covered by a Valid Claim and not covered by Orphan Drug status in such jurisdiction – 3% of all Net Sales until the expiration of 15 years from the date of the First Commercial Sale of such Licensed Product in such jurisdiction. NOTE 4 - SHORT TERM INVESTMENTS Short term investments on September 30, 2017 and December 31, 2016 include bank deposits bearing annual interest rates varying from 0.15% to 1.90%, with maturities of up to 10 and 5 months as of September 30, 2017 and December 31, 2016. NOTE 5 - DEFERRED GRANT INCOME In July 2017 the Company received an award in the amount of $15,912 from the California Institute of Regenerative Medicine (CIRM) to support the pivotal Phase 3 study of NurOwn®, for the treatment of amyotrophic lateral sclerosis (ALS). The award provided for a $5,250 project initial payment, which was received during the third quarter of 2017, and up to $15,912 in future milestone payments (inclusive of the project initial payment). The award does not bear a royalty payment commitment nor is the award otherwise refundable. NOTE 6 - STOCK CAPITAL A. The rights of Common Stock are as follows: Holders of Common Stock have the right to receive notice to participate and vote in general meetings of the Company, the right to a share in the excess of assets upon liquidation of the Company and the right to receive dividends, if declared. The Common Stock is publicly traded on the NASDAQ Capital Market under the symbol BCLI. B. Issuance of shares, warrants and options: 1. Private placements and public offering: In July 2007, the Company entered into an investment agreement, that was amended in August 2009 with ACCBT Corp. a company under the control of the Company’s current Chief Executive Officer, according to which for an aggregate consideration of approximately $5 million the Company issued 2,777,777 shares of Common Stock and a warrant to purchase 672,222 shares of Common Stock at an exercise price of $3 per share and a warrant to purchase 1,344,444 shares of common stock at an exercise price of $4.35 per share. The warrants are exercisable, through November 5, 2017. Our current Chief Executive Officer has served as the President of the Company since July 2007 and in addition has as Chief Executive Officer from August 2013 until June 2014. On September 28, 2015 he was reappointed and currently serves as Chief Executive Officer of the Company. On September 28, 2015 the Company granted to its Chief Executive Officer an option to purchase 369,619 shares of Common Stock at an exercise price of $2.45 per share. The option vested over 12 months until fully vested on August 28, 2016. On July 26, 2017, the Company granted to its Chief Executive Officer 31,185 shares of restricted common stock, which vests as to twenty-five percent (25%) of the award on each of the first, second, third and fourth anniversary of the date of grant, provided grantee remains continuously employed by the Company from the date of grant through each applicable vesting date, and is subject to accelerated vesting upon a Change of Control (as defined in an agreement with grantee) of the Company. In the event of grantee’s termination of employment, any portion of the grant that is not yet vested (after taking into account any accelerated vesting) shall automatically be immediately forfeited to the Company, without the payment of any consideration to grantee. On July 26, 2017, the Company granted to its Chief Executive Officer an option to purchase up to 41,580 shares of Common Stock at an exercise price per share of $4.81. The option is fully vested and exercisable as of the date of grant and shall remain exercisable until the 2nd anniversary of the date of grant, regardless of whether grantee remains employed by the Company. In February 2010, the Company issued to three investors an aggregate 399,999 shares of Common Stock and warrants to purchase an aggregate of 199,998 shares of Common Stock with an exercise price of $7.50 per share for aggregate proceeds of $1.5 million. NOTE 6 - STOCK CAPITAL (Cont.): B. Issuance of shares, warrants and options: (Cont.): 1. Private placements and public offering: (Cont.): On July 17, 2012, the Company raised a $5.7 million of gross proceeds through a public offering (“2012 Public Offering”) of its common stock and warrants to purchase common stock. The Company issued a total of 1,321,265 shares of common stock ($4.35 per share), and thirty month warrants to purchase 990,949 shares of Common Stock at an exercise price of $4.35 per share. After deducting closing costs and fees, the Company received net proceeds of approximately $4.9 million. The Company paid to the placement agent, a cash fee and a corporate finance fee equal to 7% of the gross proceeds of the offering. In addition, the Company issued to the placement agent a two year warrant to purchase up to 32,931 shares of Common Stock, with an exercise price equal to $5.22. On February 7, 2013, the Company issued 55,556 units to a private investor for total proceeds of $250. Each unit consisted of one share of Common Stock and a warrant to purchase one share of Common Stock at $7.5 per share exercisable for 32 months. On October 7, 2015 the warrants were cancelled. On August 16, 2013, the Company raised $4 million, gross, through a registered public offering (“2013 Public Offering”) of its Common Stock and the issuance of warrants to purchase Common Stock. The Company issued a total of 1,568,628 Common Stock, ($2.55 per share) and three year warrants to purchase 1,176,471 shares of Common Stock, at an exercise price of $3.75 per share (the “2013 Warrants”). The Warrants also included, subject to certain exceptions, full ratchet anti-dilution protection in the event of the issuance of any Common Stock, securities convertible into common stock, or certain other issuances at a price below the then-current exercise price of the Warrants, which would result in an adjustment to the exercise price of the Warrants. After deducting closing costs and fees, the Company received net proceeds of approximately $3.3 million. In accordance with the provisions of ASC 815 (formerly FAS 133) the proceeds related to the warrants at the amount of $829 were recorded to liabilities at the fair value of such warrants as of the date of issuance, and the proceeds related to common stocks of 2,496 were recorded to equity. On April 25, 2014, the Company entered into agreements with some of holders of the 2013 Warrants to exchange warrants to purchase an aggregate of 777,471 shares of Company common stock for an aggregate of 388,735 unregistered shares of Common Stock. On May 27, 2014 the Company entered into agreements with certain warrant holders to redeem “2013 warrants” to purchase 333,235 shares of Company common stock, in consideration for approximately $600 payable in cash ($1.80 per Warrant). In May 2014, certain holders of 2013 Warrants which did not participate in the redemption and whose 2013 Warrants will therefore remained outstanding waived the anti-dilution provisions of their 2013 Warrants. In July 2014, the Company agreed to adjust the exercise price of the remaining “2013 Warrants” to $0.525 per share. On January 6, 2015, the remaining “2013 Warrants” holders that did not provide a waiver of their anti-dilution rights, exercised their warrants. Therefore, the liability related to the 2013 Warrants has been cancelled. On June 13, 2014, the Company raised gross proceeds of $10.5 million through a private placement of the Company’s Common Stock and warrants purchase Common Stock. The Company issued 2.8 million shares of Common Stock at a price per share of $3.75 and three year warrants to purchase up to 2.8 million shares of Common Stock at an exercise price of $5.22 per share. Pursuant to a Warrant Exercise Agreement, dated January 8, 2015, holders of the Company’s warrants (issued in June 2014) to purchase an aggregate of 2,546,667 shares of the Company’s Common Stock at an exercise price of $5.22 per share, agreed to exercise their 2014 Warrants in full and the Company agreed to issue new warrants to the holders to purchase up to an aggregate of approximately 3.8 million unregistered shares of Common Stock at an exercise price of $6.50 per share. The $6.50 warrants expire in June 2018. Gross proceeds from the exercise of the warrants was approximately $13.3 million. In connection with the Exercise Agreement, the Company agreed to pay to the Placement Agency a cash fee equal to 6.0% of the Exercise Proceeds, as well as fees and expenses of the Placement Agency of $20. In addition, the Company issued the Placement Agency a warrant to purchase 38,000 shares of Common Stock upon substantially the same terms as the New Warrants. Net of fees and related expenses the proceeds from the warrant exercise amounted to approximately $12.4 million. Since its inception the Company has raised approximately $46.6M, net in cash in consideration for issuances of common stock and warrants in private placements and public offerings as well as proceeds from warrants exercises. 2. Share-based compensation to employees and to directors: On November 25, 2004, the Company's stockholders approved the 2004 Global Stock Option Plan and the Israeli Appendix thereto (which applies solely to participants who are residents of Israel) and on March 28, 2005, the Company's stockholders approved the 2005 U.S. Stock Option and Incentive Plan, and the reservation of 609,564 shares of Common Stock for issuance in the aggregate under these stock plans. In June 2008, June 2011 and in June 2012, the Company's stockholders approved increases in the number of shares of common stock available for issuance under these stock option plans by 333,333, 333,333 and 600,000 shares, respectively Each option granted under the plans is exercisable until the earlier of ten years from the date of grant of the option or the expiration dates of the respective option plans. The 2004 and 2005 options plans expired on November 25, 2014 and March 28, 2015, respectively. On August 14, 2014, the Company's stockholders approved the 2014 Global Share Option Plan and the Israeli Appendix thereto (which applies solely to participants who are residents of Israel) and the 2014 Stock Incentive Plan. A total 600,000 shares of Common Stock were reserved for issuance in the aggregate under these stock plans. On June 21, 2016 the Company’s stockholders approved an amendment to the Plans which increased the shared pool of shares of common stock available for issuance under the Plans by 1,600,000, from 600,000 to 2,200,000. 2. Share-based compensation to employees and to directors: (Cont.): The exercise price of the options granted under the plans may not be less than the nominal value of the shares into which such options are exercised. Any options that are canceled or forfeited before expiration become available for future grants. On December 16, 2010, the Company granted to two of its directors fully vested options to purchase an aggregate of 26,667 shares of Common Stock at an exercise price of $2.25 per share. On August 22, 2011, the Company entered into an agreement one of its directors pursuant to which the Company granted the director 61,558 restricted shares of Common Stock of the Company. The shares vested through August 22, 2014. In addition, the Company is paying the director $15 per quarter his services. On May 3, 2015 the Company granted to the director 60,000 shares of restricted Common Stock. The shares were vested in three installments through August 22, 2017. On August 1, 2012, the Company granted to three of its directors options to purchase an aggregate of 30,667 shares of Common Stock of the Company, at $2.25 per share. On April 19, 2013, the Company granted to three of its directors options to purchase an aggregate of 30,667 shares of Common Stock of the Company at $2.25 per share. In addition the Company issued to two of its directors and four of its Advisory Board members a total of 50,667 restricted shares of Common Stock. The Options and restricted shares vested over 12 months. On June 6, 2014, the Company granted its Chief Operating Officer a fully vested option to purchase 33,333 shares of the Company’s common stock. The exercise price of the grant was $2.70 per share. On June 9, 2014, the Company’s former Chief Executive Officer was granted a stock option for the purchase of 380,000 shares of the Company’s common stock, vesting over four years, with an exercise price of $4.5 per share. On November 10, 2015 the Company and the former CEO agreed that the unvested portion of the option as of October 30, 2015 (to purchase 253,333 shares) would be forfeited and that the vested potion of the option (to purchase 126,667 shares) would terminate on September 30, 2016. On August 15, 2014, the Company issued to two of its directors and four of its Advisory Board members an aggregate of 50,667 restricted shares of Common Stock. The shares vested over 12 months. On October 31, 2014, the Company granted to four of its directors options to purchase an aggregate of 70,666 shares of Common Stock of the Company, at $0.75 per share. The options vest over 12 months. On June 1, 2015, the Company granted to a director fully vested options to purchase an aggregate of 6,667 shares of Common Stock of the Company, at $0.75 per share. On July 30, 2015 the Company’s newly appointed Chief Financial Officer was granted an option to purchase 165,000 shares of Common Stock at an exercise price of $3.17 per share. The option would vest over 3 years. Effective December 1, 2015 the Company and the Chief Financial Officer agreed to amend the option agreement. Pursuant to the amendment, 82,500 shares were cancelled. The 82,500 remaining shares continued to vest and become exercisable in accordance with the terms of the grant: 20,625 shares vested and became exercisable on July 30, 2016 and 2.08333% of the 82,500 shares were scheduled to vest and become exercisable on each monthly anniversary date starting on August 30, 2016 through the fourth anniversary of the grant, so that the 82,500 shares would become fully vested and exercisable on July 30, 2019. On November 9, 2016, the Company’s Chief Financial Officer notified the Company that he was terminating his part time employment with the Company effective at the end of business on November 14, 2016. The option ceased to vest on November 14, 2016 and the right to exercise the option was terminated February 14, 2017. On August 27, 2015 the Company granted to four of its seven directors options to purchase an aggregate of 70,665 shares of Common Stock at an exercise price of $0.75 per share, and granted to two of its directors an aggregate of 17,332 restricted shares of Common Stock. The options and restricted shares of Common Stock vested over 12 months until fully vested on August 27, 2016. On September 28, 2015 the Company granted to its newly appointed Chief Executive Officer an option to purchase 369,619 shares of Common Stock at an exercise price of $2.45 per share. The option vested over 12 months until fully vested on August 28, 2016. On July 14, 2016 the Company granted to four of its seven directors options to purchase an aggregate of 70,665 shares of Common Stock at an exercise price of $0.75 per share, and on September 26, 2016 granted 8,666 restricted share of Common Stock to one director and on March 28, 2017 granted 8,666 restricted shares of Common Stock to another director. The options and restricted shares of Common Stock vested over 12 months until fully vested on June 22, 2017. On February 26, 2017 the Company granted a stock option to a director to purchase up to 6,667 shares of Common Stock at an exercise price of $0.75 per share. The option was fully vested and exercisable on the date of grant. On February 26, 2017 the Company granted a director 3,012 shares of restricted common stock. The grant vests in 12 consecutive, equal monthly installments commencing on the one month anniversary of the date of grant, until fully vested on the first anniversary of the date of grant, provided grantee remains a director of the Company on each such vesting date. B. Issuance of shares, warrants and options: (Cont.) 2. Share-based compensation to employees and to directors: (Cont.) On March 6, 2017, the Company granted to its newly appointed Chief Operating Officer 35,885 shares of restricted common stock, which vests as to twenty-five percent (25%) of the award on each of the first, second, third and fourth anniversary of the date of grant, provided grantee remains continuously employed by the Company from the date of grant through each applicable vesting date, and is subject to accelerated vesting upon a Change of Control (as defined in an agreement with grantee) of the Company. In the event of grantee’s termination of employment, any portion of the grant that is not yet vested (after taking into account any accelerated vesting) shall automatically be immediately forfeited to the Company, without the payment of any consideration to grantee. On March 6, 2017, the Company granted to its newly appointed Chief Operating Officer an option to purchase up to 47,847 shares of Common Stock at an exercise price per share of $4.18. The option is fully vested and exercisable as of the date of grant and shall remain exercisable until the 2nd anniversary of the date of grant, regardless of whether grantee remains employed by the Company. On July 13, 2017, the Company granted a stock option to a director to purchase up to 12,000 shares of Common Stock of the Company. The option is fully vested and exercisable on the date of grant. On July 13, 2017, the Company granted an aggregate of 16,629 shares of Common Stock of the Company to three officers of the Company. On August 17, 2017, the Company granted to a newly appointed VP of Patient Advocacy and Government Affairs 9,924 shares of restricted common stock, which vests on each of the first, second, third and fourth anniversary of the date of grant, provided that grantee remains continuously employed by the Company from the date of grant through each applicable vesting date. The Company accounts for shares and warrant grants issued to non-employees using the guidance of ASC 505-50, "Equity-Based Payments to Non-Employees" (EITTF 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services"), whereby the fair value of such option and warrant grants is determined using a Black-Scholes options pricing model at the earlier of the date at which the non-employee's performance is completed or a performance commitment is reached. A summary of the Company's option activity related to options to employees and directors, and related information is as follows: For the nine months ended Amount of options Weighted price Aggregate Outstanding at beginning of period 874,841 2.1258 Granted 108,094 3.8300 Exercised (11,777 ) 2.5401 Cancelled (44,446 ) 3.9175 Outstanding at end of period 926,712 2.2334 1,748,327 Vested and expected-to-vest at end of period 926,712 2.2334 1,748,327 The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the fair market value of the Company’s shares on September 30, 2017 and the exercise price, multiplied by the number of in-the-money options on those dates) that would have been received by the option holders had all option holders exercised their options on those dates. Compensation expense recorded by the Company in respect of its stock-based employee compensation awards in accordance with ASC 718-10 for the nine months ended September 30, 2017 and 2016 amounted to $416 and $667, respectively. 3. Shares and warrants to investors and service providers: 3. Shares and warrants to investors and service providers: (Cont.) (a) Warrants to investors and service providers: The fair value for the warrants to service providers was estimated on the measurement date determined using a Black-Scholes option pricing model, with the following weighted-average assumptions for the year ended December 31, 2010; weighted average volatility of 140%, risk free interest rates of 2.39%-3.14%, dividend yields of 0% and a weighted average life of the options of 5-5.5 and 1-9 years. There were no grants to service providers since 2010. Issuance date Number of issued Exercised Forfeited Outstanding Exercise Price $ Warrants exercisable Exercisable Nov-Dec 2004 973,390 959,734 13,656 - 0.00075 - 0.15 - - Feb-Dec 2005 203,898 32,011 171,887 - 2.25 - 37.5 - - Feb-Dec 2006 112,424 48,513 63,911 - 0.075 – 22.5 - - Mar-Nov 2007 180,220 33,334 133,553 13,333 2.25 13,333 Oct 2017 Nov 2008 6,667 - - 6,667 2.25 6,667 Sep-18 Apr-Oct 2009 26,667 6,667 - 20,000 1.005 – 1.5 20,000 Apr 2019– Oct 2019 Aug 2007- Jan 2011 2,016,667 - - 2,016,667 3 - 4.35 2,016,667 Nov-17 Jan 2010 83,333 - 83,333 - 7.5 - - Feb 2010 8,333 8,333 - - 0.15 - - Feb 2010 200,000 - 200,000 - 7.5 - - Feb 2010 100,000 100,000 - - 0.015 - - Feb 2011 42,735 - 42,735 - 5.85 - - Feb 2011 427,167 63,122 364,044 - 4.2 - - Jul 2012 32,931 - 32,931 - 5.22 - - Jul 2012 990,949 687,037 303,911 - 4.35 - - Feb 2013 55,556 - 55,556 - 7.5 - - April 2010-2014 12,889 8,889 4,000 - 0.00075 - - Aug 2013 1,147,471 - 1,147,471 - 3.75 - - Aug 2013 29,000 29,000 - - 0.525 - - Jun 2014 2,800,000 2,546,667 253,333 - 5.22 - - Jun 2014 84,000 - 84,000 - 4.5 - Jan 2015 3,858,201 - - 3,858,201 6.5 3,858,201 Jun-18 14,246,831 4,523,307 3,808,654 5,914,868 5,914,868 3. Shares and warrants to service providers: (Cont.): (b) Shares: On December 30, 2009, the Company issued to Ramot 74,667 shares of Common Stock (See Note 3). On December 31, 2011, the Company issued to Hadasit warrants to purchase up to 100,000 restricted shares of Common Stock at an exercise price of $0.015 per share, exercisable for a period of 5 years. The warrants vested over the course of the trials and were exercised in 2015. On January 16, 2013, the Company granted an aggregate of 14,400 shares of Common Stock of the Company to two consultants, for services rendered through December 31, 2012. Related compensation expense in the amount of $54 was recorded as research and development expense. On February 4, 2013, the Company issued 8,408 shares of Common Stock to an investor, according to a settlement agreement, for the correction of the conversion rate of a $200 convertible loan. The convertible loan was issued in 2006 and converted in 2010. On March 11, 2013, the Company granted to its legal advisor 12,913 shares of Common Stock for 2013 legal services. The related compensation expense in the amount of $44.5 was recorded as general and administrative expense. On November 13, 2013, the Company approved a grant of 30,000 shares of Common Stock to the Consultants, for services rendered during January 1, 2013 through September 30, 2013 (the “2013 Shares”). On March 24, 2014, the Company approved grants of an aggregate of 6,000 shares of Common Stock to the Consultants for services rendered in 2014, and issued such shares together with the 2013 Shares. On March 11, 2013, the Company granted to two of its service providers an aggregate of 26,667 shares of Common Stock. The shares were issued as compensation for public relations services. The related compensation expense in the amount of $92 was recorded as general and administrative expense. On July 28, 2014, the Company granted to its legal advisor 10,752 shares of Common Stock for 2014 legal services. The related compensation expense in the amount of $50 was recorded as general and administrative expense. On April 29, 2015, the Company approved grants of an aggregate of 27,411 shares of Common Stock to the Consultants for services rendered in 2014. The related compensation expense was recorded as research and development expense. On January 2, 2016, the Company granted to its legal advisor 10,752 shares of Common Stock for 2015 legal services. The related compensation expense of $31 was recorded as general and administrative expense. On July 14, 2016, the Company granted of an aggregate of 25,281 shares of Common Stock to two consultants for services rendered in 2015. The related compensation expense was recorded as research and development expense. On August 17, 2017, the Company granted to a consultant 4,327 fully vested shares of restricted common stock. The restriction expires in eight (8) equal consecutive quarterly installments (starting November 17, 2017) until fully vested on the second anniversary of the date of grant. 4. Stock Based Compensation Expense The total stock-based compensation expense, related to shares, options and warrants granted to employees, directors and service providers was comprised, at each period, as follows: Research and development 145 6 70 1 General and administrative 271 661 163 170 Total stock-based compensation expense 416 667 233 171 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This quarterly report contains numerous statements, descriptions, forecasts and projections, regarding Brainstorm Cell Therapeutics Inc. (together with its consolidated subsidiaries, the “Company,” “Brainstorm,” “we,” “us” or “our”) and its potential future business operations and performance, including financial results for the most recent fiscal quarter, statements regarding the market potential for treatment of neurodegenerative disorders such as ALS, the sufficiency of our existing capital resources for continuing operations in 2017 and beyond, the safety and clinical effectiveness of our NurOwn® technology, our clinical trials of NurOwn® and its related clinical development, and our ability to develop collaborations and partnerships to support our business plan. In some cases you can identify such “forward-looking statements” by the use of words like “may,” “will,” “should,” “could,” “expects,” “hopes,” “anticipates,” “believes,” “intends,” “plans,” “projects,” “targets,” “goals,” “estimates,” “predicts,” “likely,” “potential,” or “continue” or the negative of any of these terms or similar words. These statements, descriptions, forecasts and projections constitute “forward-looking statements,” and as such involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance and achievements to be materially different from any results, levels of activity, performance and achievements expressed or implied by any such “forward-looking statements.” These risks and uncertainties include, but are not limited to our need to raise additional capital, our ability to continue as a going concern, regulatory approval of our NurOwn® treatment candidate, the success of our product development programs and research, regulatory and personnel issues, development of a global market for our services, the ability to secure and maintain research institutions to conduct our clinical trials, the ability to generate significant revenue, the ability of our NurOwn® treatment candidate to achieve broad acceptance as a treatment option for ALS or other neurodegenerative diseases, our ability to manufacture and commercialize our NurOwn® treatment candidate, obtaining patents that provide meaningful protection, our ability to protect our intellectual property from infringement by third parties, heath reform legislation, demand for our services, currency exchange rates and product liability claims and litigation, and other factors described under “Risk Factors” in this report and in our annual report on Form 10-K for the fiscal year ended December 31, 2016. These “forward-looking statements” are based on certain assumptions that we have made as of the date hereof. To the extent these assumptions are not valid, the associated “forward-looking statements” and projections will not be correct. Although we believe that the expectations reflected in these “forward-looking statements” are reasonable, we cannot guarantee any future results, levels of activity, performance or achievements. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we may not inform you if they do and we undertake no obligation to do so, except as required by applicable securities laws and regulations. We caution investors that our business and financial performance are subject to substantial risks and uncertainties. In evaluating our business, prospective investors should carefully consider the information set forth under the caption “Risk Factors” in this report and in our annual report on Form 10-K for the fiscal year ended December 31, 2016, in addition to the other information set forth herein and elsewhere in our other public filings with the Securities and Exchange Commission. Brainstorm Cell Therapeutics Inc. is an integrated biotechnology company actively engaged in the development and commercialization of innovative adult stem cell therapies for the treatment of debilitating neurodegenerative disorders that have no or limited treatment options, thus representing a unique opportunity to address unmet medical needs. These include Amyotrophic Lateral Sclerosis (“ALS”, also known as Motor Neuron Disease (MND) or Lou Gehrig’s disease), Multiple Sclerosis (“MS”), and Parkinson’s disease (“PD”), among others. NurOwn® is our proprietary process for the propagation of adult bone marrow-derived Mesenchymal Stem Cells (“MSC”), their differentiation into neurotrophic factor (“NTF”) secreting cells (“MSC-NTF”), and transplantation at, or close to, the site of damage. Evidence to date from published animal and human studies suggests that NurOwnÒ offers the potential for more effective treatment of neurodegenerative diseases, relative to existing therapies, through unique neuroprotective and immunomodulatory effects. Groundbreaking ALS CSF biomarker work has demonstrated a strongly correlated increase in neurotrophic factors and a reduction in inflammatory biomarkers (MCP-1 and SDF-1) in NurOwnÒ-treated, and not in placebo treated, participants. This is a clear indicator of the mechanism by which this technology acts in ALS, and in related neurodegenerative diseases. Our core technology was invented by Professor (Prof.) Daniel Offen of the Felsenstein Medical Research Center, Tel Aviv University, and the late Prof. Eldad Melamed, former head of Neurology of the Rabin Medical Center and former member of the Scientific Committee of the Michael J. Fox Foundation for Parkinson’s Research. Our wholly-owned Israeli subsidiary, Brainstorm Cell Therapeutics Ltd. (“Israeli Subsidiary”), holds rights to commercialize the technology through a licensing agreement with Ramot (“Ramot”), the technology transfer company of Tel Aviv University, Israel. We currently employ 19 employees in Israel and 3 in the United States. Our Proprietary Technology Facilitated by NurOwn® technology, the differentiated MSC-NTF cells are capable of releasing several highly disease relevant neurotrophic factors, including Glial-derived neurotrophic factor (“GDNF”), Brain-derived neurotrophic factor (“BDNF”), Vascular endothelial growth factor (“VEGF”) and Hepatocyte growth factor (“HGF”), all critical for the growth, survival and differentiation of developing neurons. GDNF is one of the most potent factors involved in the protection and survival of peripheral neurons. VEGF and HGF have been reported to have important protective effects on neurons and other non-neuronal glial cells in ALS as well as other neurodegenerative diseases. The effects of neurotrophic factors on neurons may include: · Protection of existing motor neurons; · Promotion of motor neuron growth; and · Re-establishment of functional nerve-muscle interaction. In addition to the consistent and important release of neurotrophic factors, NurOwnÒ demonstrates consistent in vitro modification of the immune response (immunomodulation) and in vivo modulation of CSF biomarkers. Neuroinflammation is an important cause of disease progression in neurodegenerative diseases, including ALS. The proprietary NurOwnÒ process results in significant measurable differences from undifferentiated MSCs, including: enhanced release of neurotrophic factors; release of neurotrophic factors that are very low or not expressed by MSCs; and a unique micro-RNA profile that may regulate growth and development of neurons (neurogenesis), VEGF and neuroinflammation. In preclinical studies, NurOwnÒ was found to be more effective than MSC in treating Autism, Parkinson’s disease, Huntington’s disease and multiple sclerosis. The combination of enhanced NTF release and neuromodulation may be an optimal approach to restore function and reduce ongoing CNS tissue damage in neurodegenerative disease. NurOwnÒ treatment is a multi-step process (see table below) beginning with harvesting of undifferentiated stem cells from the patient’s own bone marrow, and concluding with transplantation of the resulting differentiated, neurotrophic factor-secreting mesenchymal stem cells (MSC-NTF) back into the patient – intrathecally (injection into the cerebrospinal fluid) by standard lumbar puncture and/or intramuscularly. This unique technology is the first-of-its-kind for the treatment of neurodegenerative diseases. The NurOwn® Transplantation Process · Bone marrow aspiration from patient; · Isolation and propagation of the patient’s mesenchymal stem cells; · Differentiation of the mesenchymal stem cells into neurotrophic-factor secreting (MSC-NTF) cells; and · Autologous transplantation into the same patient’s spinal cord fluid. Our proprietary technology process is conducted in full compliance with current Good Manufacturing Practice (“cGMP”). It is licensed to and developed by our Israeli Subsidiary. Advances of NurOwnÒ Beyond Current Therapies - Patient Benefits Given that NurOwn®’s approach involves transplantation of the stem cells derived from the same patient (autologous), there is no risk of rejection and no need for treatment with immunosuppressive agents, which can cause severe and/or long-term side effects. In addition, the use of adult stem cells precludes the controversy associated with the use of embryonic stem cells in some countries. MSC can be cryopreserved and, as required, can be subsequently differentiated into NurOwn®, and demonstrate product characteristics like NurOwn® cells derived from fresh MSC of the same patient/donor. This will allow the Company to provide repeated doses of autologous NurOwn® from a single bone marrow aspirate in its upcoming multi-dose clinical trial and will avoid the need for patients to undergo repeated bone marrow aspiration. The ALS Program Phase 1/2 and Phase 2a studies The clinical development program for NurOwn® in ALS has been granted Fast Track designation by the U.S. Food and Drug Administration (“FDA”) for this indication, and has been granted Orphan Status in both the United States and in Europe. We have completed two clinical trials of NurOwn® in patients with ALS at Hadassah Medical Center (“Hadassah”), with Prof. Dimitrios Karussis as Principal Investigator (PI): 1. A Phase 1/2 safety and efficacy study of NurOwn® in ALS patients administered either intramuscularly or intrathecally, was initiated in June 2011 after receiving approval from the Israeli Ministry of Health (“MoH”). The trial results, which were presented by Prof. Karussis at the American Academy of Neurology Annual Meeting on March 2013, demonstrated the safety of NurOwn® as well as signs of ALS patient functional improvement, as measured by the ALS Functional Rating Score (“ALSFRS-R”) and improved breathing, as measured by the Forced Vital Capacity (“FVC”). 2. A Phase 2a combined treatment (by intramuscular and intrathecal administration), dose-escalating trial, approved by the Israeli MoH in January 2013, was also conducted at Hadassah, and by September 27, 2013, we announced that 12 patients had successfully completed treatment. On December 10, 2013 Prof. Karussis presented some of the preliminary findings from this trial at the 24th International Symposium on ALS/MND in Milan, Italy, followed in June 2014 by the interim results of the trial, at the Joint Congress of European Neurology in Istanbul, Turkey. The last follow-up visits in this study occurred in September 2014. On January 5, 2015, the Company presented final topline data from this study in a press release and an investor conference call. The results of this study confirmed the safety profile observed in the earlier Phase 1/2 trial, with the clear majority of adverse events being low-grade and transient. There were two deaths and two serious adverse events, all of which were deemed by the investigators to be unrelated to treatment. Subjects in this study showed a meaningful reduction in the rate of disease progression for the three and six months after treatment, compared to the three months prior to treatment. This confirmed the safety of intrathecal administration of NurOwnÒ in ALS. In January 2016, the Company announced the publication of a paper in the January 2016 edition of JAMA Neurology based on the results of the first in man Phase 1/2 and Phase 2a studies and Phase 2 dose escalation study with NurOwn® in ALS. The data provide indication of clinically meaningful benefit as reflected by a slower rate of ALS disease progression following NurOwnÒ treatment, a positive trend on two ALS disease biomarkers, including rate of decline of muscle volume and electrical muscle function. This was the first published clinical data with NurOwnÒ, or any treatment, to achieve a neuroprotective effect in ALS and potentially modify the course of disease. In April 2016, the Company presented the combined results of the Phase 1/2 and Phase 2a NurOwn® clinical studies in ALS at the ISRASTEM 2016 and 6th Israel Stem Cell Society (ISCS) joint annual meeting which took place in Tel Aviv, Israel. The US Phase 2 Multicenter Double-Blind Placebo Controlled Clinical Study for ALS Patients In December 2013, the Company submitted an Investigational New Drug (“IND”) application to the FDA for NurOwn® in ALS, and on April 28, 2014, we initiated an FDA-approved randomized, double-blind, placebo controlled multi-center U.S. Phase 2 clinical trial evaluating NurOwn® in ALS patients. The trial was conducted at the Massachusetts General Hospital (PIs - Drs. Merit Cudkowicz and James Berry) in Boston, Massachusetts, at the University of Massachusetts Memorial Hospital (PI - Dr. Robert Brown) in Worcester, Massachusetts, and at the Mayo Clinic (PI - Drs. Anthony Windebank and Nathan Staff) in Rochester, Minnesota. For this study, NurOwn® was manufactured at the Connell and O’Reilly Cell Manipulation Core Facility at the Dana Farber Cancer Institute in Boston, Massachusetts, and at the Human Cellular Therapy Lab at the Mayo Clinic. In the study, 48 patients were randomized 3:1 to receive NurOwn® or placebo. In February 2015, the Company announced that the Data Safety Monitoring Board (“DSMB”) for the multi-center U.S. Phase 2 clinical trial had reviewed the safety data collected through a cutoff date in January 2015, and did not find any significant lab abnormalities, adverse events or significant protocol deviations that would be cause for concern and therefore approved continuation of the trial as planned. On August 11, 2015, the Company announced that it had completed enrollment achieving the target of 48 subjects to be enrolled in its ongoing randomized, double-blind placebo-controlled Phase 2 clinical trial of NurOwn® in ALS. The Company further announced, in November 2015, that the DSMB review of the safety data collected through a cutoff date in October 2015 for the multi-center U.S. Phase 2 clinical trial indicated that 47 of the 48 patients enrolled in the study confirmed that they experienced no treatment-related serious adverse events (SAEs). Furthermore, the DSMB did not identify any significant adverse events, lab abnormalities or significant protocol deviations that would be cause for concern. In July 2016, the Company announced topline data from the recently completed U.S. randomized, double-blind, placebo-controlled Phase 2 Study of NurOwn® in ALS which confirmed that the study achieved its primary objective, demonstrating that NurOwn® was safe and well tolerated. NurOwn® also achieved multiple secondary efficacy endpoints, showing clear evidence of a clinically meaningful benefit. Notably, response rates were higher for NurOwn®-treated subjects compared to placebo at all time points in the study out to 24 weeks. In October 2016, some of the Company’s topline Phase 2 ALS clinical trial results were presented by Dr. Robert Brown and Dr. James Berry, at the 15th Annual Meeting of the Northeast ALS Consortium (NEALS). In December 2016, the Company announced that data from the Company’s Phase 2 study of NurOwn® in ALS, would be highlighted in presentations at the 27th International Symposium on ALS/MND, being held December 7-9, 2016 in Dublin, Ireland. Lead investigator, Dr. James Berry, presented new data from the Phase 2 study demonstrating that in ALS patients treated with NurOwnÒ, CSF neurotrophic factors (VEGF, HGF and LIF) showed a statistically significant increase and correlated with a statistically significant decrease in CSF inflammatory markers (MCP-1 and SDF-1) two weeks post-transplantation compared to pre-transplantation. In addition, reductions in CSF inflammatory markers at two weeks post-transplantation correlated with improvements in ALSFRS-R slope at 12 weeks post-transplantation, consistent with the proposed mechanism of action of NurOwnÒ in ALS. Dr. Berry also presented the pre-specified responder analyses from the Phase 2 trial which examined percentage improvements in post treatment of Amyotrophic Lateral Sclerosis Functional Rating Scale (ALSFRS-R) slope compared to pre-treatment slope. These analyses showed that, in the NurOwn® treated group, a greater number of patients achieved the high threshold of 100% or greater improvement in the post-treatment vs. pre-treatment slope, compared with the placebo group. Responders were defined as those in whom disease symptoms were essentially halted for the period of the treatment effect or those who achieved a positive improvement on their ALSFRS-R score. Moreover, in the pre-specified subgroup that excluded subjects whose disease was progressing slowly, this effect was even more pronounced. Dr. Berry’s presentation was posted on the Company website. In May 2017, the Company presented data from its Phase 2 clinical study of NurOwn® in ALS at the International Society for Cellular Therapy (ISCT) annual conference in London, England and at the World Advanced Therapy and Regenerative Medicine Congress in London, England. Phase 3 Clinical Study for ALS Patients In October 2017, the Company announced that the first patients have been enrolled in the Phase 3 clinical trial of NurOwn® for the treatment of amyotrophic lateral sclerosis (ALS) at the Massachusetts General Hospital and UC Irvine Medical Center in California. The trial is expected to enroll approximately 200 patients and will be conducted at six leading ALS clinical sites in the U.S. The primary outcome measure will be the ALSFR-S score responder analysis. The patient population will be optimized to include the pre-specified subgroups who demonstrated superior outcomes in the NurOwn® Phase 2 ALS clinical trial. Top-line data are expected in 2019. In January 2017, the Company announced that it had validated its cryopreservation process for NurOwn® in preparation for the upcoming Phase 3 clinical study in ALS. The validation involved a comparison of NurOwn® (MSC-NTF cells) derived from fresh mesenchymal stem cells (MSC) to those derived from cryopreserved MSC. Company scientists were successful in showing that the MSC can be stored in the vapor phase of liquid nitrogen for prolonged periods of time while maintaining their characteristics. The cryopreserved MSC can differentiate into NurOwn®, similar to the NurOwn® derived from fresh MSC of the same patient/donor, prior to cryopreservation. This will allow the Company to provide repeated doses of autologous NurOwn® from a single bone marrow aspirate in its upcoming multi-dose clinical trial. Cryopreservation will avoid the need for patients to undergo repeated bone marrow aspirations. In February 2017, the Company announced that it plans to contract with City of Hope’s Center for Biomedicine and Genetics to produce clinical supplies of NurOwn® adult stem cells for the company’s planned randomized, double-blind, multi-dose Phase 3 clinical study in patients with ALS. City of Hope will support manufacturing of NurOwn® for all U.S. medical centers participating in the Phase 3 trial. Future development of NurOwn® in ALS may require additional clinical trials, including a Phase 3 FDA-approved multi dose trial. Patient Access Programs In December 2016, the Company announced that it plans to apply for Hospital Exemption for NurOwn® in Israel that will allow patient access to NurOwn® as a treatment that has been granted Hospital Exemption. This recently approved pathway would permit the Company to partner with a medical center in Israel and be allowed to treat patients with NurOwn® for a fee. Hospital Exemption allows for advanced therapy medicinal products to be made available to a group of patients to be agreed upon by the Israeli Ministry of Health. It is intended to provide patients with the possibility to benefit from a custom-made, innovative, individual treatment where there is a critical unmet need and an absence of valid therapeutic alternatives. To qualify for a Hospital Exemption, several important criteria must be met including preparation according to specific quality standards (equivalent to those for a licensed product), use in a hospital and use under the exclusive responsibility of a medical practitioner. In March 2017, the Company announced that it has signed a Memorandum of Understanding (MOU) with The Medical Research, Infrastructure, and Health Services Fund of the Tel Aviv Sourasky Medical Center (Ichilov Hospital) to explore the possibility of making NurOwn® available to Amyotrophic Lateral Sclerosis (ALS) patients under the provisions of Hospital Exemption regulation. The MOU sets forth the basic terms under which the Company and Tel Aviv Sourasky Medical Center would work together to submit the application to the Israeli MoH, and is subject to a definitive agreement. The agreement is expected to be formalized in the second half of 2017. In June 2017, the Company announced that for the tenth consecutive year its wholly-owned subsidiary, Brainstorm Cell Therapeutics Ltd., was awarded a new grant from Israel’s Office of the Chief Scientist (OCS), in the amount of approximately $2,100,000. The Office of the Chief Scientist, is part of the Ministry of Economy Program to support innovative technologies in Israel. The funds supported the development of NurOwn® Phase 3 clinical program in ALS. In July 2017, the Company announced that the California Institute for Regenerative Medicine (CIRM) has awarded Brainstorm a grant of up to $16 million to support the Company’s pivotal Phase 3 study of NurOwn®, for the treatment of amyotrophic lateral sclerosis (ALS). The award provided for a $5,250,000 project initial payment, which was received during the third quarter of 2017, and up to $15,912,000 in future milestone payments (inclusive of the project initial payment). The award does not bear a royalty payment commitment nor is the award otherwise refundable. In October 2016, the Company announced that it has been granted United States Patent No. 9,474,787 titled “Mesenchymal Stem Cells for the Treatment of CNS Diseases. The allowed claims cover mesenchymal stem cells that secrete neurotrophic factors, including brain-derived neurotrophic factor (BDNF) and glial derived neurotrophic factor (GDNF), as well as a pharmaceutical composition comprising these factors. Future Development Plans In addition to its active clinical program in ALS, the Company is focusing on further in-depth molecular and functional characterization of NurOwn® and its adaptation to additional indications. The Company is reviewing the potential clinical development of NurOwn® in other neurodegenerative disorders, such as Parkinson’s disease, Huntington’s disease, and multiple sclerosis. More research is currently ongoing on developing an additional product which might be suitable for many neurodegenerative diseases. In April 2017, the Company announced the Publication of the NurOwn® Autism Research Study, entitled “Long Term Beneficial Effect of Neurotrophic Factors-Secreting Mesenchymal Stem Cells Transplantation in the BTBR Mouse Model of Autism” (Perets N. et al. Behav Brain Res. 2017 Jul 28;331:254-260 [Apr 6. Epub ahead of print] PMID: 28392323), showing that transplantation of NurOwn® in the BTBR mice demonstrated significant long-term improvements in autistic behavior in the BTBR mice compared to MSC treated and to untreated BTBR mice. In addition, the Company has recently improved the scale and efficiency of NurOwn® production and improved its stability, with the goal of manufacturing in central clean room facilities near the clinical trial sites, where the cells are administered to patients. We are incorporated under the laws of the State of Delaware. Our principal executive offices are located at 3 University Plaza Drive, Suite 320, Hackensack, NJ 07601, and our telephone number is (201) 488-0460. We maintain an Internet website at http://www.brainstorm-cell.com. The information on our website is not incorporated into this Quarterly Report on Form 10-Q. For the period from inception (September 22, 2000) through September 30, 2017, the Company has not earned any revenue from operations. The Company does not expect to earn revenue from operations until 2018, if ever. The Company has incurred operating costs and other expenses of approximately $2,392,000 during the three months ended September 30, 2017 compared to $1,638,000 during the three months through September 30, 2016. Research and Development Expenses: Research and development expenses, net for the three months ended September 30, 2017 and 2016 were $1,168,000 and $790,000, respectively, representing an increase of $378,000. This increase is due to (i) an increase of $219,000 for costs of payroll and stock-based compensation expenses; (ii) an increase of $328,000 costs for activities related to the U.S. Clinical Trial and (iii) an increase of $115,000 for other costs such as material costs, travel, rent and other activities. This increase was partially offset by an increase of $284,000 in participation of the Chief Scientist. General and Administrative Expenses: General and administrative expenses for the three months ended September 30, 2017 and 2016 were $1,224,000 and $848,000, respectively. The increase in general and administrative expenses of $376,000 is primarily due to an increase of $367,000 in payroll costs and an increase of $68,000 in consultants, stock-based compensation and travel costs. This increase was partially offset by a net decrease of $59,000 in rent, public relations, and other costs. Other Income and Expenses: Financial expense for the three months ended September 30, 2017 was $11,000 as compared to financial income of $32,000 for the three months ended September 30, 2016. Net Loss: Net loss for the three months ended on September 30, 2017 was $2,403,000, as compared to a net loss of $1,606,000 for the three months ended September 30, 2016. Net loss per share for the three months ended September 30, 2017 and 2016 was $0.13 and $0.09, respectively. The weighted average number of shares of Common Stock used in computing basic and diluted net loss per share for the three months ended September 30, 2017 was 18,783,997, compared to 18,656,615for the three months ended September 30, 2016. The Company has financed its operations since inception primarily through public and private sales of its Common Stock and warrants and the issuance of convertible promissory notes. At September 30, 2017, the Company had net working capital of $4,811,000 including cash, cash equivalents and short-term bank deposits amounting to $10,547,000. Net cash provided by operating activities was $3,843,000 for the three months ended September 30, 2017. Cash used for operating activities was primarily attributed to cost of rent of clean rooms and materials for clinical trials, payroll costs, rent, outside legal fee expenses and public relations expenses. Net cash used in investing activities was $7,238,000 for the three months ended September 30, 2017, representing net change in short term interest bearing bank deposits. Net cash provided by financing activities was $75,000 for the three months ended September 30, 2017 and is attributable to the exercise of stock options. On June 4, 2015, we filed a shelf registration statement, effective June 10, 2015, relating to Common Stock, warrants and units that we may sell from time to time in one or more offerings, up to a total dollar amount of $100,000,000. We have not filed any supplemental prospectus defining particular terms of securities to be offered under the shelf registration statement. Our material cash needs for the next 24 months, assuming we do not expand our clinical trials beyond the upcoming multi dose clinical trial in Israel, will include (i) costs of the clinical trial in the U.S. (ii) employee salaries, (iii) costs expected for the upcoming multi-dose clinical trial in Israel, (iv) payments to Hadassah for rent and operation of the GMP facilities, and (v) fees to our consultants and legal advisors, patents, and fees for facilities to be used in our research and development. Over the longer term if we are not able to raise substantial additional capital, we may not be able to continue to function as a going concern and may have to cease operations or the Company will reduce its costs, including curtailing its current plan to pursue larger clinical trials in ALS and move new indications into clinical testing. We will be required to raise a substantial amount of capital in the future in order to reach profitability and to complete the commercialization of our products. Our ability to fund these future capital requirements will depend on many factors, including the following: • our ability to obtain funding from third parties, including any future collaborative partners; • the scope, rate of progress and cost of our clinical trials and other research and development programs; • the time and costs required to gain regulatory approvals; • the terms and timing of any collaborative, licensing and other arrangements that we may establish; • the costs of filing, prosecuting, defending and enforcing patents, patent applications, patent claims, trademarks and other intellectual property rights; • the effect of competition and market developments; and • future pre-clinical and clinical trial results. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenue and expenses during the reporting periods. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, our expected course of development, historical experience and other factors we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes to our critical accounting policies during the quarter ended September 30, 2017. For information about critical accounting policies, see the discussion of critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Off Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources. Item 3. Quantitative and Qualitative Disclosures About Market Risk. This information has been omitted as the Company qualifies as a smaller reporting company. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II: OTHER INFORMATION From time to time, we may become involved in litigation relating to claims arising out of operations in the normal course of business, which we consider routine and incidental to our business. We currently are not a party to any material legal proceedings, the adverse outcome of which, in management’s opinion, would have a material adverse effect on our business, results of operation or financial condition. There have not been any material changes from the risk factors previously disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 5. Other Information. During the quarter ended September 30, 2017, we made no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors, as described in our most recent proxy statement. Item 6. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or incorporated by reference in this report. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: October 17, 2017 By: /s/ Alla Patlis Name: Alla Patlis Title: Interim Chief Financial Officer (Principal Financial Officer) No. Description 10.1* Brainstorm Cell Therapeutics Inc. Third Amendment to the Second Amended and Restated Director Compensation Plan dated July 13, 2017. 10.2* Restricted Stock Award Agreement under the Brainstorm Cell Therapeutics Inc. 2014 Global Share Option Plan, regarding July 26, 2017 grant to Chaim Lebovits. 10.3* Second Amendment to Employment Agreement dated July 26, 2017 between the Company and Chaim Lebovits. 31.1* Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1‡ Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2‡ Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* XBRL Taxonomy Extension Label Linkbase Document 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith ‡ Furnished herewith Quote for BCLI.OB/ BRAINSTORM CELL THERAPEUTICS INC. Page BRAINSTORM CELL THERAPEUTICS INC. Reports

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Michaels Stores, Inc. Reports Fourth Quarter and Full Year Earnings Download as PDF March 07, 2007 IRVING, TX -- (MARKET WIRE) -- 03/07/07 -- Michaels Stores, Inc. today reported unaudited financial results for the fourth quarter and fiscal year 2006. Financial results for fiscal 2006, as reported under U.S. generally accepted accounting principles (GAAP), include several significant items, such as costs associated with the Company's recent merger with affiliates of Bain Capital and The Blackstone Group as well as expenses associated with various legal matters. For the fourth quarter, net income decreased $184.9 million to a loss of ($67.6) million, versus $117.3 million for the same quarter last year. For fiscal 2006, income before cumulative effect of accounting change was $41.2 million, a decrease of $178.3 million from $219.5 million last year. Operating Performance The Company had solid sales growth and significantly improved margin performance as a result of continued focus on improving overall profitability and further strengthening financial returns. Total sales for the fourth quarter were $1.368 billion, a 7.7% increase over last year's fourth quarter sales of $1.270 billion. Fiscal 2006 was a 53-week year and sales for the additional week contributed $58.7 million in sales for the quarter. Same-store sales for the comparable 13-week period increased 0.8% on a 2.0% increase in average ticket, a (1.7%) decrease in transactions and a 0.5% increase in custom frame deliveries. The decline in sales of yarn products adversely impacted the fourth quarter same-store sales by approximately 1.9%. A favorable Canadian currency translation added approximately 0.1% to the average ticket increase for the fourth quarter. Michaels stores' best performing domestic departments were Framing, Impulse, General Crafts (primarily Jewelry and Beads) and Seasonal. The Company's gross margin rate in the fourth quarter increased from 37.2% in 2005 to 41.7% in 2006, an increase of 450 basis points. The increase in the gross margin rate was primarily due to ongoing product sourcing initiatives, improved seasonal sell-through and enhancements to pricing and promotion execution. In addition, the Company experienced lower shrink expense as a percent of sales than in the prior year period, contributing to the increased merchandise margins. Occupancy costs as a percent of sales increased slightly for the quarter primarily due to higher rent-related expenses. Selling, general, and administrative expenses in the fourth quarter increased $243.1 million to $528.2 million, or as a percent of sales, to 38.6% in fiscal 2006 compared to 22.4% in the fourth quarter of fiscal 2005. The increase in selling, general, and administrative expenses as a percent of sales versus the fourth quarter of fiscal 2005 was primarily due to $217.3 million of merger-related expenses, or 15.9% as a percent of sales in the quarter. Merger-related expenses include such items as share-based compensation, investment banking, legal, accounting and other professional fees. Operating income decreased as a percent of sales, from 14.7% in the fourth quarter of fiscal 2005 to 3.1% in the fourth quarter of fiscal 2006. The decrease was primarily due to the $217.3 million of merger-related expenses, partially offset by strong gross margin improvement in the quarter. For the fourth quarter, net income decreased $184.9 million, primarily due to the merger-related expenses, from $117.3 million in fiscal 2005 to a net loss of ($67.6) million in fiscal 2006. The Company presents EBITDA and Adjusted EBITDA to provide investors with additional information to evaluate our operating performance and our ability to service our debt. EBITDA for the quarter was $72.8 million or 5.3% of sales. Adjusted EBITDA for the quarter was $304.0 million or 22.2% of sales. Reconciliations of fourth quarter and full year actual results to EBITDA and Adjusted EBITDA, which are non-GAAP measures, are included at the end of this press release. Full Year Results Fiscal 2006 sales of $3.865 billion increased 5.1% from $3.676 billion in fiscal 2005. New store growth net of store closures contributed approximately $124.3 million of the increase in net sales, with sales in the 53rd week of fiscal 2006 contributing an additional $58.7 million. Our same-store sales for fiscal 2006 were up 0.3% over fiscal 2005 on a (2.3%) decrease in transactions, a 2.5% increase in average ticket, and a 0.1% increase in custom frame deliveries. The decline in sales of yarn products for the year adversely impacted same-store sales by approximately 1.4%. A favorable Canadian currency translation added approximately 0.3% to the average ticket increase for the fiscal year. Michaels stores' best-performing domestic departments for the year were General Crafts (led by Jewelry & Beads), Impulse, Framing, and Apparel Crafts. The gross margin rate for the fiscal year increased from 37.0% in fiscal 2005 to 38.4% in fiscal 2006. Gross margin expanded as a result of stronger sales of merchandise at regular price, improved sourcing, stronger seasonal sell-through and better shrink results. In fiscal 2005 the Company recorded various accounting items affecting gross margin, the most significant of these was the $23.9 million charge related to inventory cost deferral and vendor allowance recognition. Occupancy expenses, as a percentage of sales, increased by 60 basis points due primarily to increased property taxes and higher remodel expenses. Remodel expenses increased as the Company remodeled 67 stores in fiscal 2006 compared to 27 stores in fiscal 2005. Selling, general, and administrative expenses for the year, as a percent of sales, increased 610 basis points to 33.0%, compared to 26.9% in fiscal 2005. The expense increase was primarily due to $239.0 million of merger-related expenses and $7.4 million of incremental expenses related to the stock option review and responses to government inquiries, representing a total of 640 basis points as a percent of sales for the year. For fiscal 2006, operating income as a percent of sales decreased 460 basis points from 9.9% in fiscal 2005 to 5.3% in fiscal 2006. The decrease was primarily due to the $239.0 million of merger-related expenses and the $7.4 million of incremental legal fees, offset partly by the $23.9 million inventory cost deferral and vendor allowance recognition adjustment recorded in fiscal 2005 and strong gross margin rate improvement in the fourth quarter of fiscal 2006. Fiscal 2006 income before cumulative effect of accounting change decreased 81.2%, primarily due to the merger-related expenses and a higher effective tax rate, from $219.5 million in fiscal 2005 to $41.2 million this year. EBITDA for fiscal 2006 was $323.7 million or 8.4% of sales. Adjusted EBITDA was $618.4 million or 16.0% of sales for the year. The Company's cash balance at the end of fiscal 2006 was $30.1 million, a decrease of $422.3 million over last year's ending balance of $452.4 million. This reduction was primarily a result of the Company using its available cash to finance, in part, the Company's merger transaction with affiliates of Bain Capital and The Blackstone Group. Year-end debt levels totaled $3.959 billion, down $296 million from the peak post-closing borrowing level of $4.255 billion on November 9, 2006. During the fourth quarter the Company voluntarily prepaid $50 million of its long-term debt, made a $5.9 million amortization payment and executed a repricing amendment on its Senior secured term loan. Average inventory per Michaels store, at the end of fiscal 2006, inclusive of distribution centers, increased 6.2% to $867,000 from $816,000 last year. The fiscal 2006 increase compares to the 3.1% decrease reported at the end of fiscal 2005. Capital spending for the year totaled $142.6 million, with $79.8 million attributable to real estate activities, such as new, relocated, existing and remodeled stores, and $19.3 million for its new Centralia, Washington distribution center. The Company also spent approximately $21.1 million on strategic initiatives such as a work force management system, an energy management system, and a new merchandise planning system. During fiscal 2006, the Company opened 43 new stores, relocated seven stores, remodeled 67 stores and closed eight stores under the Michaels banner. It also opened one and closed one Aaron Brothers store. The Company will host a conference call at 4:00 p.m. central time today, hosted by President and Chief Financial Officer, Jeffrey Boyer, and President and Chief Operating Officer, Gregory Sandfort. Those who wish to participate in the call may do so by dialing 973-935-8513, conference ID# 8403458. Any interested party will also have the opportunity to access the call via the Internet at www.michaels.com. To listen to the live call, please go to the website at least fifteen minutes early to register and download any necessary audio software. For those who cannot listen to the live broadcast, a recording will be available for 30 days after the date of the event. Recordings may be accessed at www.michaels.com or by phone at 973-341-3080, PIN 8403458. Michaels Stores, Inc. is the world's largest specialty retailer of arts, crafts, framing, floral, wall décor, and seasonal merchandise for the hobbyist and do-it-yourself home decorator. As of March 6, 2007, the Company owns and operates 921 Michaels stores in 48 states and Canada, 167 Aaron Brothers stores, 11 Recollections stores and four Star Wholesale operations. This news release may contain forward-looking statements that reflect our plans, estimates, and beliefs. Any statements contained herein (including, but not limited to, statements to the effect that Michaels or its management "anticipates," "plans," "estimates," "expects," "believes," and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006, and in our Quarterly Reports on Form 10-Q for the quarters ended April 29, 2006, July 29, 2006 and October 28, 2006. Specific examples of forward-looking statements include, but are not limited to, forecasts of same-store sales growth, operating income, and forecasts of other financial performance. Our actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: our substantial leverage, as well as the restrictions and financial exposure associated with the same; our ability to service the interest and principal payments of our debt; restrictions contained in our various debt agreements that limit our flexibility in operating our business; the finalization of our fiscal year end closing process including the accounting for the merger transaction; our ability to remain competitive in the areas of merchandise quality, price, breadth of selection, customer service, and convenience; our ability to anticipate and/or react to changes in customer demand; changes in consumer confidence; unexpected consumer responses to changes in promotional programs; unusual weather conditions; the execution and management of our store growth and the availability of acceptable real estate locations for new store openings; the effective maintenance of our perpetual inventory and automated replenishment systems and related impacts to inventory levels; delays in the receipt of merchandise ordered from our suppliers due to delays in connection with either the manufacture or shipment of such merchandise; transportation delays (including dock strikes and other work stoppages); changes in political, economic, and social conditions; commodity, energy and fuel cost increases, currency fluctuations, and changes in import duties; our ability to maintain the security of electronic and other confidential information; financial difficulties of any of our insurance providers, key vendors, or suppliers; lawsuits asserted by our previous stockholders or others challenging the merger transaction; and other factors as set forth in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006, particularly in "Critical Accounting Policies and Estimates" and "Risk Factors," and in our other Securities and Exchange Commission filings. We intend these forward-looking statements to speak only as of the time of this release and do not undertake to update or revise them as more information becomes available. This press release is also available on the Michaels Stores, Inc. website (www.michaels.com). Michaels Stores, Inc. Supplemental Disclosures Regarding Non-GAAP Financial Information The following table sets forth the Company's Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA"). The Company defines EBITDA as net income before interest, income taxes, depreciation and amortization. Additionally, the table presents Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"). The Company defines Adjusted EBITDA as EBITDA adjusted for certain defined amounts that are added to or subtracted from EBITDA in accordance with the Company's credit agreements (collectively, "the Adjustments"). The Adjustments are described in further detail in the footnotes to the table below. The Company has presented EBITDA and Adjusted EBITDA in this press release to provide investors with additional information to evaluate our operating performance and our ability to service our debt. The Company uses EBITDA, among other things, to evaluate operating performance, to plan and forecast future periods' operating performance, and as an incentive compensation target for certain management personnel. The Company uses Adjusted EBITDA in the calculation of various financial covenants that the Company is subject to under its current credit agreements. On October 31, 2006, the Company entered into various credit agreements with lenders, including a $1.0 billion Revolving Credit Facility and a $2.4 billion Term Loan Facility. Contained in those agreements are covenants that require the maintenance of financial ratios tied to Adjusted EBITDA. Under the Company's Revolving Credit Facility, a Fixed Charge Ratio covenant requires the maintenance of a ratio of certain fixed charges, such as interest expense and principal payments, to Adjusted EBITDA of 1.1 to 1. However, testing for such covenant compliance is not required unless availability falls below $75 million. As of March 6, availability was approximately $513 million. Under the Term Loan facility, a Secured Debt Ratio covenant requires the maintenance of certain total indebtedness to Adjusted EBITDA. As EBITDA and Adjusted EBITDA are not measures of operating performance or liquidity calculated in accordance with U.S. GAAP, these measures should not be considered in isolation of, or as a substitute for, net income, as an indicator of operating performance, or net cash provided by operating activities as an indicator of liquidity. Our computation of EBITDA and Adjusted EBITDA may differ from similarly titled measures used by other companies. As EBITDA and Adjusted EBITDA exclude certain financial information compared with net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded. The table below shows a reconciliation of EBITDA and Adjusted EBITDA to net earnings and net cash provided by operating activities. Regulation G Reconciliation of non-GAAP data Fourth fiscal Fiscal year quarter ending 2006 ending (in millions) February 3, 2007 February 3, 2007 ---------------- ---------------- Cash flows from operating activities $ 186.6 $ 205.6 Depreciation and amortization (33.6) (118.6) Share-based compensation (119.1) (134.7) Tax benefit from stock options exercised 62.5 83.2 Other (5.2) (5.4) Changes in assets and liabilities (158.7) 11.2 Net (loss) income (67.6) 41.2 Interest expense 103.9 104.5 Interest income - (9.6) Income tax provision (1) 3.0 69.0 Depreciation and amortization 33.6 118.6 EBITDA 72.8 323.7 Adjustments: Share-based compensation (2) 119.1 134.7 Strategic alternatives and other legal (3) 99.0 127.3 Store pre-opening costs (4) 0.6 5.2 Multi-year initiatives (5) 1.5 13.5 Other (6) 10.9 13.9 Adjusted EBITDA $ 304.0 $ 618.4 ================ ================ (amounts in table may not foot due to rounding) (1) The fiscal 2006 income tax rate of 63.5% was adversely impacted primarily by non-deductible merger-related expenses. (2) Reflects share-based compensation expense recorded under the provisions of SFAS No. 123 (R), Share-Based Payment. Note fiscal 2006 contains share-based compensation expense of about $119.1 million associated with the merger. (3) Reflects legal, investment banking and other costs incurred in connection with our strategic alternatives process, as well as CEO post-employment benefits and costs associated with the review of our historical stock option practices and responses to governmental inquiries. (4) The company opened 44 stores in fiscal 2006. We expense all start-up activity costs as incurred, which primarily include store pre-opening costs. Rent expense incurred prior to a store opening is recorded in cost of sales and occupancy expense on our consolidated income (5) Reflects costs associated with multi-year initiatives related to the company's hybrid distribution network, expenses associated with opening the new northwest distribution center, and store standardization/remodel program. Under the hybrid initiative, the company incurred approximately $1.9 million in fiscal 2006 of abnormal costs as a result of consolidation and repositioning of merchandise inventories in our distribution centers. The company expects this consolidation to be substantially complete in fiscal 2007. In fiscal 2006, we incurred approximately $1.3 million of costs associated with opening our northwest distribution center. Under our store standardization/remodel initiative the company is changing store layouts to enhance the in-store experience. The company remodeled 67 stores in fiscal 2006 under this program, incurring costs of approximately $10.3 million. (6) Reflects other adjustments required in calculating debt covenant compliance. Positive adjustments to the calculation consist of management fees paid to our Sponsors, employee severance and relocation costs, closed store expense, costs we identified as related to our former public company status (partially reduced by costs incurred under our new ownership structure), foreign currency losses arising from the translation of our intercompany debt, and franchise and similar taxes. Consolidated Statements of Income Quarter Ended Fiscal Year ------------------------ ------------------------ February 3, January 28, February 3, January 28, 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Net sales $ 1,368,151 $ 1,270,193 $ 3,864,976 $ 3,676,365 Cost of sales and occupancy expense 797,458 797,460 2,379,584 2,317,082 Gross profit 570,693 472,733 1,485,392 1,359,283 Selling, general, and administrative expense 528,210 285,079 1,276,011 987,312 Store pre-opening costs 576 981 5,218 7,631 Operating income 41,907 186,673 204,163 364,340 Interest expense 103,899 1,594 104,548 22,409 Other (income) and expense, net 2,617 (1,854) (10,591) (9,944) (Loss) Income before income taxes and cumulative effect of accounting change (64,609) 186,933 110,206 351,875 Provision for income taxes 2,977 69,683 68,970 132,363 accounting change (67,586) 117,250 41,236 219,512 accounting change, net of income tax of $54.2 million - - - 88,488 Net (loss) income $ (67,586) $ 117,250 $ 41,236 $ 131,024 =========== =========== =========== =========== (In thousands, except share amounts) Subject to reclassification February 3, January 28, ----------- ----------- Cash and equivalents $ 30,098 $ 452,449 Merchandise inventories 847,612 784,032 Prepaid expenses and other 54,435 44,042 Deferred and prepaid income taxes 77,811 34,125 Total current assets 1,009,956 1,314,648 Property and equipment, at cost 1,122,948 1,011,201 Less accumulated depreciation (674,275) (586,382) 448,673 424,819 Goodwill 115,839 115,839 Debt issuance costs, net of accumulated amortization of $4,537 at February 3, 2007 120,193 - Other assets 8,117 20,249 Total assets $ 1,702,778 $ 1,875,555 =========== =========== LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Accounts payable $ 214,470 $ 193,595 Accrued liabilities and other 290,431 282,499 Income taxes payable 7,331 20,672 Current portion of long-term debt 229,765 - Total current liabilities 741,997 496,766 Long-term debt 3,728,745 - Deferred income taxes 29,139 2,803 Other long-term liabilities 68,444 88,637 Total long-term liabilities 3,826,328 91,440 4,568,325 588,206 Stockholders' (deficit) equity: Common Stock, $0.10 par value, 220,000,000 shares authorized; 117,973,396 shares issued and outstanding at February 3, 2007; 350,000,000 shares authorized and 133,821,417 shares issued and 132,986,517 shares outstanding at January 28, 2006 11,797 13,382 Additional paid-in capital - 386,627 Retained (deficit) earnings (2,884,064) 907,773 Treasury Stock (none at February 3, 2007 and 834,900 shares at January 28, 2006) - (27,944) Accumulated other comprehensive income 6,720 7,511 Total stockholders' (deficit) equity (2,865,547) 1,287,349 Total liabilities and stockholders' (deficit) equity $ 1,702,778 $ 1,875,555 Subject to reclassification February 3, January 28, 2007 2006 ------------- ------------- Net income $ 41,236 $ 131,024 Depreciation 117,458 99,686 Amortization 1,164 388 Share-based compensation 134,699 29,808 Tax benefits from stock options exercised (83,248) (25,221) Loss from early extinguishment of debt - 12,136 Non-cash charge for the cumulative effect of accounting change - 142,723 Other 5,449 1,005 Merchandise inventories (63,830) 10,885 Prepaid expenses and other (11,242) (17,429) Deferred income taxes and other (25,618) (42,657) Accounts payable 31,141 (62,671) Accrued liabilities and other 42,769 38,027 Income taxes payable 26,189 32,901 Other long-term liabilities (10,573) 13,351 Net cash provided by operating activities 205,594 363,956 Additions to property and equipment (142,625) (118,346) Purchases of short-term investments - (226) Sales of short-term investments - 50,605 Net proceeds from sales of property and equipment 40 49 Net cash used in investing activities (142,585) (67,918) Issuance of Notes 1,400,000 - Payment of debt issuance costs (124,813) - Borrowings on senior secured term loan facility 2,400,000 - Repayments on senior secured term loan facility (55,875) - Borrowings on asset-based revolving credit Payments on asset-based revolving credit facility (799,671) - Equity investment of the Sponsors 1,760,261 - Payment for old Common Stock in the Merger (6,034,833) - Repayment of Senior Notes - (209,250) Cash dividends paid to stockholders (58,589) (46,181) Repurchase of Common Stock (66,182) (190,431) Proceeds from stock options exercised 35,608 37,690 Tax benefits from stock options exercised 83,248 25,221 Proceeds from issuance of Common Stock and other 1,804 3,510 Cash overdraft (31,459) - Other (295) - Net cash used in financing activities (485,360) (379,441) Net (decrease) in cash and equivalents (422,351) (83,403) Cash and equivalents at beginning of period 452,449 535,852 Cash and equivalents at end of period $ 30,098 $ 452,449 ============= ============= Supplemental Cash Flow Information: Cash paid for interest $ 55,388 $ 19,653 Cash paid for income taxes $ 78,526 $ 94,591 Summary of Operating Data The following table sets forth the percentage relationship to net sales of each line item of our unaudited consolidated statements of income: Quarter Ended Fiscal Year ---------- ----------- ----------- ----------- Net sales 100.0% 100.0% 100.0% 100.0% occupancy expense 58.3 62.8 61.6 63.0 Gross profit 41.7 37.2 38.4 37.0 administrative expense 38.6 22.4 33.0 26.9 Store pre-opening costs 0.0 0.1 0.1 0.2 Operating income 3.1 14.7 5.3 9.9 Interest expense 7.6 0.1 2.7 0.6 expense, net 0.2 (0.1) (0.3) (0.3) accounting change (4.7) 14.7 2.9 9.6 taxes 0.2 5.5 1.8 3.6 accounting change (4.9) 9.2 1.1 6.0 of income tax - - - 2.4 Net (loss) income (4.9)% 9.2% 1.1% 3.6% ========== =========== =========== =========== The following table sets forth certain of our unaudited operating data (dollar amounts in thousands): Quarter Ended Fiscal Year ------------------------ ----------------------- February 3, January 28, February 3, January 28, 2007 2006 2007 2006 Michaels stores: Retail stores open at beginning of period 919 889 885 844 Retail stores opened during the period 4 - 43 46 (relocations) during the period - - 7 18 Retail stores closed during the period (3) (4) (8) (5) the period - - (7) (18) end of period 920 885 920 885 Aaron Brothers stores: during the period 1 - 1 2 during the period - - (1) - Recollections stores: beginning of period 11 11 11 8 during the period - - - 3 end of period 11 11 11 11 Star Decorators Wholesale stores: Wholesale stores open at beginning of period 4 4 4 3 Wholesale stores opened at end of period 4 4 4 4 Total store count at end of period 1,101 1,066 1,101 1,066 Other operating data: Average inventory per Michaels store (1) $ 867 $ 816 $ 867 $ 816 Comparable store sales increase (2) 0.8% 2.4% 0.3% 3.6% Footnotes to Financial and Operating Data Tables (1) Average inventory per Michaels store calculation excludes Aaron Brothers, Recollections, and Star Decorators Wholesale stores. (2) Comparable store sales increase represents the increase in net sales for stores open the same number of months in the indicated period and the comparable period of the previous year, including stores that were relocated or expanded during either period. A store is deemed to become comparable in its 14th month of operation in order to eliminate grand opening sales distortions. A store temporarily closed more than 2 weeks due to a catastrophic event is not considered comparable during the month it closed. If a store is closed longer than 2 weeks but less than 2 months, it becomes comparable in the month in which it reopens, subject to a mid-month convention. A store closed longer than 2 months becomes comparable in its 14th month of operation after its reopening. Lisa K. Klinger Senior Vice President - Finance

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professional_accounting

Who Is Certified to Complete a SOC Audit? Updated on March 29, 2019 by Bernard Gallagher Listen to: "Who Is Certified to Complete a SOC Audit?" A growing number of businesses are requesting that service organizations perform regular SOC audits to ensure adherence to set controls and objectives that serve to protect customer information, human resource data and intellectual property that all becomes increasingly vulnerable with each additional entity that has access to it. You may be wondering how to go about performing a SOC audit. Just as importantly, you may wonder who is certified to complete a SOC audit. Take a few moments to learn who can best help your organization get through your next SOC audit with flying colors. What Are SOC Reports? System and Organization Control (SOC) reports were developed specifically for third party service organizations by the American Institute of Certified Public Accountants (AICPA). The reports focus on the service organization’s internal controls, which amounts to a detailed list of AICPA-governed policies and procedures. Internal controls are so important because they impact the user entity’s sensitive data. Client organizations, also known as user entities, must comply with certain regulatory and/or contractual requirements—particularly when handing customer or patient data—that naturally require service organizations to do the same. With this report, a user entity can obtain an objectively performed evaluation of a service organization’s controls that address operations, financial reporting and compliance of a specified service organization. The AICPA has designed three unique SOC reporting options, which are SOC 1, SOC 2, SOC 3. The primary question for many service organizations is: who is certified to perform SOC audits? Who Is Certified to Perform and Complete a SOC Audit? SOC audits can only be performed by an independent Certified Public Accountant (CPA). The CPA must comply with all the most current updates to each type of SOC audit, as established by the AICPA. The CPA, or auditor, must also have the technical expertise, training and certification to perform such engagements. Therefore, if the auditing firm you normally engage is not a certified CPA firm, they cannot perform a SOC 1 or SOC 2 audit that fully complies with the standards set by the AICPA. Further, anyone intending to use the report cannot rely on the validity of the contents within. Each SOC 1 and SOC 2 audit features at least four main sections that users of the report will need to look for, including the following: Management’s Assertion Auditor’s Opinion Results of Testing The crucial portion of the SOC audit is what comes next, and that is the point at which the auditor provides an opinion on the contents detailed within the Description of Services and Results of Testing. If the auditor does not have the proper credentials, or the firm is not CPA certified, they cannot provide an opinion at this crucial juncture. This non-negotiable condition from the AICPA makes it essential for the business—whether the service organization or the user entity—interested in performing a SOC audit ensures that the auditing firm meets this fundamental requirement. Are There Any Workarounds That Allow a Business to Engage a Non-CPA Organization for SOC Audits? The short answer is “no.” The confusion for businesses is easy to understand since many businesses hire accountants who, for a variety of possible reasons, may not be a CPA. These organizations might have counted on their trusted accountant, also known as a bookkeeper at times in these cases, for years to perform tasks that include designing and implementing accounting systems for new companies, performing bookkeeping functions, managing cash flow questions, and preparing and filing tax returns. While valuable to the accounting and auditing community, these professionals do not have the expertise or certification to work with businesses that need to perform SOC audits. The AICPA requires that anyone engaged to work with SOC audits hold a certain level of competence and capabilities that help them earn CPA status. Even if a long-trusted non-CPA auditor has learned the process and steps to perform a SOC audit—and could perform one adequately, or even perfectly—he or she does not have the true technical capability to perform a review of the system or services up for examination. He or she may not be able to decipher the crucial differences between SOC 1 and SOC 2 audits. Further, it is not permissible to work with a non-CPA auditing firm to perform the groundwork of the SOC audit before enlisting the services of a CPA firm to provide an opinion. Businesses must use a certified firm from the beginning to the end of the process to ensure two main points: The evaluation of the design of controls and the operating effectiveness to confirm that they have functioned for the service organization over a period of time, and that they meet the applicable Trust Services Criteria (TSC) included in the report. The understanding of professional standards that are required by the ACIPA, which includes the AICPA Code of Conduct, along with other audit standards that provide auditors with the tools to apply professional skepticism and judgment, as required. Is There Anything That Might Bar a CPA Organization from Performing a SOC Audit? Yes, the AICPA Code of Conduct requires that CPA firms must be independent, in fact and appearance, before engaging with a client to perform an audit. What Happens If a Business Engages a Non-CPA Auditing Firm? The SOC report, whether SOC 1 or SOC 2, would be deemed invalid and would need to be performed again, according to the Code of Conduct created by the AICPA. Do You Need a Certified CPA to Perform Your Upcoming SOC Audit? Do you need more information about the SOC audit and who can perform it for you to ensure the best outcome? Our team at I.S. Partners, LLC. can answer all your questions regarding the latest updates on the AICPA’s policies and procedures. Call us at 215-675-1400, send us a message, or request a quote for our certified auditing services. About Bernard Gallagher Bernard has over 15 years of experience working in the Healthcare, Insurance, Banking and Telecommunications industries. Berard has expertise in MAR, HIPAA and Sarbanes Oxley Compliance, IT Security and Privacy Management, Enterprise Risk Management (ERM), Health Care Insurance, Banking and Financial Services and Department of Insurance. Read other articles written by Bernard Gallagher Are Pen Tests & Vulnerability Scans Needed for SOC 2 Report Compliance? Anticipating SOC for Supply Chain: Creating a Sophisticated Supply Chain can Reduce Risk Building a Strong SOC 2 Team Our Guideline of a SOC 2 Timeline: Know What to Expect

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professional_accounting

Income (loss) before income tax provision (benefit) was generated in the following jurisdictions: The components of the income tax provision (benefit) charged to operations are summarized as follows: Deferred: Net deferred tax assets (liabilities) consist of the following: Prepaid expenses and accruals Deferred rent and lease incentives Net operating loss and tax credit carryforwards Property and equipment and intangible assets Stock-based compensation expense Total deferred tax assets Less: valuation allowance Net deferred tax liabilities On December 22, 2017 the Tax Cuts and Jobs Act (“the Act”) was signed into United States law. The Act significantly changes U.S. income tax law and is the first major overhaul of the federal income tax code in more than 30 years. Key provisions of the Act that may impact the Company include: (i) reduction of the U.S. federal corporate income tax rate from 35% to 21%, (ii) repeal of the Corporate Alternative Minimum Tax (“AMT”) system, (iii) replacement of the worldwide taxation system with a territorial tax system which exempts certain foreign operations from U.S. taxation but also taxes certain foreign income under a new regime, called Global Intangible Low-Taxed Income ("GILTI"), (iv) further limitation on the deductibility of certain executive compensation, (v) modification of earnings calculations for certain foreign subsidiaries that were previously tax deferred to a one-time tax, (vi) creation of a new base erosion anti-abuse tax (Base Erosion Anti-Abuse Tax, or "BEAT"), (vii) allowance for immediate capital expensing of certain qualified property, (viii) limitation on the deduction for net interest expense incurred by a U.S. corporation, and (ix) modification and/or repeal of a number of other international provisions. Due to the complexities involved in accounting for the enactment of the Tax Reform, SAB 118 allowed us to record provisional amounts in earnings for the year ended December 31, 2017. In 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects. SAB 118 provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Reform. SAB 118 allowed a measurement period of up to one year from the enactment date to identify Tax Reform impacts. As of the period ended December 31, 2018, we completed our analysis of the Tax Reform on our consolidated financial statements and recorded additional tax expense of $814 primarily related to the one-time tax on deferred foreign earnings in the tax provision. Our accounting for the final income tax effects of the Tax Reform has been finalized and the measurement period under SAB 118 ended during the period ended December 31, 2018. Despite the completion of our accounting for the Tax Reform under SAB 118, many aspects of the law remain unclear and we expect ongoing guidance to be issued at both the federal and state levels. We will continue to monitor and assess the impact of any new developments. Related to the Act's new provision on GILTI, under GAAP, the Company is allowed to make an accounting policy choice to either (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method"); or (ii) factor in such amounts into the measurement of our deferred taxes (the "deferred method"). The selection of an accounting policy related to the GILTI tax provisions depends, in part, on analyzing our global income to determine whether the Company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. While the future global operations depend on a number of different factors, the Company does expect to have future U.S. inclusions in taxable income related to GILTI. Further, the Company has made a policy decision to record GILTI tax as a current-period expense when incurred. In addition, the BEAT provision has an impact on the Company in the current year. In accordance with FASB guidance, the incremental effect of BEAT is recognized in the year the BEAT is incurred and also there is no need to evaluate the effect of potentially paying the BEAT in future years. The current year estimated BEAT liability and therefore impact to the Company's tax expense is $3,760. The valuation allowance for net deferred tax assets as of December 31, 2018 and 2017 was $15,531 and $32,513, respectively. The change in the valuation allowance from 2017 to 2018 was primarily related to the acquisition of Folio and the Company's convertible debt incurred in 2018 in addition to the current year movement related to the amortization of book intangible assets. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence is the cumulative loss incurred over the three-year period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. On the basis of this evaluation, as of December 31, 2018, a valuation allowance of $15,531 has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. Prior to December 31, 2017, the Company did not claim permanent reinvestment of our accumulated foreign earnings, and recorded taxes on these earnings. The amount of this estimated liability at December 31, 2016 was approximately $4,500. As of December 31, 2017, the Company changed our position on this matter and claimed permanent reinvestment on accumulated earnings of approximately $20,600. As of December 31, 2018, the Company has claimed permanent reinvestment on accumulated earnings of approximately $33,000. Post Tax Reform, the primary deferred tax liability that is not being recorded by the Company relates to India withholding tax. The reinvested foreign earnings of the Company will be used to fund future foreign acquisitions, capital expenditures, headcount expansion and other operating expenses. As these earnings will be permanently reinvested in the foreign jurisdictions, deferred taxes were not recorded. The expected tax provision (benefit) calculated at the statutory federal rate differs from the actual provision as follows: Tax provision (benefit), at U.S. federal statutory tax rate State income tax provision (benefit), net of federal benefit Effect of stock-based compensation excess tax benefit Effect of permanent items Change in valuation allowance Effect of change in federal income tax rate Effect of change in state and foreign income tax rates Uncertain tax positions BEAT liability Research and development credits Change in permanent reinvestment assertion State net operating loss adjustment, net of valuation allowance impact Income tax provision At December 31, 2018, the Company had NOL carryforwards, before any uncertain tax position reserves, for federal income tax purposes of approximately $267,000 which are available to offset future federal taxable income, if any, and expire through 2038. In addition, as of December 31, 2018, the Company had NOL carryforwards for state income tax purposes of approximately $153,000 available to reduce future income subject to income taxes. The state NOL carryforwards expire through 2038. In addition, at December 31, 2018, the Company had AMT credit carryforwards of approximately $1,455 for Federal purposes. As a result of tax reform, AMT credits are refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50% (100% in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the minimum tax credit was reclassified from a deferred tax asset to an income tax receivable. The Company also had AMT credits of $19 for California, which are available to reduce future California income taxes, if any, over an indefinite period. In addition, the Company had research and development credit carryforwards of approximately $15,259 for federal and $9,452 for California and Illinois, as well as foreign tax credits of $1,401 available to offset federal income tax. A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows: Unrecognized tax benefits balance at beginning of year Additions based on tax positions related to the current year Additions based on tax positions related to prior years Reductions for settlements with taxing authorities related to prior years Reductions for lapses of statute of limitations Unrecognized tax benefits balance at end of year At December 31, 2018, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $15,628. The Company estimates it is reasonably possible that there will not be a material change to the liability for unrecognized tax benefits in the next twelve months. The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31, 2018 and 2017, income tax expense included $126 and $1,690, respectively, of potential interest and penalties related to unrecognized tax benefits. The Company had accrued interest and penalties of $5,977 and $6,018 as of December 31, 2018 and 2017, respectively. The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company was notified by the Internal Revenue Service as of December 18, 2017 that the calendar year 2015 and 2016 federal income tax returns have been have been selected for audit by the Internal Revenue Service. As of the date of this report, no additional taxes had been assessed, as the audit has not yet concluded. The Company’s tax returns for the calendar years ended December 31, 2017, 2016, and 2015 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2017, 2016, 2015, and 2014 remain open to examination by various state revenue services. Our Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2005, 2008, 2011, 2012, 2013, 2014, 2015, 2016, and 2017. Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheet. It is possible that one or more of these audits may be finalized within the next twelve months. The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. Name: us-gaap_IncomeTaxDisclosureTextBlock

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- Any -No Business & Self Employed Charities and Nonprofits International Taxpayers Federal State and Local Governments Indian Tribal Governments Tax Exempt Bonds FILING FOR INDIVIDUALS Who Should File How to File When to File Get Your Tax Record Apply for an Employer ID Number (EIN) Check Your Amended Return Status Get an Identity Protection PIN (IP PIN) File Your Taxes for Free PAY BY Bank Account (Direct Pay) Payment Plan (Installment Agreement) Electronic Federal Tax Payment System (EFTPS) Tax Withholding Estimator Reduced Refunds Fix/Correct a Return Credits & Deductions Businesses & Self-Employed Standard mileage and other information Earned Income Credit (EITC) Advance Child Tax Credit Forms & Instructions POPULAR FORMS & INSTRUCTIONS Individual Tax Return Form 1040 Instructions Instructions for Form 1040 Request for Taxpayer Identification Number (TIN) and Certification Form 4506-T Request for Transcript of Tax Return Employee's Withholding Certificate Employer's Quarterly Federal Tax Return Employers engaged in a trade or business who pay compensation Installment Agreement Request POPULAR FOR TAX PROS Form 1040-X Amend/Fix Return Apply for Power of Attorney Apply for an ITIN Circular 230 Rules Governing Practice before IRS Internal Revenue Bulletin: 2020-34 HIGHLIGHTS OF THIS ISSUE The IRS Mission T.D. 9904 Recapture of Excess Employment Tax Credits under the Families First Act and the CARES Act Notice of Proposed Rulemaking and Partial Withdrawal of Notice of Proposed Rulemaking REG-112042-19 Notice of Proposed Rulemaking Numerical Finding List Finding List of Current Actions on Previously Published Items1 How to get the Internal Revenue Bulletin INTERNAL REVENUE BULLETIN We Welcome Comments About the Internal Revenue Bulletin These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. REG-111879-20, page 421. Temporary and proposed regulations provide guidance on the recapture of excess employment tax credits. Under the Families First Coronavirus Response Act and Coronavirus Aid, Relief and Economic Security Act, eligible employers may claim refundable paid sick and family leave and employee retention credits up to the total allowable amounts either on their employment tax returns or as an advance payment that is later reconciled on their employment tax returns. Any refund of these credits paid to a taxpayer that exceeds the credit amount the taxpayer is allowed is an erroneous refund. These temporary regulations authorize the assessment and collection of any erroneous refund of the credits in the normal course of processing the applicable employment tax returns. This allows the IRS to efficiently recover any refund, while preserving administrative protections for taxpayers. T.D. 9904, page 413. 26 CFR 31.3111-6T & 26 CFR 31.3221-5T: Recapture of credits under the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic S This document contains proposed regulations relating to the excise taxes imposed on certain amounts paid for transportation of persons and property by air. Specifically, the proposed regulations relate to the exemption for amounts paid for certain aircraft management services. The proposed regulations also amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete and generally update the existing regulations to incorporate statutory changes, case law, and other published guidance. In addition, the proposed regulations withdraw a provision that was included in a prior notice of proposed rulemaking that was never finalized and re-propose it. The proposed regulations affect persons that provide air transportation of persons and property, and persons that pay for those services. Notice 2020-58, page 419. In response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic, this notice provides temporary relief from certain requirements under § 47 of the Internal Revenue Code. This document contains proposed regulations to implement legislative changes to sections 263A, 448, 460, and 471 of the Internal Revenue Code (Code) that simplify the application of those tax accounting provisions for certain businesses having average annual gross receipts that do not exceed $25 million, adjusted for inflation. This document also contains proposed regulations regarding certain special accounting rules for long-term contracts under section 460 to implement legislative changes applicable to corporate taxpayers. The proposed regulations generally affect taxpayers with average annual gross receipts of not more than $25 million (adjusted for inflation). Additionally, this document contains a request for comments regarding the application of section 460 (or other special methods of accounting) to a contract with income that is accounted for in part under section 460 (or other special method) and in part under section 451. Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all. The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly. It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforcement). Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements. The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period. DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 31 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Temporary regulations. SUMMARY: This document amends the regulations under sections 3111 and 3221 of the Internal Revenue Code with the addition of temporary regulations issued under the regulatory authority granted by the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act to prescribe such regulations as may be necessary for reconciling advance payments of refundable employment tax credits provided under these acts and recapturing the benefit of the credits when necessary. Consistent with this authority, these temporary regulations authorize the assessment of any erroneous refund of the credits paid under sections 7001 and 7003 of the Families First Coronavirus Response Act, including any increases in such credits under section 7005 thereof, and section 2301 of the Coronavirus Aid, Relief, and Economic Security Act. The text of these temporary regulations also serves as the text of the proposed regulations (REG-111879-20) set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register. DATES: Effective Date: These temporary regulations are effective on July 29, 2020. Applicability Date: For date of applicability, see §§31.3111-6T and 31.3221-5T of these temporary regulations. FOR FURTHER INFORMATION CONTACT: Concerning these temporary regulations, NaLee Park at 202-317-6798. SUPPLEMENTARY INFORMATION: I. The Statutes in General: The Families First Act and the CARES Act The Families First Coronavirus Response Act (Families First Act), Public Law 116-127, 134 Stat. 178 (2020), enacted on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 (2020), enacted on March 27, 2020, provide relief to taxpayers from economic hardships resulting from the Coronavirus Disease 2019 (COVID-19). The Families First Act, through the enactment of the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act, generally requires employers with fewer than 500 employees to provide paid leave due to certain circumstances related to COVID-19. Division E of the Families First Act, the Emergency Paid Sick Leave Act (EPSLA), requires certain employers to provide employees with up to 80 hours of paid sick leave if the employee is unable to work or telework because the employee: (1) is subject to a Federal, State, or local quarantine or isolation order related to COVID-19; (2) has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; (3) is experiencing symptoms of COVID-19 and seeking a medical diagnosis; (4) is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; (5) is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions; or (6) is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor.1 An employee who is unable to work or telework for reasons related to COVID-19 described in (1), (2), or (3) above is entitled to paid sick leave at the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $511 per day and $5,110 in the aggregate. An employee who is unable to work or telework for reasons related to COVID-19 described in (4), (5), or (6) above is entitled to paid sick leave at two-thirds the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $200 per day and $2,000 in the aggregate. Division C of the Families First Act, the Emergency Family and Medical Leave Expansion Act (EFMLEA), amends the Family and Medical Leave Act of 1993 to require certain employers to provide expanded paid family and medical leave to employees who are unable to work or telework for reasons related to COVID-19. An employee can receive up to 10 weeks of paid family and medical leave at two-thirds the employee’s regular rate of pay, up to $200 per day and $10,000 in the aggregate if the employee is unable to work or telework because the employee is caring for a son or daughter whose school or place of care is closed or whose child care provider is unavailable for reasons related to COVID-19. Sections 7001 and 7003 of the Families First Act generally provide that employers subject to the paid leave requirements under EPSLA and EFMLEA (“eligible employers”) are entitled to fully refundable tax credits to cover the cost of the leave required to be paid for those periods of time during which employees are unable to work or telework for reasons related to COVID-19.2 Eligible employers are entitled to receive a refundable credit equal to the amount of the qualified sick leave wages and qualified family leave wages (collectively “qualified leave wages”), plus allocable qualified health plan expenses. Under the respective provisions, qualified leave wages are defined to mean wages (as defined in section 3121(a) of the Internal Revenue Code (Code)) and compensation (as defined in section 3231(e) of the Code) paid by an employer which are required to be paid under the EPSLA and EFMLEA. See section 7001(c) and 7003(c). The credit is allowed against the taxes imposed on employers by section 3111(a) of the Code (the Old-Age, Survivors, and Disability Insurance tax (social security tax)), first reduced by any credits claimed under sections 3111(e) and (f) of the Code, and section 3221(a) of the Code (the Railroad Retirement Tax Act Tier 1 tax), on all wages and compensation paid to all employees. Under section 7005 of the Families First Act, the qualified leave wages are not subject to the taxes imposed on employers by sections 3111(a) and 3221(a) of the Code. In addition, section 7005 provides that the credits under sections 7001 and 7003 of the Families First Act are increased by the amount of the tax imposed by section 3111(b) of the Code (employer’s share of Medicare tax) on qualified leave wages.3 The CARES Act provides an additional credit for employers experiencing economic hardship related to COVID-19. Under section 2301 of the CARES Act, certain employers who pay qualified wages to their employees are eligible for an employee retention credit. Employers eligible for the employee retention credit are employers that carry on a trade or business during calendar year 2020 and tax-exempt organizations that either have a full or partial suspension of operations during any calendar quarter in 2020 due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or experience a significant decline in gross receipts during the calendar quarter. Qualified wages are wages (as defined in section 3121(a) of the Code) and compensation (as defined in section 3231(e) of the Code) paid by an employer to some or all employees after March 12, 2020, and before January 1, 2021, and include the employer’s qualified health plan expenses that are properly allocable to such wages or compensation. For employers that averaged more than 100 full-time employees during 2019, qualified wages are wages and compensation (including allocable qualified health plan expenses), up to $10,000 per employee, paid to employees that are not providing services because operations were fully or partially suspended due to orders from an appropriate governmental authority or due to a decline in gross receipts. For employers who averaged 100 full-time employees or fewer during 2019, qualified wages are wages and compensation (including allocable qualified health plan expenses), up to $10,000 per employee, paid to any employee during the period operations were suspended due to orders from an appropriate governmental authority or due to a decline in gross receipts, regardless of whether its employees are providing services. The employee retention credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages. Because the maximum amount of qualified wages taken into account with respect to each employee is $10,000, the maximum employee retention credit for an eligible employer for qualified wages paid to any employee is $5,000. The credit is allowed against the taxes imposed on employers by section 3111(a) of the Code, first reduced by any credits allowed under sections 3111(e) and (f) of the Code and sections 7001 and 7003 of the Families First Act, and the taxes imposed under section 3221(a) of the Code that are attributable to the rate in effect under section 3111(a) of the Code, first reduced by any credits allowed under sections 7001 and 7003 of the Families First Act, on all wages and compensation paid to all employees. The same wages or compensation cannot be counted for both the Families First Act leave credits and the CARES Act employee retention credit. II. Refundability of Credits Sections 7001(b)(4) and 7003(b)(3) of the Families First Act provide that if the amount of the paid sick and family leave credits under these sections exceeds the taxes imposed by section 3111(a) or 3221(a) of the Code for any calendar quarter, such excess shall be treated as an overpayment that shall be refunded under sections 6402(a) and 6413(b) of the Code. Section 2301(b)(3) of the CARES Act provides that if the amount of the employee retention credit exceeds the taxes imposed by section 3111(a) or 3221(a) (limited to the portion attributable to the rate in effect under section 3111(a)) of the Code for any calendar quarter, such excess shall be treated as an overpayment that shall be refunded under sections 6402(a) and 6413(b) of the Code. Section 6402(a) of the Code provides that, within the applicable period of limitations, overpayments may be credited against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and any remaining balance refunded to such person. Section 6413(b) provides that if more than the correct amount of employment tax imposed by sections 3101, 3111, 3201, 3221, or 3402 is paid or deducted and the overpayment cannot be adjusted under section 6413(a)4, the amount of the overpayment shall be refunded (subject to the applicable statute of limitations) as the Secretary may prescribe in regulations. The IRS has revised Form 941, Employer’s Quarterly Federal Tax Return, and is revising Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, Form 944, Employer’s Annual Federal Tax Return, and Form CT-1, Employer’s Annual Railroad Retirement Tax Return, so that employers may use these returns to claim the paid sick and family leave credits under the Families First Act and the employee retention credit under the CARES Act. The revised employment tax returns will provide for any credits in excess of the taxes imposed under sections 3111(a) or 3221(a) (for the employee retention credit, only the taxes imposed under section 3221(a) that are attributable to the rate in effect under section 3111(a)) to be credited against other employment taxes and then for any remaining balance to be refunded to the employer (per section 6402(a) or section 6413(b)).5 III. Advance Payment of Credits and Erroneous Refunds Section 3606 of the CARES Act amends sections 7001(b)(4) and 7003(b)(3) of the Families First Act to provide that, in anticipation of the paid sick and family leave credits under these sections, including any refundable portions (which would include any increases in the credits under section 7005), these credits may be advanced, according to forms and instructions provided by the Secretary, up to the total allowable amount and subject to applicable limits for the calendar quarter. Section 2301(l)(1) of the CARES Act provides that the Secretary shall issue such forms, instructions, regulations, and guidance as are necessary to allow the advance payment of the employee retention credit under section 2301, subject to the limitations provided in section 2301 and based on such information as the Secretary shall require. To implement the advance payment provisions of the Families First Act and the CARES Act, the IRS has created Form 7200, Advance Payment of Employer Credits Due To COVID-19, which employers may use to request an advance of the paid sick or family leave credits under the Families First Act, the employee retention credit under the CARES Act, or two or more of them. Employers are required to reconcile any advance payments claimed on Form 7200 with total credits claimed and total taxes due on their employment tax returns. A refund, a credit, or an advance of any portion of these credits to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund for which the IRS must seek repayment. IV. Assessment Authority Section 6201, in general, authorizes the Secretary to determine and assess tax liabilities including interest, additional amounts, additions to the tax, and assessable penalties. However, the general authority to assess tax liabilities under section 6201(a) does not allow the assessment of any non-rebate6 portion of an erroneous refund of a refundable credit. Instead, non-rebate refunds are generally recovered or recaptured through voluntary payment or litigation. The government by appropriate action can bring civil litigation to recover funds which its agents have wrongfully, erroneously, or illegally paid, and no statute is necessary to authorize the government to sue in such a case, since the right to sue is independent of statute. United States v. Wurts, 303 U.S. 414, 415 (1938), citing United States v. The Bank of the Metropolis, 40 U.S. 377 (1841). However, the statutory language of the Families First Act and the CARES Act provides for the administrative recapture of these non-rebate refunds by authorizing the promulgation of regulations or other guidance to do so. Sections 7001 and 7003 of the Families First Act and section 2301 of the CARES Act grant authority to the Department of the Treasury (Treasury Department) and the IRS to issue regulations or other guidance to recapture an erroneous refund of the credits. Specifically, sections 7001(f) and 7003(f) of the Families First Act and section 2301(l) of the CARES Act authorize the Secretary to issue guidance to allow for the administrative reconciliation and recapture of erroneous refunds. Sections 7001(f) and 7003(f) of the Families First Act provide, in relevant part, that the Secretary (or the Secretary’s delegate) shall provide such regulations or other guidance as may be necessary to carry out the purposes of the credit, including regulations or other guidance: (1) to prevent the avoidance of the purposes of the limitations under this provision; (2) to minimize compliance and record-keeping burdens associated with the credit; (3) to provide for a waiver of penalties for failure to deposit amounts in anticipation of the allowance of the credit; (4) to recapture the benefit of the credit in cases where there is a subsequent adjustment to the credit; and (5) to ensure that the wages taken into account for the credit conform with the paid sick leave and paid family leave required to be provided under the Families First Act. Similarly, section 2301(l) of the CARES Act provides in relevant part that the Secretary shall issue such forms, instructions, regulations, and guidance as are necessary to provide for the reconciliation of an advance payment of the employee retention credit with the amount advanced at the time of filing the return of tax for the applicable calendar quarter or taxable year, and to provide for the recapture of the credit under section 2301 of the CARES Act if such credit is allowed to a taxpayer that receives a small business loan under section 1102 of the CARES Act during a subsequent quarter. Accordingly, this document amends the Employment Tax Regulations (26 CFR Part 31) by adding temporary regulations under sections 3111 and 3221 of the Code. Concurrent with the publication of this Treasury decision, the Treasury Department and the IRS are publishing in the Proposed Rules section of this issue of the Federal Register a notice of proposed rulemaking (REG-111879-20) on this subject that cross-references the text of these temporary regulations. See section 7805(e)(1). Interested persons are directed to the ADDRESSES and COMMENTS AND REQUESTS FOR A PUBLIC HEARING sections of the preamble to REG-111879-20 for information on submitting public comments or requesting a public hearing on the proposed regulations. Explanation of Provisions Sections 7001 and 7003 of the Families First Act and section 2301 of the CARES Act provide that the credits described in these sections are taken against the taxes imposed on employers under sections 3111(a) or 3221(a) of the Code (for the employee retention credit, only the taxes imposed under section 3221(a) that are attributable to the rate in effect under section 3111(a) of the Code). Additionally, if the amount of the credit exceeds the taxes imposed under sections 3111(a) or 3221(a) of the Code (for the employee retention credit, only the taxes imposed under section 3221(a) that are attributable to the rate in effect under section 3111(a) of the Code) for any calendar quarter, such excess shall be treated as an overpayment to be refunded or credited under sections 6402(a) and 6413(b) of the Code. Any credits claimed that exceed the amount to which the employer is entitled and that are actually credited or paid by the IRS are considered to be erroneous refunds of the credits. These temporary regulations provide that erroneous refunds of these credits are treated as underpayments of the taxes imposed under sections 3111(a) or 3221(a) of the Code and authorize the IRS to assess any portion of the credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were tax liabilities under sections 3111(a) and 3221(a) subject to assessment and administrative collection procedures. This allows the IRS to efficiently recover the amounts, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation. These assessment and administrative collection procedures will apply in the normal course in processing employment tax returns that report advances in excess of claimed credits and in examining returns for excess claimed credits. Specifically, these temporary regulations provide that any amount of the credits for qualified leave wages under sections 7001 and 7003 of the Families First Act, plus any amount of credits for qualified health plan expenses under sections 7001 and 7003, and including any increases in these credits under section 7005, and any amount of the employee retention credit for qualified wages under section 2301 of the CARES Act that are erroneously refunded or credited to an employer shall be treated as underpayments of the taxes imposed by section 3111(a) or section 3221(a), as applicable, by the employer and may be administratively assessed and collected in the same manner as the taxes. These temporary regulations provide that the determination of any amount of credits erroneously refunded must take into account any credit amounts advanced to an employer under the process established by the IRS in accordance with sections 7001(b)(4)(A)(ii) and 7003(b)(3)(B) of the Families First Act and section 2301(l)(1) of the CARES Act. Because in certain situations third party payors claim credits on behalf of their common law employer clients, these temporary regulations also provide that employers against whom an erroneous refund of credits can be assessed as an underpayment include persons treated as the employer under sections 3401(d), 3504, and 3511 of the Code, consistent with their liability for the section 3111(a) and section 3221(a) taxes against which the credit applied. Finally, these temporary regulations apply to all credit refunds under section 7001 and 7003 of the Families First Act advanced or paid on or after April 1, 2020, and all credit refunds under section 2301 of the CARES Act advanced or paid on or after March 13, 2020. These applicability dates correspond to the effective dates of the statutory sections that provide for these credits and that authorize guidance to allow for the administrative reconciliation and recapture of erroneous refunds of these credits. Sections 7001(g) and 7003(g) of the Families First Act provide that sections 7001 and 7003 apply to wages paid with respect to the period beginning on a date selected by the Secretary of the Treasury which is during the 15-day period beginning on the date of the enactment of the Families First Act (March 18, 2020). In Notice 2020-21, 2020-16 I.R.B. 660, the IRS provided that the tax credits for qualified sick leave wages and qualified family leave wages under sections 7001 and 7003 of the Families First Act apply to wages paid for the period beginning on April 1, 2020, and ending on December 31, 2020. Section 2301(m) of the CARES Act provides that section 2301 applies to wages paid on or after March 13, 2020, and before January 1, 2021. Pursuant to section 7805(b)(2) of the Code, these temporary regulations are permitted to apply before the dates provided under section 7805(b)(1), including the date on which these temporary regulations are filed with the Federal Register, because these temporary regulations are being issued within 18 months of the date of the enactment of the relevant statutory provisions under the Families First Act and the CARES Act. Accordingly, these temporary regulations apply to all credits under sections 7001 and 7003 of the Families First Act, as modified by section 3606 of the CARES Act, including any increases in the credits under section 7005 of the Families First Act, refunded on or after April 1, 2020, including advanced refunds, as well as all credits under section 2301 of the CARES Act that are refunded on or after March 13, 2020, including advanced refunds. Special Analyses The Office of Management and Budget’s Office of Information and Regulatory Analysis has determined that these temporary regulations are not significant and not subject to review under section 6(b) of Executive Order 12866. Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary certifies that these temporary regulations will not have a significant economic impact on a substantial number of small entities because these temporary regulations impose no compliance burden on any business entities, including small entities. Although these temporary regulations will apply to all employers eligible for the credits under the Families First Act and the CARES Act, including small businesses and tax-exempt organizations with fewer than 500 employees, and will therefore be likely to affect a substantial number of small entities, the economic impact will not be significant. These temporary regulations do not affect the employer’s employment tax reporting or the necessary information to substantiate entitlement to the credits. Rather, these temporary regulations merely implement the statutory authority granted under sections 7001(f) and 7003(f) of the Families First Act and section 2301(l) of the CARES Act that authorize the IRS to assess, reconcile, and recapture any portion of the credits erroneously credited, paid, or refunded in excess of the actual amount allowed as if the amounts were tax liabilities under sections 3111(a) and 3221(a) subject to assessment and administrative collection procedures. Notwithstanding this certification, the Treasury Department and the IRS invite comments on any impact these temporary regulations would have on small entities. Pursuant to section 7805(f), these temporary regulations have been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business. The Treasury Department and the IRS have determined that good cause exists under section 553(b)(B) of the Administrative Procedure Act (APA) (5 U.S.C. 551 et seq.). Section 553(b)(B) provides that an agency is not required to publish a notice of proposed rulemaking in the Federal Register when the agency, for good cause, finds that notice and public comment thereon are impracticable, unnecessary, or contrary to the public interest. Employers must file Form 941, Employer’s Quarterly Federal Tax Return, for the second quarter of calendar year 2020 by July 31, 2020, as required by section 6071 of the Code and Treas. Reg. § 31.6071(a)-1. Employers use Form 941 to claim qualified leave credits under the Families First Act and the employee retention credit under the CARES Act, as well as to report any advance of these credits they received during the quarter. In filing their second quarter 2020 Form 941, some employers will report and receive, or will have already received as an advance, refund amounts in excess of the refund to which they are entitled. These temporary regulations authorize the assessment of any such erroneous refunds. Without these temporary regulations, in some instances the IRS may not be able to avoid bringing costly and burdensome litigation to recover such reported erroneous refunds. Further, comments are being solicited in the cross-referenced notice of proposed rulemaking that is in this issue of the Federal Register, and any comments will be considered before final regulations are issued. Statement of Availability of IRS Documents IRS notices and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. Drafting Information The principal author of these temporary regulations is NaLee Park, Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of these temporary regulations. List of Subjects in 26 CFR 31 Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 31 is amended as follows: PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE Paragraph 1. The authority citation for part 31 is amended by adding entries for §§31.3111-6T and 31.3221-5T in numerical order to read in part as follows: Authority: 26 U.S.C. 7805. Section 31.3111-6T also issued under sec. 7001 and sec. 7003 of the Families First Coronavirus Response Act of 2020 and sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act of 2020. Par. 2. Section 31.3111-6T is added to read as follows: §31.3111-6T Recapture of credits under the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act. (a) Recapture of erroneously refunded credits under the Families First Coronavirus Response Act. Any amount of credits for qualified sick leave wages or qualified family leave wages under sections 7001 and 7003, respectively, of the Families First Coronavirus Response Act (Families First Act), Public Law 116-127, 134 Stat. 178 (2020), as modified by section 3606 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 (2020), plus any amount of credits for qualified health plan expenses under sections 7001 and 7003, and including any increases in those credits under section 7005 of the Families First Act, that are treated as overpayments and refunded or credited to an employer under section 6402(a) or section 6413(b) of the Internal Revenue Code (Code) and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed by section 3111(a) of the Code and may be assessed and collected by the Secretary in the same manner as the taxes. (b) Recapture of erroneously refunded credits under the Coronavirus Aid, Relief, and Economic Security Act. Any amount of credits for qualified wages under section 2301 of the CARES Act that is treated as an overpayment and refunded or credited to an employer under section 6402(a) or section 6413(b) of the Code and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed by section 3111(a) of the Code and may be assessed and collected by the Secretary in the same manner as the taxes. (c) Advance credit amounts erroneously refunded. The determination of any amount of credits erroneously refunded as described in paragraphs (a) and (b) of this section must take into account any amount of credits advanced to an employer under the process established by the Internal Revenue Service in accordance with sections 7001(b)(4)(A)(ii) and 7003(b)(3)(B) of the Families First Act, as modified by section 3606 of the CARES Act, and section 2301(l)(1) of the CARES Act. (d) Third party payors. For purposes of this section, employers against whom an erroneous refund of the credits under sections 7001 and 7003 of the Families First Act (including any increases in those credits under section 7005 of the Families First Act), as modified by section 3606 of the CARES Act, and the credits under section 2301 of the CARES Act can be assessed as an underpayment of the taxes imposed by section 3111(a) include persons treated as the employer under sections 3401(d), 3504, and 3511 of the Code, consistent with their liability for the section 3111(a) taxes against which the credit applied. (e) Applicability date. This regulation applies to all credit refunds under sections 7001 and 7003 of the Families First Act (including any increases in those credits under section 7005 of the Families First Act), as modified by section 3606 of the CARES Act, advanced or paid on or after April 1, 2020, and all credit refunds under section 2301 of the CARES Act advanced or paid on or after March 13, 2020. (a) Recapture of erroneously refunded credits under the Families First Coronavirus Response Act. Any amount of credits for qualified sick leave wages or qualified family leave wages under sections 7001 and 7003, respectively, of the Families First Coronavirus Response Act (Families First Act), Public Law 116-127, 134 Stat. 178 (2020), as modified by section 3606 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 (2020), plus any amount of credits for qualified health plan expenses under sections 7001 and 7003, that are treated as overpayments and refunded or credited to an employer under section 6402(a) or section 6413(b) of the Internal Revenue Code (Code) and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed by section 3221(a) of the Code and may be assessed and collected by the Secretary in the same manner as the taxes. (d) Third party payors. For purposes of this section, employers against whom an erroneous refund of the credits under sections 7001 and 7003 of the Families First Act, as modified by section 3606 of the CARES Act, and the credits under section 2301 of the CARES Act can be assessed as an underpayment of the taxes imposed by section 3221(a) include persons treated as the employer under sections 3401(d), 3504, and 3511 of the Code, consistent with their liability for the section 3221(a) taxes against which the credit applied. (e) Applicability date. This regulation applies to all credit refunds under sections 7001 and 7003 of the Families First Act, as modified by section 3606 of the CARES Act, advanced or paid on or after April 1, 2020, and all credit refunds under section 2301 of the CARES Act advanced or paid on or after March 13, 2020. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: July 14, 2020. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on July 24, 2020, 4:15 p.m., and published in the issue of the Federal Register for July 29, 2020, 85 F.R. 45514) 1 The U.S. Department of Health and Human Services has not yet specified any other such conditions as of July 29, 2020. 2 Under sections 7001(d)(4) and 7003(d)(4) of the Families First Act, these credits do not apply to the government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing. 3 The credit for the employer’s share of Medicare tax does not apply to eligible employers that are subject to Railroad Retirement Tax Act (RRTA) because under section 7005(a) of the Families First Act qualified leave wages are not subject to Medicare tax under RRTA due to that section’s reference to section 3221(a) of the Code, which includes both social security tax and Medicare tax. 4 Section 6413(a) addresses interest-free adjustments of overpayments. The section provides that if more than the correct amount of employment tax imposed by section 3101, 3111, 3201, 3221, or 3402 is paid with respect to any payment of remuneration, proper adjustments with respect to both the tax and the amount to be deducted, shall be made, without interest, in such manner and at such times as the Secretary may by regulations prescribe. 5 Employment tax returns have also been revised to provide for reporting of any deferral of employment taxes under the CARES Act. Section 2302 of the CARES Act provides that employers may defer the deposit and payment of the employer’s share of social security tax for the payroll tax deferral period of March 27, 2020 through December 31, 2020. The deferral applies in addition to the credits claimed on an employment tax return, but the deferral does not reduce the amount of the employer’s share of social security tax against which the credits are applied. 6 ”Non-rebate” refers to the portion of any refund of a credit that exceeds the IRS’s determination of the recipient’s tax liability (i.e., the remaining portion of the refund that is paid to the recipient after the refund has been applied to the recipient’s tax liability). I. PURPOSE On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. The emergency declaration instructed the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).” Section III of this notice describes the relief provided pursuant to § 7508A(a) of the Internal Revenue Code (Code) for certain requirements of the rehabilitation credit under § 47 of the Code. Section 38(b)(1) of the Code provides that the current year general business credit includes the investment credit determined under § 46 of the Code. The investment credit under § 46 includes the rehabilitation credit under § 47. On December 22, 2017, former § 47 was amended by section 13402 of Public Law No. 115-97, 131 Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA). Prior to the TCJA, former § 47(a) provided for the purposes of § 46 a two-tier credit for qualified rehabilitation expenditures (QREs) incurred in connection with the rehabilitation of a qualified rehabilitated building (QRB). Former § 47(a)(2) allowed a 20-percent credit for QREs with respect to a certified historic structure, and former § 47(a)(1) allowed a 10-percent credit for QREs with respect to a QRB other than a certified historic structure (for certain buildings first placed in service before 1936 (pre-1936 buildings)). Under former § 47, both the 20-percent and 10-percent credits were fully allowed in the taxable year the QRB was placed in service. Section 13402(a) of the TCJA repealed the 10-percent credit for pre-1936 buildings and modified the rules for claiming the 20-percent credit for certified historic structures. Section 13402(b) of the TCJA amended § 47(c), in part, by redesignating former § 47(c)(1)(C) and (D) as § 47(c)(1)(B) and (C). Section 13402(c)(1) of the TCJA provides that the amendments made by section 13402(a) and (b) are generally applicable to QRE amounts paid or incurred after December 31, 2017, subject to a statutory transition rule provided in section 13402(c)(2) of the TCJA (TCJA transition rule). Section 47(a)(1) provides for the purposes of § 46, for any taxable year during the 5-year period beginning in the taxable year in which a QRB is placed in service, the rehabilitation credit for such year is an amount equal to the ratable share for such year. Section 47(a)(2) defines the ratable share for any taxable year during the 5-year period described in § 47(a)(1) as an amount equal to 20 percent of the QREs with respect to the QRB, as allocated ratably to each year during the 5-year period. Section 47(b) provides that QREs with respect to any QRB are taken into account for the taxable year in which the QRB is placed in service. Under § 47(c)(1)(A)(i), a QRB must be a building that has been substantially rehabilitated. Under § 47(c)(1)(B)(i), a building is treated as substantially rehabilitated only if the QREs during the 24-month period selected by the taxpayer ending with or within the taxable year exceed the greater of the taxpayer’s adjusted basis in the building (and its structural components) or $5,000. For certain rehabilitations expected to be completed in phases set forth in architectural plans and specifications completed before the rehabilitation begins as described in § 47(c)(1)(B)(ii) (phased rehabilitation), the taxpayer selects a 60-month period rather than a 24-month period. Section 1.48-12(b)(2)(i) of the Income Tax Regulations defines “substantial rehabilitation test” and provides that a building is treated as having been substantially rehabilitated for a taxable year only if the QREs incurred during any 24-month period selected by the taxpayer ending with or within the taxable year exceed the greater of (A) the adjusted basis of the building (and its structural components), or (B) $5,000. Section 1.48-12(b)(2)(v) describes special rules for phased rehabilitation and provides that § 1.48-12(b)(2)(i) is applied by substituting “60-month period” for “24-month period.” The TCJA transition rule provides that in the case of QREs (for either a certified historic structure eligible for a 20-percent credit or a pre-1936 building eligible for a 10-percent credit prior to December 31, 2017), with respect to any building owned or leased by the taxpayer at all times on and after January 1, 2018, the 24-month period selected by the taxpayer under § 47(c)(1)(B)(i), or the 60-month period selected by the taxpayer under the rule for phased rehabilitation under § 47(c)(1)(B)(ii), is to begin no later than the end of the 180-day period beginning on December 22, 2017, and the amendments made by section 13402 of the TCJA apply to such QREs paid or incurred after the end of the taxable year in which such 24-month or 60-month period ends. For taxpayers selecting a 24-month period, the requirement to begin the period within 180 days from December 22, 2017, means that the latest day that such a 24-month period can end under the TCJA transition rule is June 20, 2020. For taxpayers permitted to select a 60-month period for phased rehabilitation, the requirement to begin the period within 180 days from December 22, 2017, means that the latest day that such a 60-month period can end under the TCJA transition rule is June 20, 2023. Section 7508A provides the Secretary of the Treasury or his delegate (Secretary) with authority to postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the Secretary to be affected by a Federally declared disaster as defined in § 165(i)(5)(A). Pursuant to § 7508A(a), a period of up to one year may be disregarded in determining whether the performance of certain acts is timely under the internal revenue laws. On April 9, 2020, the Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2020-23, 2020-18 I.R.B. 742, which pursuant to § 7508A provided certain relief to affected taxpayers and postponed due dates until July 15, 2020, with respect to certain tax filings and payments, certain time-sensitive government actions, and all time-sensitive actions listed in Rev. Proc. 2018-58, 2018-50 I.R.B. 990 (Dec. 10, 2018), that were due to be performed on or after April 1, 2020, and before July 15, 2020. See Notice 2020-23 and Rev. Proc. 2018-58. Among the relief granted, Notice 2020-23 (referencing Rev. Proc. 2018-58) postponed until July 15, 2020, the time to perform certain time-sensitive actions for purposes of § 47 that were due to be performed on or after April 1, 2020, and before July 15, 2020, including the time period for satisfying the substantial rehabilitation test described in former § 47(c)(1)(C) (redesignated as § 47(c)(1)(B) by the TCJA) and § 1.48-12(b)(2). III. GRANT OF RELIEF UNDER SECTION 47 PURSUANT TO SECTION 7508A The Secretary has determined that persons with deadlines under § 47 that are described in sections III.A and B of this notice are persons affected by the COVID-19 emergency for the purposes of the relief provided under § 7508A(a) as described in sections III.A and B of this notice. A. MEASURING PERIOD UNDER THE SUBSTANTIAL REHABILITATION TEST For purposes of §§ 47(c)(1)(B) and 1.48-12(b)(2), if the 24- or 60-month measuring period in which the requisite amount of QREs have to be paid or incurred in order to satisfy the substantial rehabilitation test for a building originally ends on or after April 1, 2020, and before March 31, 2021, the last day of the 24- or 60-month measuring period for a taxpayer to incur the requisite QREs with respect to the building is postponed to March 31, 2021. This means that a taxpayer may have a measuring period that is longer than 24 or 60 months. B. DEADLINE FOR TCJA TRANSITION RULE For purposes of taxpayers subject to the TCJA transition rule, if the 24- or 60-month measuring period in which the requisite amount of QREs have to be paid or incurred in order to satisfy the substantial rehabilitation test for a building originally ends on or after April 1, 2020, and before March 31, 2021, the last day of the 24- or 60-month measuring period for a taxpayer to pay or incur the requisite QREs with respect to the building is postponed to March 31, 2021. Thus, if the requisite QREs described in the preceding sentence are paid or incurred by March 31, 2021, the TCJA transition rule allows the rules of former § 47 allowing the 10-percent and 20-percent credits in a single year to apply to QREs paid or incurred with respect to such building in the taxable year in which the 24- or 60-month measuring period (the last day of which is postponed by this notice) ends. In addition, the amendments made by section 13402(a) and (b) of the TCJA, under which only the 20-percent credit is allowed over five years, apply to QREs paid or incurred with respect to such building in succeeding taxable years. C. OTHER REQUIREMENTS Except as expressly provided in this notice, all other rules and requirements of § 47 continue to apply. IV. EFFECT ON OTHER DOCUMENTS Notice 2020-23 is amplified. V. DRAFTING INFORMATION The principal authors of this notice are Barbara J. Campbell and Michael J. Torruella Costa, Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Barbara J. Campbell or Michael J. Torruella Costa at (202) 317-4137 (not a toll-free number). Notice of Proposed Rulemaking by Cross-reference to Temporary Regulations ACTION: Notice of Proposed Rulemaking by cross-reference to temporary regulations. SUMMARY: In the Rules and Regulations section of this issue of the Federal Register, the IRS is issuing temporary regulations pursuant to the regulatory authority granted under the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act to prescribe such regulations as may be necessary for reconciling advance payments of refundable employment tax credits provided under these acts and recapturing the benefit of the credits when necessary. These proposed regulations affect businesses and tax-exempt organizations that claim certain credits under the Families First Coronavirus Response Act for qualifying sick and family leave wages and that claim certain employee retention credits under the Coronavirus Aid, Relief, and Economic Security Act. The text of those temporary regulations serves as the text of these proposed regulations. DATES: Written or electronic comments and requests for a public hearing must be received by September 28, 2020. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-111879-20) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through the mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR (REG-111879-20), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, NaLee Park at (202) 317-6879; concerning submissions of comments and/or requests for a public hearing, Regina Johnson, (202) 317-5177 (not toll-free numbers). Background and Explanation of Provisions Temporary regulations in the Rules and Regulations section of this issue of the Federal Register amend the Employment Taxes and Collection of Income at the Source Regulations (26 CFR part 31) relating to sections 3111 and 3221 of the Internal Revenue Code (Code) pursuant to the regulatory authority granted under the Families First Coronavirus Response Act (Families First Act) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to prescribe such regulations as may be necessary for reconciling advance payments of refundable employment tax credits provided under these acts and recapturing the benefit of the credits when necessary. Consistent with this authority, these proposed regulations authorize the assessment of erroneous refunds of the credits paid under sections 7001 and 7003 of the Families First Act and section 2301 of the CARES Act. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments. The Office of Management and Budget’s Office of Information and Regulatory Analysis has determined that these regulations are not significant and not subject to review under section 6(b) of Executive Order 12866. Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities because these proposed regulations impose no compliance burden on any business entities, including small entities. Although these proposed regulations will apply to all employers eligible for the credits under the Families First Act and the CARES Act, including small businesses and tax-exempt organizations with fewer than 500 employees, and will therefore be likely to affect a substantial number of small entities, the economic impact will not be significant. These proposed regulations do not affect the employer’s employment tax reporting or the necessary information to substantiate entitlement to the credits. Rather, these proposed regulations merely implement the statutory authority granted under sections 7001(f) and 7003(f) of the Families First Act and section 2301(l) of the CARES Act that authorize the Service to assess, reconcile, and recapture any portion of the credits erroneously paid or refunded in excess of the actual amount allowed as if such amounts were tax liabilities under sections 3111(a) and 3221(a) subject to assessment and administrative collection procedures. Notwithstanding this certification, the Treasury Department and the IRS invite comments on any impact these regulations would have on small entities. Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are timely submitted to the IRS as prescribed in the preamble under the “ADDRESSES” section. The Treasury Department and the IRS request comments on all aspects of these proposed regulations. Any electronic comments submitted, and to the extent practicable any paper comments submitted, will be made available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a hearing are strongly encouraged to be submitted electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register. Announcement 2020-4, 2020-17 IRB 1, provides that until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities. The principal author of these regulations is NaLee Park, Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of these regulations. Proposed Amendments to the Regulations Accordingly, 26 CFR part 31 is proposed to be amended as follows: Paragraph 1. The authority citation for part 31 is amended by adding entries for §§ 31.3111-6T and 31.3221-5T in numerical order to read in part as follows: Section 31.3111-6T also issued under sec. 7001 and sec. 7003 of the Families First Coronavirus Response Act of 2020 and sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act of 2020 Par. 2. Section 31.3111-6 is added to read as follows: §31.3111-6 Recapture of credits under the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act [The text of proposed §31.3111-6 is the same as the text of §31.3111-6T published elsewhere in this issue of the Federal Register]. Excise Taxes; Transportation of Persons by Air; Transportation of Property by Air; Aircraft Management Services ACTION: Notice of proposed rulemaking and partial withdrawal of notice of proposed rulemaking. SUMMARY: This document contains proposed regulations relating to the excise taxes imposed on certain amounts paid for transportation of persons and property by air. Specifically, the proposed regulations relate to the exemption for amounts paid for certain aircraft management services. The proposed regulations also amend, revise, redesignate, and remove provisions of existing regulations that are out-of-date or obsolete and generally update the existing regulations to incorporate statutory changes, case law, and other published guidance. In addition, the proposed regulations withdraw a provision that was included in a prior notice of proposed rulemaking that was never finalized and re-propose it. The proposed regulations affect persons that provide air transportation of persons and property, and persons that pay for those services. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-112042-19) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR (REG-112042-19), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Michael H. Beker or Rachel S. Smith at (202) 317-6855; concerning submissions of comments and/or requests for a public hearing, Regina Johnson, (202) 317-5177 (not toll-free numbers). This document contains proposed amendments to the Facilities and Services Excise Tax Regulations (26 CFR part 49) under sections 4261, 4262, 4263, 4264, 4271, 4281, and 4282 of the Internal Revenue Code (Code). This document also contains proposed amendments to the Excise Tax Procedural Regulations (26 CFR part 40). Section 4261 imposes an excise tax on certain amounts paid for transportation of persons by air. Section 4271 imposes an excise tax on certain amounts paid for transportation of property by air. The excise taxes imposed by sections 4261 and 4271 (collectively, air transportation excise tax), as well as certain Federal fuel taxes, are deposited into the Airport and Airway Trust Fund, which funds the Federal Aviation Administration’s (FAA) operations, air transportation infrastructure, and other aviation-related programs. See section 9502 of the Code. Section 13822 of Public Law 115-97, 131 Stat. 2054, 2182 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), amended the Code by adding paragraph (e)(5) to section 4261. The new provision provides that no tax shall be imposed by section 4261 or 4271 on any amount paid by an aircraft owner for aircraft management services related to: (1) maintenance and support of the aircraft owner’s aircraft, or (2) flights on the aircraft owner’s aircraft. Section 4261(e)(5)(B) defines the term “aircraft management services” to include assisting an aircraft owner with: (1) administrative and support services, such as scheduling, flight planning, and weather forecasting; (2) obtaining insurance; (3) maintenance, storage, and fueling of aircraft; (4) hiring, training, and provision of pilots and crew; (5) establishing and complying with safety standards; and (6) such other services as are necessary to support flights operated by an aircraft owner. Section 4261(e)(5)(C)(i) provides that the term “aircraft owner” includes a person who leases an aircraft other than under a “disqualified lease.” Section 4261(e)(5)(C)(ii) defines the term “disqualified lease” for purposes of section 4261(e)(5)(C)(i) as a lease from a person providing aircraft management services with respect to the aircraft (or a related person (within the meaning of section 465(b)(3)(C)) to the person providing such services), if the lease is for a term of 31 days or less. Finally, section 4261(e)(5)(D) provides that in the case of amounts paid to any person which (but for section 4261(e)(5)) are subject to air transportation excise tax, a portion of which consists of amounts described in section 4261(e)(5)(A), section 4261(e)(5) shall apply on a pro rata basis only to the portion which consists of amounts described in section 4261(e)(5)(A). The Conference Report accompanying the TCJA, H.R. Rep. No. 115-466, at 536 (2017) (Conference Report), explains that section 4261(e)(5) “exempts certain payments related to the management of private aircraft from the excise taxes imposed on taxable transportation of persons by air.” The Conference Report further explains that certain arrangements that do not qualify a person as an ‘‘aircraft owner’’ for purposes of section 4261(e)(5) include ownership of stock in a commercial airline and participation in a fractional ownership aircraft program. Id. at 536 n.1190. With regard to commercial airlines, the Conference Report specifically states that ownership of stock in a commercial airline cannot qualify an individual as an ‘‘aircraft owner’’ of a commercial airline’s aircraft, and amounts paid for transportation on such flights remain subject to air transportation excise tax. Id. The Conference Report further states that participation in a fractional ownership aircraft program does not constitute ‘‘aircraft ownership’’ for purposes of section 4261(e)(5). Id. Amounts paid to a fractional ownership aircraft program for transportation under such a program are already exempt from air transportation excise tax pursuant to section 4261(j) if certain requirements provided in section 4043 of the Code are satisfied, including that the aircraft is operated under subpart K of part 91 of Title 14 of the Code of Federal Regulations (subpart K). Id. Flights under a fractional ownership aircraft program are subject to both the fuel tax levied on noncommercial aviation and an additional fuel surtax imposed by section 4043 (fuel surtax). Id. As a result, the Conference Report explains that “a business arrangement seeking to circumvent the fuel surtax by operating outside of subpart K, allowing an aircraft owner the right to use any of a fleet of aircraft, be it through an aircraft interchange agreement, through holding nominal shares in a fleet of aircraft, or any other arrangement that does not reflect true tax ownership of the aircraft being flown upon, is not considered ownership for purposes of [section 4261(e)(5)].” Id. With regard to the pro rata allocation rule in section 4261(e)(5)(D), the Conference Report states that in the event that a payment made to an aircraft management company is allocated in part to exempt services and flights on the aircraft owner’s aircraft, and in part to flights on aircraft other than that of the aircraft owner, air transportation excise tax must be collected on that portion of the payment attributable to flights on aircraft not owned by the aircraft owner. Id. at 536. Section 4007 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. 116-136, 134 Stat. 181 (2020), created an excise tax holiday on certain aviation taxes by suspending air transportation excise tax and certain fuel excise taxes from March 28, 2020, through December 31, 2020. Nothing in these proposed regulations should be construed as affecting the excise tax holiday created by the CARES Act. In addition, except with regard to the provisions in 26 CFR part 40, the Treasury decision adopting these proposed regulations as final regulations will apply no sooner than January 1, 2021. 1.Aircraft Management Services The proposed regulations provide rules related to the exemption from air transportation excise tax for amounts paid by an aircraft owner for aircraft management services pursuant to section 4261(e)(5). During the development of these proposed regulations, the Treasury Department and the IRS received various requests for guidance from stakeholders (referred to herein as “commenters”) related to the first five issues discussed in part 1 of this Explanation of Provisions. a. Applicability of Possession, Command, and Control Test Commenters requested clarification on the applicability of the possession, command, and control test in existing guidance to amounts paid for aircraft management services in light of section 4261(e)(5). The possession, command, and control test is a facts-and-circumstances analytical framework that is used to determine whether a person is providing taxable transportation to another person in cases where each of the parties contribute some, but not all, of the elements necessary for complete air transportation services. See e.g., Rev. Rul. 60-311 (1960-2 C.B. 341), Rev. Rul. 70-325 (1970-1 C.B. 231), and Rev. Rul. 76-394 (1976-2 C.B. 355). Section 4261(e)(5) directly addresses a situation that, but for section 4261(e)(5), would be analyzed using the possession, command, and control test. As a result, in situations to which the section 4261(e)(5) exemption applies, the possession, command, and control test is not relevant. b. Related-Party Payments The second issue for which commenters requested guidance relates to the treatment of payments for aircraft management services made by a person who has a close relationship to the aircraft owner, but is not itself the owner of the aircraft. The commenters suggested that payments that are made by certain parties related to the aircraft owner should be considered as though made by the aircraft owner. First, the commenters suggested that the proposed regulations should treat payments made by one member of an affiliated group (as that term is used in section 4282) on behalf of an aircraft owner that is a member of the same affiliated group as being made by the aircraft owner. Second, the commenters suggested that payments made by an owner of a special purpose entity should be treated as being made by the aircraft owner if the special purpose entity owns the aircraft. For example, individuals and corporations often create a single member limited liability company (SMLLC) to own an aircraft in order to comply with FAA regulations or limit liability exposure. In such cases, the owner of the SMLLC often makes payments for aircraft management services on behalf of the SMLLC. Finally, the commenters suggested that payments made by an aircraft owner’s family members, as well as other persons and entities (for example, trusts, as well as the trust’s fiduciaries and beneficiaries) closely related to an aircraft owner be treated as being made by the aircraft owner. For this purpose, the commenters suggested that the proposed regulations should treat payments for aircraft management services made on behalf of the aircraft owner by a family member of the aircraft owner and by persons and entities bearing relationships to the aircraft owner described in sections 267(b) and 707(b) of the Code as amounts paid by the aircraft owner. The Treasury Department and the IRS understand that it is common practice in the private aviation sector for persons that bear certain close relationships to an aircraft owner to make payments for aircraft management services on behalf of the aircraft owner. However, exceptions to tax, like deductions, are matters of legislative grace, and such provisions are construed narrowly. See Comm’r v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 148-9 (1974) (“The propriety of a deduction [...] depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.” (citations omitted)); Shami v. Comm’r, 741 F.3d 560, 567 (5th Cir. 2014) (“Tax credits are a matter of legislative grace, are only allowed as clearly provided for by statute, and are narrowly construed.” (citation omitted)); Lettie Pate Whitehead Found., Inc. v. U.S., 606 F.2d 534, 539 (5th Cir. 1979) (“Deductions are matters of legislative grace and must be narrowly construed.” (citation omitted)); Chrysler Corp. v. Comm’r, 436 F.3d 644, 654 (6th Cir. 2006) (“While statutes imposing a tax are generally construed liberally in favor of the taxpayer, those granting a deduction are matters of legislative grace and are strictly construed in favor of the government.” (citations omitted)). Section 4261(e)(5) specifically states that the exemption applies to “amounts paid by an aircraft owner” and makes no reference to any other entity or arrangement. The Treasury Department and the IRS are concerned that if the regulations were to treat payments for aircraft management services made on behalf of an aircraft owner (other than in a principal-agent scenario in which the aircraft owner is the principal) as being made by the aircraft owner itself, the regulations would effectively expand the exemption in a manner not authorized by Congress. Additionally, a qualified subchapter S subsidiary (QSub) (as defined in section 1361(b)(3)(B)) that is generally not treated as a separate corporation from its S corporation owner under section 1361(b)(3)(A), and a non-corporate, wholly-owned business entity, such as a SMLLC, that is disregarded as an entity separate from its owner for Federal income tax purposes (under §§301.7701-1 through 301.7701-3 of the Procedure and Administration Regulations), are each treated as an entity separate from its owner for certain Federal excise tax purposes. See §1.1361-4(a)(8) of the Income Tax Regulations and §301.7701-2(c)(2)(v). The rules under §§1.1361-4(a)(8) and 301.7701-2(c)(2)(v) were adopted because difficulties arose from the interaction of the rules in section 1361(b)(3)(A) and §§301.7701-1 through 301.7701-3 with the Federal excise tax rules. It would be contrary to the existing rules in §§1.1361-4(a)(8) and 301.7701-2(c)(2)(v) to treat a person or entity that is separate from the aircraft owner as the aircraft owner for purposes of the exemption from air transportation excise tax in section 4261(e)(5). For these reasons, the proposed regulations do not adopt the commenters’ suggestion to provide a related-party rule. c. Choice of Flight Rules The third issue for which commenters requested guidance relates to whether an aircraft owner’s decision to operate its aircraft under certain parts of the Federal Aviation Regulations (FARs) promulgated by the FAA affects the application of section 4261(e)(5). Part 91 of the FARs governs general aviation. However, some aircraft owners choose to operate their aircraft under Part 135 of the FARs (governing on-demand and commuter flights), which imposes additional FAA regulatory requirements related to operational safety and enhanced liability protection. Commenters suggested that the proposed regulations provide that if an aircraft owner elects to conduct flights on its own aircraft under Part 135 of the FARs (rather than under Part 91 of the FARs), then payments made by the aircraft owner for aircraft management services related to those flights qualify for the exemption provided in section 4261(e)(5) in the same manner as a flight conducted under Part 91 of the FARs. It has long been the position of the Treasury Department and the IRS that rules promulgated by the FAA, including the FARs, do not control for Federal excise tax purposes. See Rev. Rul. 78-75 (1978-1 C.B. 340). Further, section 4261(e)(5) makes no reference to the FARs; under the plain language of section 4261(e)(5), its application does not depend upon the FAR flight rules under which an aircraft is operated. The Treasury Department and the IRS agree with the commenters’ suggestion. Accordingly, the proposed regulations provide that whether an aircraft owner operates its aircraft pursuant to the rules under FARs Part 91 or pursuant to the rules under FARs Part 135 does not affect the application of section 4261(e)(5). d. Charters The fourth issue for which commenters requested guidance relates to situations in which an aircraft owner permits an air charter operator (which may or may not be the same person as the person or persons providing aircraft management services to the aircraft owner) to use the aircraft owner’s aircraft to provide charter flights. It is common for an aircraft owner to permit an air charter operator to use the aircraft owner’s aircraft for a fee (in cash or in kind) when the aircraft would otherwise sit idle or when the aircraft is being repositioned and would otherwise not carry any passengers. In such instances, amounts paid for charter flights operated on the aircraft owner’s aircraft are subject to air transportation excise tax, unless otherwise exempt from the taxes (for example, in the case of an aircraft used as an air ambulance dedicated to acute care emergency medical services under section 4261(g)(2)). See §49.4261-7(h) for the rules regarding the taxation of charter flights. The commenters suggested that the proposed regulations clarify that the application of section 4261(e)(5) is not affected by an aircraft owner permitting a charter operator to use the aircraft owner’s aircraft for charter flights. The Treasury Department and the IRS agree with the commenters that, in general, the application of section 4261(e)(5) should not be affected by an aircraft owner permitting an aircraft management services provider or other person to use the aircraft owner’s aircraft for for-hire flights (such as charter flights, air taxi flights, and flightseeing flights). Accordingly, the proposed regulations provide that whether an aircraft owner permits its aircraft to be used for for-hire flights does not affect the application of section 4261(e)(5) to amounts paid by the aircraft owner for aircraft management services. The proposed regulations also clarify that to the extent such for-hire flights are subject to the tax imposed by section 4261 or 4271, taxable fuel (as defined in section 4083(a) of the Code) or any other liquid taxable under section 4041(c) of the Code that is used as fuel on such flights is used in commercial aviation, as that term is defined in section 4083(b). See sections 4081(a)(2) and 4041(c) for the applicable fuel tax rates. e. Payment Arrangements The fifth issue for which commenters requested guidance relates to business decisions made by a person providing aircraft management services regarding how to charge, invoice, or bill (referred to collectively herein as “bill” or “billed”) aircraft owners for their services. An aircraft owner may be billed for aircraft management services in a variety of ways. For example, an aircraft owner may be charged a monthly fee for aircraft management services and an hourly fee for each hour of flight time. Alternatively, an aircraft owner may be billed for specific costs related to the operation of the aircraft, plus a mark-up to compensate the aircraft management services provider. In addition to these two examples, there are many other possible arrangements that may be used to bill an aircraft owner based on the particular agreement between an aircraft owner and the aircraft management services provider. The commenters suggested that the proposed regulations should clarify that the manner in which an aircraft owner is billed for aircraft management services should not control whether the exemption from air transportation excise tax provided in section 4261(e)(5) applies to amounts paid for those services. The Treasury Department and the IRS agree with the commenters that the manner in which an aircraft owner is billed for aircraft management services is a business decision that providers of aircraft management services and aircraft owners should be free to make with each other in order to satisfy their particular needs. Accordingly, the proposed regulations provide that the method or manner by which an aircraft owner is billed for aircraft management services does not affect whether the exemption from air transportation excise tax provided in section 4261(e)(5) applies to amounts paid for those services. While the proposed regulations acknowledge that the manner in which an aircraft owner is billed for aircraft management services is a business decision, the proposed regulations require both the aircraft owner and the aircraft management services provider to maintain adequate records to show that amounts paid by the aircraft owner to the aircraft management services provider relate to aircraft management services specifically for the aircraft owner’s aircraft or for flights on the aircraft owner’s aircraft. f. Other Proposed Aircraft Management Services Rules The proposed regulations clarify that the exemption from air transportation excise tax in section 4261(e)(5) is limited to private aviation. Section 49.4261-10(b)(6) of the proposed regulations defines “private aviation” as the use of an aircraft for civilian flights except scheduled passenger service. This rule is consistent with the Conference Report, which explicitly states that section 4261(e)(5) “exempts certain payments related to the management of private aircraft from the excise taxes imposed on taxable transportation by air.” Conference Report at 536. The proposed regulations also clarify the application of section 4261(e)(5)(D), which requires a pro rata allocation of the amounts paid for aircraft management services between services that relate to flights taken by an aircraft owner on the aircraft owner’s aircraft and services that relate to flights taken by an aircraft owner on an aircraft that is not owned by the aircraft owner. An aircraft that is not owned by the aircraft owner is referred to in the proposed regulations as a “substitute aircraft.” Section 4261(e)(5)(D) limits the section 4261(e)(5) exemption to amounts paid for aircraft management services related to flights taken by an aircraft owner on the aircraft owner’s aircraft. Therefore, the section 4261(e)(5) exemption does not extend to those amounts paid for aircraft management services that relate to flights taken by an aircraft owner on a substitute aircraft (that is, an aircraft not owned by the aircraft owner). The proposed regulations provide that the pro rata allocation is calculated by applying to the amount paid by the aircraft owner for aircraft management services the ratio of flight hours provided on substitute aircraft during the calendar quarter over the total flight hours flown by the aircraft owner on both the aircraft owner’s aircraft and substitute aircraft during the calendar quarter. The Treasury Department and the IRS request comments regarding whether the proposed flight hour ratio allocation method is fair and practicable or whether a different allocation method should be required (and if so, what exactly such required method should be). In addition, the proposed regulations clarify that taxable fuel (as defined in section 4083(a)) or any other liquid taxable under section 4041(c) that is used as fuel on a flight for which amounts paid are exempt from the taxes imposed by sections 4261 and 4271 by reason of section 4261(e)(5) is not fuel used in commercial aviation, as that term is defined in section 4083(b). See sections 4081(a)(2) and 4041(c) for the applicable fuel tax rates. Finally, the section 4043 fuel surtax applies to fuel used in fractional program aircraft operated under FARs Part 91K (14 CFR part 91K) but not to fuel used on flights for which amounts paid are exempt by reason of section 4261(e)(5). The Treasury Department and the IRS are concerned that this creates an incentive for persons to operate flights that would otherwise be subject to the section 4043 fuel surtax outside of FARs Part 91K in order to avoid the surtax. In these instances, such persons would likely also argue that amounts paid for aircraft management services related to the fractional program aircraft are exempt from air transportation excise tax under section 4261(e)(5). To address this issue, the proposed regulations include an anti-abuse rule providing that the section 4261(e)(5) exemption does not apply to any amount paid for aircraft management services by a participant in any transaction or arrangement, or through other means, that seeks to circumvent the surtax imposed by section 4043. In addition, the proposed regulations clarify that the section 4261(e)(5) exemption does not apply to amounts paid for aircraft management services related to flights on fractional program aircraft operated (or required to be operated) under FARs Part 91K. The proposed regulations also provide that if an amount paid qualifies for both the exemption provided in section 4261(e)(5) and the exemption provided in section 4261(j), the section 4261(j) exemption applies to the amount paid and the surtax imposed by section 4043 applies to any liquid used in the fractional program aircraft as fuel. See sections 4261(j) and 4043. This provision is consistent with the Conference Report and the definition of “aircraft owner” in §49.4261-10(b)(3)(B) in the proposed regulations. 2. Additional Proposed Changes to the Regulations a. Changes to Part 40 The privilege to file consolidated returns under section 1501 applies only to income tax returns and not to excise tax returns. The proposed regulations add §40.0-1(d) to note this rule and also reflect the rules of §§1.1361-4(a)(8) and 301.7701-2(c)(2)(v) that treat QSubs and certain business entities as entities separate from their owners for Federal excise tax purposes. See also Revenue Ruling 2008-18 (2008-1 C.B. 674). Thus, proposed §40.0-1(d) treats each business unit that has, or is required to have, a separate Employer Identification Number as a separate person. In the context of air transportation excise tax, this rule applies with respect to both the person required to pay the tax under proposed §49.4261-1(b) and the person required to collect and pay over the tax under §40.6011(a)-1(a)(3) and section 4291 of the Code. Proposed §40.0-1(d) was originally proposed on July 29, 2008, in a notice of proposed rulemaking (REG-155087-05) published in the Federal Register (73 FR 43890), but the rules in that regulation project have not been finalized. Because of the length of time that has passed since it was originally proposed, this document withdraws proposed §40.0-1(d) and re-proposes the provision as part of these proposed regulations. Existing §40.6071(a)-3 provides excise tax return filing rules that apply only to the quarterly return required under §40.6011(a)-1(a) for the third calendar quarter of 2001. The proposed regulations remove §40.6071(a)-3 in its entirety because it is obsolete. b. Changes to Part 49 The existing regulations under section 4261 have not been revised since 1962. The proposed regulations remove existing language relating to taxes on transportation by rail, motor vehicle, and water, which have been repealed, and otherwise update the existing regulations to conform to current law. The proposed regulations also remove references to exemptions that were repealed in 1970. More specifically, the proposed regulations update §49.4261-1 to reflect: (i) the enactment of the international travel facilities tax in 1970 (Airport and Airway Development Act of 1970 (AADA), Pub. L. No. 91-258, 84 Stat. 236 (1970)); (ii) the enactment of the domestic segment tax in 1997 (Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788 (1997)), and (iii) the current statutory exemptions from tax under sections 4261(e)(5), 4261(f), 4261(g), 4261(h), 4261(j), 4281, 4282, and 4293 of the Code. Section 49.4261-1(b)(1) of the proposed regulations incorporates the payment and collection rules in sections 4261(d) and 4291. Section 49.4261-1(b)(2) of the proposed regulations reflects the statutory change to section 4263(c) under section 1031 of the Taxpayer Relief Act of 1997, and case law interpreting that revision. Under prior law, section 4263(c) provided that where any tax imposed by section 4261 was not paid at the time payment for transportation was made, the tax was paid by the person paying for the transportation or by the person using the transportation. In other words, the prior law placed no payment obligation on the air carrier. The current version of section 4263(c) provides that where any tax imposed by section 4261 is not paid at the time the payment for transportation is made, the air carrier providing the initial segment of transportation that begins and ends in the United States is liable for the tax. Several courts have rejected arguments that current section 4263(c) imposes only secondary liability for the applicable section 4261 tax on the air carrier if the tax is not otherwise collected. See Sundance Helicopters, Inc. v. U.S., 104 Fed. Cl. 1, 11 (2012) (“The plain language of IRC [section] 4263(c) provides that the air carrier is to pay the tax if it is not otherwise collected. There is no mention of primary versus secondary liability in the text of the statute [...] The language of IRC [section] 4263(c) clearly imposes a payment obligation on the air carrier.”); Temsco Helicopters, Inc. v. U.S., 409 F.App’x. 64, 67 (9th Cir. 2010) (“nothing in [section] 4263(c) requires that the government first attempt to collect the [air transportation excise tax] from the purchasers...”); Papillon Airways, Inc. v. U.S., 105 Fed. Cl. 154, 163 (2012) (IRC 4263(c) makes “the carrier’s liability conditional on whether the tax was collected at the time payment for transportation was made, not whether the government is unsuccessful at collecting the tax.” (emphasis in original)). Section 49.4261-1(d) of the proposed regulations generally incorporates the holdings of Revenue Ruling 71-126 (1971-1 C.B. 363) regarding the general applicability of the section 4261 taxes to the transportation of persons on all types of aircraft, and Revenue Ruling 67-414 (1967-2 C.B. 382) regarding the inapplicability of the section 4261 taxes to the transportation of persons on hovercraft. Section 49.4261-2 of the proposed regulations generally updates the existing regulations to reflect the statutory additions of the domestic segment tax and the international travel facilities tax to section 4261. This section also incorporates the holdings in Revenue Ruling 72-309 (1972-1 C.B. 348) and Revenue Ruling 2002-34 (2002-1 C.B. 1150) regarding the computation of the domestic segment tax and the international travel facilities tax. Section 49.4261-9(a) of the proposed regulations reflects the rule in section 4261(e)(3)(A) regarding the tax treatment of mileage awards. The Treasury Department and the IRS are currently considering whether to exercise their authority under section 4261(e)(3)(C) to prescribe rules for excluding from the tax base amounts attributable to mileage awards that are used other than for transportation of persons by air. See Notice 2015-76 (2015-46 I.R.B. 669). Nothing in these proposed regulations can be construed as an exercise of that authority. The proposed regulations reserve §49.4261-9(b) for the possible future exercise of the authority granted to the Secretary of the Treasury or his delegate under section 4261(e)(3)(C). The regulations under sections 4262 and 4263 also have generally not been revised since the 1960s. Amendments to the Code since then, including the repeal of the seats and berths tax, a change to the definition of “uninterrupted international air transportation” under section 4262(c)(3), and a change to the rules in section 4263(c), have rendered certain provisions in the existing regulations obsolete. The proposed regulations remove obsolete provisions and generally update the existing regulations to conform to current law. Section 4264 of the Code was redesignated as section 4263 in 1970 by Title II, section 205(c)(2), of the AADA. However, the regulations under section 4264 were not similarly redesignated. The proposed regulations redesignate the current section 4264 regulations as section 4263 regulations, remove obsolete provisions, and generally update the existing regulations to conform to current law. The proposed regulations update the rule in §49.4263-5 (which the proposed regulations redesignate as §49.4281-1) relating to small aircraft on nonestablished lines to reflect statutory changes to the exemption. Specifically, the current regulation provides, in relevant part, that amounts paid to transport a person on a small aircraft are “exempt from the tax imposed under section 4261 provided the aircraft: (1) has a gross take-off weight of less than 12,500 pounds [...] and (2) has a passenger seating capacity of less than 10 adult passengers, including the pilot.” In 1970, the permissible aircraft weight to qualify for the exemption for small aircraft on nonestablished lines was reduced to a maximum certificated take-off weight of 6,000 pounds or less and the maximum passenger seating capacity rule was eliminated. AADA, Title II, section 205(a)(1). In 2005, Congress amended section 4281 to clarify that flights for which the sole purpose is sightseeing are not considered to be operated on an established line. Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, Pub. L. No. 109-59, section 11124(a), 119 Stat 1144 (2005). In 2012, Congress amended section 4281 to exclude jet aircraft from the exemption. FAA Modernization and Reform Act of 2012, Pub. L. No. 112-95, section 1107(a), 126 Stat 11 (2012). The proposed regulations incorporate the changes to the exemption for small aircraft on nonestablished lines as described above. Section 4282 provides an exemption from the taxes imposed by section 4261 and 4271 for certain transportation by air for members of an affiliated group. The Treasury Department and the IRS have not issued regulations regarding this provision. The proposed regulations reserve §49.4282-1 for future rules regarding the affiliated group exemption under section 4282. The updates to part 49 in these proposed regulations are not comprehensive and do not fully update every provision and example that require modernization. The updates are intended to address only the most straightforward and well-settled issues; they are not intended to introduce new rules or address issues that may require a more nuanced approach. The Treasury Department and the IRS believe that these updates will help reduce the burden on taxpayers, collectors, and revenue agents by providing much needed basic updates to the part 49 regulations. Effect on Other Documents Revenue Ruling 67-414 (1967-2 C.B. 382), Revenue Ruling 72-309 (1972-1 C.B. 348), and Revenue Ruling 2002-34 (2002-1 C.B. 1150) will be obsoleted on the date these regulations are published as final regulations in the Federal Register. Partial Withdrawal of Proposed Regulations Under the authority of 26 U.S.C. 7805, §40.0-1(d) of the notice of proposed rulemaking (REG-155087-05) published in the Federal Register on July 29, 2008 (73 FR 43890) is withdrawn. Proposed Applicability Date The regulations, other than §40.0-1(d), generally are proposed to apply on and after the later of the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register or January 1, 2021. Section 40.0-1(d) of the regulations is proposed to apply on and after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations. Because the regulation does not impose a collection of information on small entities a Regulatory Flexibility Act (5 U.S.C. chapter 6) analysis is not required. Pursuant to section 7805(f) of the Code these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. IRS Revenue Procedures, Revenue Rulings, Notices and other guidance cited in this document are published in the Internal Revenue Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. Comments and Requests for a Public Hearing Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the “ADDRESSES” section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any electronic comments submitted, and to the extent practicable any paper comments submitted, will be made available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register. Announcement 2020-4 (2020-17 I.R.B. 1) provides that until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities. The principal authors of these regulations are Michael H. Beker and Rachel S. Smith, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects 26 CFR Part 40 Excise taxes, Reporting and recordkeeping requirements. Excise taxes, Reporting and recordkeeping requirements, Telephone, Transportation. Accordingly, 26 CFR parts 40 and 49 are proposed to be amended as follows: PART 40—EXCISE TAX PROCEDURAL REGULATIONS Paragraph 1. The authority citation for part 40 is amended by removing the entry for §40.6071(a)-3 to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 40.0-1 is amended by redesignating paragraph (d) as paragraph (e), adding a new paragraph (d), and revising newly redesignated paragraph (e) to read as follows: §40.0-1 Introduction. (d) Person. For purposes of this part, each business unit that has, or is required to have, a separate employer identification number is treated as a separate person. Thus, business units (for example, a parent corporation and a subsidiary corporation, a partner and the partner’s partnership, or the various members of a consolidated group), each of which has, or is required to have, a different employer identification number, are separate persons. (e) Applicability date—(1) Paragraphs (a), (b), and (c). Paragraphs (a), (b), and (c) of this section apply to returns that relate to periods beginning after March 31, 2013. For rules that apply before that date, see 26 CFR part 40, revised as of April 1, 2013. (2) Paragraph (d). Paragraph (d) of this section applies to returns that relate to periods beginning on or after [date these regulations are published as final regulations in the Federal Register]. For rules that apply before that date, see 26 CFR part 40, revised as of April 1, 2020. §40.6071(a)-3 [Removed] Par. 3. Section 40.6071(a)-3 is removed. PART 49—FACILITIES AND SERVICES EXCISE TAX REGULATIONS Par. 4. The authority citation for part 49 continues to read in part as follows: Authority: 26 U.S.C. 7805. * * * Par. 5. Section 49.4261-1 is revised to read as follows: §49.4261-1 Imposition of tax; in general. (a) In general. Section 4261 of the Internal Revenue Code (Code) imposes three separate taxes on amounts paid for certain transportation of persons by air. Tax attaches at the time of payment for any transportation taxable under section 4261. The applicability of each section 4261 tax is generally determined on a flight-by-flight basis. (1) Percentage tax. Section 4261(a) imposes a 7.5 percent tax on the amount paid for the taxable transportation of any person. See section 4262(a) of the Code and §49.4262-1(a) for the definition of the term taxable transportation. (2) Domestic segment tax. Section 4261(b)(1) imposes a $3 tax (indexed annually for inflation pursuant to section 4261(e)(4)) on the amount paid for each domestic segment of taxable transportation. See section 4261(b)(2) for the definition of the term domestic segment. The domestic segment tax does not apply to a domestic segment beginning or ending at an airport that is a rural airport for the calendar year in which the segment begins or ends (as the case may be). See section 4261(e)(1)(B) for the definition of the term rural airport. (3) International travel facilities tax. Section 4261(c) imposes a $12 tax (indexed annually for inflation pursuant to section 4261(e)(4)) on any amount paid (whether within or without the United States) for any transportation by air that begins or ends in the United States. The international travel facilities tax does not apply to any transportation that is entirely taxable under section 4261(a) (determined without regard to sections 4281 and 4282). See section 4261(c)(2). A special rule applies to Alaska and Hawaii flights. See section 4261(c)(3). (b) Payment and collection obligations—(1) In general. The taxes imposed by section 4261 are collected taxes. In general, the person making the payment subject to tax is the taxpayer. See section 4261(d). The person receiving the payment is the collector (also commonly referred to as the collecting agent). See section 4291 of the Code. The collector must collect the applicable tax from the taxpayer, report the tax on Form 720, Quarterly Federal Excise Tax Return, and remit the tax to the Internal Revenue Service. See sections 4291, 6011, and 7501 of the Code. See §40.6011(a)-1 of this chapter and §49.4291-1. The collector must also make semimonthly deposits of the taxes imposed by section 4261. See section 6302(e) of the Code. See §§40.0-1(c), 40.6302(c)-1, and 40.6302(c)-3 of this chapter. See section 4263(a) and (c) of the Code for special rules relating to the payment and collection of tax. (2) Failure to collect tax. Where any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, to the extent the tax is not collected under any other provision of subchapter C of chapter 33 of the Code, the tax must be paid by the carrier providing the initial segment of transportation that begins or ends in the United States. See section 4263(c). In other words, if an amount paid for transportation is subject to tax under section 4261 and the applicable tax is not collected at the time the payment is made, the carrier providing the initial segment of transportation that begins or ends in the United States is liable for the tax. See section 6672 of the Code for rules relating to the application of the trust fund recovery penalty. (c) Type of aircraft. The taxes imposed by section 4261 generally apply regardless of the type of aircraft on which the transportation is provided, provided all of the other conditions for liability are present and no specific statutory exemption applies. See paragraph (f) of this section for a list of statutory exemptions from tax. Amounts paid for the transportation of persons by air cushion vehicles, also known as hovercraft, are not subject to the taxes imposed by section 4261. (d) Purpose of transportation. The purpose of the transportation (for example, business or pleasure) is not a factor in determining taxability under section 4261. (e) Routes. Amounts paid for transportation may be taxable even if the transportation is not between two definite points. Unless otherwise exempt, a payment for continuous transportation that begins and ends at the same point is subject to tax. See section 4281 of the Code and §49.4282-1 for the exemption for small aircraft on nonestablished lines. (f) Exemptions from tax; cross-references—(1) Aircraft management services. For the exemption for certain aircraft management services, see section 4261(e)(5) of the Code and §49.4261-10. (2) Hard minerals, oil, and gas. For the exemption for certain uses related to the exploration, development, or removal of hard minerals, oil, or gas, see section 4261(f)(1). (3) Trees and logging operations. For the exemption for certain uses related to trees and logging operations, see section 4261(f)(2). (4) Air ambulances. For the exemption for air ambulances providing certain emergency medical transportation, see section 4261(g). (5) Skydiving. For the exemption for certain skydiving uses, see section 4261(h). (6) Seaplanes. For the exemption for certain seaplane segments, see section 4261(i). (7) Fractionally-owned aircraft. For the exemption for certain aircraft in fractional ownership aircraft programs, see section 4261(j). (8) Small aircraft on nonestablished lines. For the exemption for certain small aircraft on nonestablished lines, see section 4281 of the Code and §49.4281-1. (9) Affiliated groups. For the exemption for certain transportation of members of an affiliated group, see section 4282. (10) United States and territories. For exemptions authorized by the Secretary of the Treasury or his delegate for the exclusive use of the United States, see section 4293. (g) Applicability date. This section applies on and after the later of [date these regulations are published as final regulations in the Federal Register] or January 1, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. Par. 6. Section 49.4261-2 is amended by: 1. Revising paragraphs (a) and (b). 2. Adding paragraph (d). The revisions and addition read as follows: §49.4261-2 Application of tax. (a) Tax on total amount paid. The tax imposed by section 4261(a) of the Internal Revenue Code (Code) is measured by the total amount paid for taxable transportation, whether paid in cash or in kind. (b) Tax on transportation of each person. The taxes imposed by section 4261(b) and (c) of the Code are head taxes and, therefore, apply on a per-passenger basis. The taxes apply to each passenger for whom an amount is paid, regardless of whether the payment is made as a single lump sum or is made individually for each passenger. In the case of charter flights for which a fixed amount is paid, the section 4261(b) and (c) taxes are computed by multiplying the applicable rate of tax by the number of passengers transported on the aircraft. (d) Applicability date. Paragraphs (a) and (b) of this section apply on and after the later of [date these regulations are published as final regulations in the Federal Register] or January 1, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. 1. Removing “§49.4262(c)-1” wherever it appears and adding “§49.4262-3” in its place. 2. In the first sentence of paragraph (a), removing “The tax imposed by section 4261(a)” and adding “The taxes imposed by section 4261(a) and (b) of the Internal Revenue Code (Code)” in its place. 3. In the second sentence of paragraph (a), adding “under section 4261(a) and (b)” at the end of the sentence. 4. Removing (b) introductory text and (b)(1) and redesignating paragraph (b)(2) as paragraph (b). 5. Revising newly redesignated paragraph (b). 6. Revising paragraph (c). 7. In paragraph (d), removing “section 4262(b) and §49.4262(b)-1” and adding “section 4262(b) of the Code and §49.4262-2” in its place. 8. Adding paragraph (e). The revisions and additions read as follows: §49.4261-3 Payments made within the United States. (b) Other transportation. In the case of transportation, other than that described in paragraph (a) of this section, for which payment is made in the United States, the taxes imposed by section 4261(a) and (b) apply with respect to the amount paid for that portion of such transportation by air which is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such portion is not a part of uninterrupted international air transportation within the meaning of section 4262(c)(3) of the Code and §49.4262-3(c). Transportation that: (1) Begins in the United States or the 225–mile zone and ends outside such area, (2) Begins outside the United States or the 225–mile zone and ends inside such area, or (3) Begins outside the United States and ends outside such area, is taxable only with respect to such portion of the transportation by air which is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such portion is not a part of “uninterrupted international air transportation” within the meaning of section 4262(c)(3) and §49.4262-3(c). Thus, on a trip by air from Chicago to London, England, with a stopover at New York, for which payment is made in the United States, if the portion from Chicago to New York is not a part of “uninterrupted international air transportation” within the meaning of section 4262(c)(3) and §49.4262-3(c), the taxes would apply to the part of the payment which is applicable to the transportation from Chicago to New York. However, if the portion from Chicago to New York is a part of “uninterrupted international air transportation” within the meaning of section 4262(c)(3) and §49.4262-3(c), the taxes would not apply. (c) Method of computing tax on taxable portion. Where a payment is made for transportation which is partially taxable under paragraph (b) of this section, the tax imposed by section 4261(a) may be computed on that proportion of the total amount paid which the mileage of the taxable portion of the transportation bears to the mileage of the entire trip. (e) Applicability date. This section applies on and after the later of [the date these regulations are published as final regulations in the Federal Register] or January 1, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. §49.4261-4 [Amended] 1. In paragraph (a), removing the first “4261(a)” and add “4261 of the Internal Revenue Code (Code)” in its place. 2. In paragraph (a), removing “section 4261(a) (see section 4264(d))” and adding “section 4261 (see section 4263(d) of the Code)” in its place. 3. In paragraph (b), removing “§49.4262(c)-1” and adding “§49.4262-3” in its place. 4. In the first sentence of paragraph (d), removing “§49.4262(c)-1” and adding “§49.4262-3” in its place. 5. In the first sentence of paragraph (d), removing “six-hour” and adding “12-hour” in its place. Par. 9. Section 49.4261-5 is amended as follows: 1. In paragraph (a), remove “4261(b)” wherever it appears and add “4261(a) and (b)” in its place. 2. In paragraph (c), remove “§49.4262(b)-1” and add “§49.4262-2” in its place. Par. 10. Section 49.4261-7 is amended by: 1. In the introductory paragraph, removing “4263, 4292, 4293, or 4294” and adding “4261, 4281, 4282 or 4293 of the Internal Revenue Code” in its place. 2. Removing and reserving paragraphs (b), (d), (e), and (g). 3. Revising paragraph (h). 4. In paragraph (i), remove “paragraph (c) of §49.4261-2 and paragraph (f)(4) of §49.4261-8” and add “§§49.4261-2(c) and 49.4261-8(f)(4)” in its place. 5. Adding paragraph (k). The revision and addition read as follows: §49.4261-7 Examples of payments subject to tax. (h) Aircraft charters—(1) When no charge is made by the charterer of an aircraft to the persons transported, the amount paid by the charterer for the charter of the aircraft is subject to tax. (2) The charterer of an aircraft who sells transportation to other persons must collect and account for the tax with respect to all amounts paid to the charterer by such other persons. In such case, no tax will be due on the amount paid by the charterer for the charter of the aircraft but it shall be the duty of the owner of the aircraft to advise the charterer of the charterer’s obligation for collecting, accounting for, and paying over the tax to the Internal Revenue Service. (k) Applicability date. Paragraph (h) of this section applies on and after the later of [the date these regulations are published as final regulations in the Federal Register] or January 1, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. Par. 11. Section 49.4261-8 is amended as follows: 1. In the introductory paragraph, remove “4263, 4292, 4293, or 4294” and add “4261, 4281, 4282 or 4293 of the Internal Revenue Code” in its place. 2. Paragraphs (f)(2), (3), and (5) are removed and reserved. Par. 12. Section 49.4261-9 is revised to read as follows: §49.4261-9 Mileage awards. (a) Tax imposed. Any amount paid (and the value of any other benefit provided) to an air carrier (or any related person) for the right to provide mileage awards for or other reductions in the cost of any transportation of persons by air is an amount paid for taxable transportation and is therefore subject to the tax imposed by section 4261(a) of the Internal Revenue Code. See section 4261(e)(3)(A). (b) [Reserved] (c) Applicability date. This section applies on and after the later of [date these regulations are published as final regulations in the Federal Register] or January 1, 2021. Par. 13. Section 49.4261-10 is revised to read as follows: §49.4261-10 Aircraft management services. (a) In general—(1) Overview. This section prescribes rules relating to the exemption from tax for amounts paid (in cash or in kind) by an aircraft owner to an aircraft management services provider for certain aircraft management services. Pursuant to section 4261(e)(5) of the Internal Revenue Code (Code), the taxes imposed by sections 4261 and 4271 of the Code do not apply to amounts paid by an aircraft owner to an aircraft management services provider for aircraft management services related to maintenance and support of the aircraft owner’s aircraft; or related to flights (flight services) on the aircraft owner’s aircraft. The exemption in section 4261(e)(5) applies to amounts paid by an aircraft owner to an aircraft management services provider for flight services on the aircraft owner’s aircraft, even if the aircraft owner is not on the flight. The exemption in section 4261(e)(5) does not apply to amounts paid to an aircraft management services provider on behalf of an aircraft owner (other than in a principal-agent scenario in which the aircraft owner is the principal). For example, amounts paid for aircraft management services by one member of an affiliated group (as that term is defined in section 4282 of the Code) for flights on an aircraft owned by another member of the affiliated group are not treated as amounts paid by the aircraft owner. See paragraph (b) of this section for definitions of terms used in this section. (2) Private aviation. The exemption in section 4261(e)(5) is limited to aircraft management services related to aircraft used in private aviation. (3) Adequate records required. In order to qualify for the exemption in section 4261(e)(5), an aircraft owner and aircraft management services provider must maintain adequate records to show that the amounts paid by the aircraft owner to the aircraft management services provider relate to aircraft management services specifically for the aircraft owner’s aircraft or for flights on the aircraft owner’s aircraft. (b) Definitions. This paragraph provides definitions applicable to this section. (1) Aircraft management services. The term aircraft management services means— (i) Statutory services. The services listed in section 4261(e)(5)(B); and (ii) Other services. Any service (including, but not limited to, purchasing fuel, purchasing aircraft parts, and arranging for the fueling of an aircraft owner’s aircraft) provided directly or indirectly by an aircraft management services provider to an aircraft owner, that is necessary to keep the aircraft owner’s aircraft in an airworthy state or to provide air transportation to the aircraft owner on the aircraft owner’s aircraft at a level and quality of service required under the agreement between the aircraft owner and the aircraft management services provider. (2) Aircraft management services provider. The term aircraft management services provider means a person that provides aircraft management services, as defined in paragraph (b)(1) of this section, to an aircraft owner, as defined in paragraph (b)(3) of this section. (3) Aircraft owner—(i) In general. The term aircraft owner means an individual or entity that leases or owns (that is, holds title to or substantial incidents of ownership in) an aircraft managed by an aircraft management services provider (commonly referred to as a managed aircraft). The term aircraft owner does not include a lessee of an aircraft under a disqualified lease, as defined in paragraph (b)(4) of this section. A person that owns stock in a commercial airline does not qualify as an aircraft owner of that commercial airline’s aircraft. (ii) Fractional aircraft ownership and similar arrangements. A participant in a fractional aircraft ownership program, as defined in section 4043(c)(2) of the Code, does not qualify as an aircraft owner of the program’s managed aircraft if the amount paid for such person’s participation is exempt from the taxes imposed by sections 4261 and 4271 by reason of section 4261(j). Similarly, a participant in a business arrangement seeking to circumvent the surtax imposed by section 4043 by operating outside of subpart K of 14 CFR part 91, that allows an aircraft owner the right to use any of a fleet of aircraft (through an aircraft interchange agreement, through holding nominal shares in a fleet of aircraft, or any other similar arrangement), is not an aircraft owner with respect to any of the aircraft owned or leased as part of that business arrangement. (4) Disqualified lease. The term disqualified lease has the meaning given to it by section 4261(e)(5)(C)(ii). A disqualified lease also includes any arrangement that seeks to circumvent the rule in section 4261(e)(5)(C)(ii) by providing a lease term that is greater than 31 days but does not provide the lessee with exclusive and uninterrupted access and use of the leased aircraft, as identified by the aircraft’s airframe serial number and tail number. For purposes of the preceding sentence, the fact that a lease permits the lessee to use the aircraft for for-hire flights, as defined in paragraph (b)(5) of this section, when the lessee is otherwise not using the aircraft does not, because of this fact alone, cause a lease with a term that is greater than 31 days to be a disqualified lease. (5) For-hire flight. The term for-hire flight means the use of an aircraft to transport passengers for compensation that is paid in cash or in kind. The term includes, but is not limited to, charter flights, air taxi flights, and sightseeing flights (commonly referred to as flightseeing flights). (6) Private aviation. The term private aviation means the use of an aircraft for civilian flights except scheduled passenger service. (7) Substitute aircraft. The term substitute aircraft means an aircraft, other than the aircraft owner’s aircraft, that is provided by an aircraft management services provider to the aircraft owner when the aircraft owner’s aircraft is not available, regardless of the reason for the unavailability. (c) Substitute Aircraft—(1) Allocation required. If an aircraft management services provider provides flight services to an aircraft owner on a substitute aircraft during a calendar quarter, the taxes imposed by section 4261 (including the taxes imposed by section 4261(b) or (c), as appropriate, on each passenger transported) or 4271, as the case may be, apply to that portion of the amounts paid by the aircraft owner to the aircraft management services provider, determined on a pro rata basis, as described in paragraph (c)(2) of this section, that are related to the flight services provided on the substitute aircraft. (2) How calculated. The allocation described in paragraph (c)(1) of this section is calculated by applying to the total amount paid by an aircraft owner to an aircraft management services provider during the calendar quarter the ratio of— (i) Substitute aircraft hours. The total flight hours provided on substitute aircraft during the calendar quarter; over (ii) Total hours. The sum of— (A) The total flight hours made on the aircraft owner’s aircraft during the calendar quarter; and (B) The total flight hours provided to the aircraft owner on substitute aircraft during the calendar quarter. (d) Choice of flight rules. Whether a flight on an aircraft owner’s aircraft operates pursuant to the rules under Federal Aviation Regulations prescribed by the Federal Aviation Administration (FARs) Part 91 (14 CFR part 91) or pursuant to the rules under FARs Part 135 (14 CFR part 135) does not affect the application of section 4261(e)(5). (e) Aircraft available for hire—(1) In general. Whether an aircraft owner permits an aircraft management services provider or other person to use its aircraft to provide for-hire flights (for example, when the aircraft is not being used by the aircraft owner or when the aircraft is being moved in deadhead service) does not affect the application of section 4261(e)(5). However, an amount paid for for-hire flights on the aircraft owner’s aircraft does not qualify for the section 4261(e)(5) exemption. Therefore, an amount paid for a for-hire flight on an aircraft owner’s aircraft is subject to the tax imposed by section 4261 or 4271, as the case may be, unless the amount paid is otherwise exempt from the tax imposed by section 4261 or 4271 other than by reason of section 4261(e)(5). See §49.4261-7(h) for rules relating to the application of the tax imposed by section 4261 on amounts paid for charter flights. (2) Fuel used on for-hire flights. To the extent amounts paid for for-hire flights are subject to the tax imposed by section 4261 or 4271, taxable fuel (as defined in section 4083(a) of the Code) or any liquid taxable under section 4041(c) of the Code that is used as fuel on such flights is used in commercial aviation, as that term is defined in section 4083(b). See sections 4081(a)(2) and 4041(c) for the applicable fuel tax rates. (f) Billing methods. Except as provided in paragraph (a)(3) of this section (relating to adequate records), the method an aircraft management services provider bills, invoices, or otherwise charges an aircraft owner for aircraft management services, whether by specific itemization of costs, flat monthly or hourly fee, or otherwise, does not affect the application section 4261(e)(5). (g) Coordination with fuel tax provisions. Taxable fuel (as defined in section 4083(a)) or any liquid taxable under section 4041(c) that is used as fuel on a flight for which amounts paid are exempt from the taxes imposed by sections 4261 and 4271 by reason of section 4261(e)(5) is not fuel used in commercial aviation, as that term is defined in section 4083(b). See sections 4081(a)(2) and 4041(c) for the applicable fuel tax rates. (h) Multiple aircraft management services providers not disqualifying. Whether an aircraft owner pays amounts to more than one aircraft management services provider for aircraft management services does not affect the application of section 4261(e)(5). (i) Coordination with exemption for aircraft in fractional ownership aircraft programs and fuel surtax; no choice of exemption; anti-abuse rule. The exemption in section 4261(e)(5) does not apply to any amount paid for aircraft management services by a participant in any transaction or arrangement, or through other means, that seeks to circumvent the surtax imposed by section 4043. Further, the exemption in section 4261(e)(5) does not apply to any amounts paid for aircraft management services related to flights that are (or are required to be) operated under FARs Part 91K (14 CFR part 91K). As a result, if an amount paid qualifies for both the exemption provided in section 4261(e)(5) and the exemption provided in section 4261(j), the exemption provided in section 4261(j) applies to the amount paid and the surtax imposed by section 4043 applies to any liquid used in the managed aircraft as fuel. See sections 4261(j) and 4043. (j) Examples. The following examples illustrate the provisions of this section. (1) Example 1—(i) Facts. An aircraft owner, which is organized as corporation under state law, pays a monthly fee of $1,000 to an aircraft management services provider for the provision of a pilot for flights on the aircraft owner’s aircraft to transport employees of the aircraft owner’s business to business meetings. The flights constitute taxable transportation, as that term is defined in section 4262(a), and no exemptions (other than section 4261(e)(5)) apply. During the first calendar quarter of 2020, the pilot provides 200 flight hours of service on the aircraft owner’s aircraft and 50 hours of service on a substitute aircraft. (ii) Analysis. The tax imposed by section 4261(a) applies on a pro rata basis to the pilot’s flight hours on a substitute aircraft. The allocation is calculated by applying to the $3,000 total amount paid (3 months x $1,000 monthly fee) by the aircraft owner to the aircraft management services provider during the calendar quarter the ratio of: 50 (the total pilot flight hours provided on substitute aircraft during the calendar quarter) over 250 (the sum of the total pilot flight hours on the aircraft owner’s aircraft during the calendar quarter and the total pilot flight hours provided on substitute aircraft during the calendar quarter). The computation is as follows: $3,000 x (50/250) = $600 (amount subject to tax). The portion of the amount paid that is exempt from the section 4261 taxes by application of section 4261(e)(5) is $2,400. The portion of the amount paid that is subject to the tax imposed by section 4261(a) is $600. The tax imposed by section 4261(b) also applies to amounts paid for flights on substitute aircraft on a per-passenger basis. See §49.4261-2(b) for rules regarding the application of the tax imposed by section 4261(b). (2) Example 2—(i) Facts. An aircraft owner pays a monthly fee to an aircraft management services provider for aircraft management services related to the aircraft owner’s aircraft. When the aircraft is not being used by the owner, the owner sometimes permits a charter company to use the aircraft for charter flights. At other times when the aircraft is not being used by the owner, the owner permits a tour operator to use the aircraft for flightseeing tours. All charter and flightseeing flights on the aircraft constitute taxable transportation, as that term is defined in section 4262(a), and no exemptions (other than section 4261(e)(5)) apply. The aircraft’s maximum certificated takeoff weight is 7,000 pounds and the aircraft uses kerosene as fuel. (ii) Analysis. Amounts paid by the aircraft owner to the aircraft management services provider for aircraft management services related to the aircraft owner’s own aircraft are exempt under section 4261(e)(5). Amounts paid by the charterer or passengers for the charter flights are subject to tax under section 4261(a) and (b). See §49.4261-7(h) for rules relating to the application of the tax imposed by section 4261 on amounts paid for charter flights. See §49.4261-2(b) for rules regarding the application of the tax imposed by section 4261(b). Amounts paid by flightseeing customers for flightseeing tours are also subject to tax under section 4261(a) and (b). If a payment for a flightseeing tour includes charges for nontransportation services, the charges for the nontransportation services may be excluded in computing the tax payable provided the payments are separable and provided in exact amounts. See §49.4261-2(c). The kerosene used as fuel on the charter flights and the flightseeing flights is subject to the tax imposed by section 4081(a) at the commercial rate. (k) Applicability date. This section applies on and after the later of [date these regulations are published as final regulations in the Federal Register] or January 1, 2021. §49.4262(a)-1 [Redesignated] Par. 14. Section 49.4262(a)-1 is redesignated as §49.4262-1. Par. 15. Newly redesignated §49.4262-1 is amended by: 1. In paragraph (a) introductory text, removing “section 4262(b) (see §49.4262(b)-1)” and adding “section 4262(b) of the Internal Revenue Code (Code) (see §49.4262-2)” in its place. 2. In the first sentence of paragraph (a)(1), removing “Transportation” and adding “Transportation by air” in its place. 3. In the first sentence of paragraph (a)(1), removing “(the “225-mile zone”)” and adding “(225-mile zone)” in its place. 4. Revising paragraphs (a)(2) and (b)(2). 5. In paragraph (b), removing “subparagraphs (1) and (5) of this paragraph” and adding “paragraph (b)(1) and (5) of this section” in its place. 6. In paragraph (b), removing “subject to the tax” and adding “subject to the taxes imposed by section 4261(a) and (b)” in its place. 7. Removing and reserving paragraph (c). 8. Revising introductory paragraph (d); designating Example (1) as paragraph (d)(1) and revising new paragraph (d)(1) Example 1. 9. In paragraph (d), designating Example (2) as (d)(2) and removing and reserving newly designated paragraph (d)(2) Example 2. 10. In paragraph (d), designating Example (3) as paragraph (d)(3) and removing “6 hours” wherever it appears and adding “12 hours” in its place and also removing “subject to tax” wherever it appears and adding “subject to the taxes imposed by section 4261(a) and (b)” in its place. 11. In paragraph (d), designating Example (4) as paragraph (d)(4), and removing “six hours” wherever it appears and adding “12 hours” in its place and also removing “subject to tax” wherever it appears and adding “subject to the taxes imposed by section 4261(a) and (b)” in its place. 12. Revising paragraph (e). 13. Adding paragraph (f). §49.4262-1 Taxable transportation. (a) * * * (2) In the case of any other transportation by air, that portion of such transportation that is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such transportation is not part of uninterrupted international air transportation within the meaning of section 4262(c)(3) of the Code and §49.4262-3(c). Transportation from one port or station in the United States occurs whenever a carrier, after leaving any port or station in the United States, makes a regularly scheduled stop at another port or station in the United States irrespective of whether stopovers are permitted or whether passengers disembark. (b) * * * (2) New York to Vancouver, Canada, with a stop at Toronto, Canada; (d) Examples. The following examples illustrate the application of section 4262(a)(2) and the taxes imposed by section 4261(a) and (b) of the Code: (1) Example (i). A purchases in New York a ticket for air transportation from New York to Nassau, Bahamas, with a scheduled stopover of 14 hours in Miami. The part of the transportation from New York to Miami is taxable transportation as defined in section 4262(a) because such transportation is from one station in the United States to another station in the United States and the trip is not uninterrupted international air transportation (because the scheduled stopover interval in Miami is greater than 12 hours). Therefore, the amount paid for the transportation from New York to Miami is subject to the taxes imposed by section 4261(a) and (b). (e) Examples of transportation that is not taxable transportation. The following examples illustrate transportation that is not taxable transportation: (1) New York to Trinidad with no intervening stops; (2) Minneapolis to Edmonton, Canada, with a stop at Winnipeg, Canada; (3) Los Angeles to Mexico City, Mexico, with stops at Tijuana and Guadalajara, Mexico; (4) New York to Whitehorse, Yukon Territory, Canada, by air with a scheduled stopover in Chicago of five hours. Amounts paid for the transportation referred to in examples set forth in paragraphs (e)(1), (2), and (3) of this section are not subject to the tax regardless of where payment is made, since none of the trips: (i) Begin in the United States or in the 225–mile zone and end in the United States or in the 225–mile zone, nor (ii) Contain a portion of transportation which is directly or indirectly from one port or station in the United States to another port or station in the United States. The amount paid within the United States for the transportation referred to in the example set forth in paragraph (4) of this section is not subject to tax since the entire trip (including the domestic portion thereof) is “uninterrupted international air transportation” within the meaning of section 4262(c)(3) and paragraph (c) of §49.4262-3. In the event the transportation is paid for outside the United States, no tax is due since the transportation does not begin and end in the United States. (f) Applicability date. This section applies on and after the later of [date these regulations are published as final regulations in the Federal Register] or January 1, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. §49.4262(b)-1 [Redesignated] Par. 16. Section 49.4262(b)-1 is redesignated as §49.4262-2. Par. 17. Newly redesignated §49.4262-2 is amended as follows: 1. In paragraph (a), “section 4262(b)” is removed and “section 4262(b) of the Internal Revenue Code” is added in its place. 2. In paragraph (b)(2), Example (2) is removed and reserved. 3. Revise paragraph (d). “Illustration” and add “Example” in its place. The revisions and additions reads as follows: §49.4262-2 Exclusion of certain travel. (d) Example. The application of paragraph (c) of this section may be illustrated by the following example: A purchases in San Francisco a ticket for transportation by air to Honolulu, Hawaii. The portion of the transportation which is outside the continental United States and is outside Hawaii is excluded from taxable transportation. The tax applies to that part of the payment made by A which is applicable to the portion of the transportation between the airport in San Francisco and the three-mile limit off the coast of California (a distance of 15 miles) and between the three-mile limit off the coast of Hawaii and the airport in Honolulu (a distance of 5 miles). The part of the payment made by A which is applicable to the taxable portion of his transportation and the tax due thereon are computed in accordance with paragraph (c)(1) as follows: Mileage of entire trip (San Francisco airport to Honolulu airport) (miles)............................................. 2,400 Mileage in continental United States (miles)....................... 15 Mileage in Hawaii (miles)................................................ 5 Fare from San Francisco to Honolulu................................ $168.00 Payment for taxable portion (20/2400 x $168)..................... $1.40 Tax due (7.5% (rate in effect on date of payment) x $1.40)... $0.11 (All distances and fares assumed for purposes of this example. This example only addresses the computation of the tax imposed by section 4261(a). It does not address the computation of any other tax imposed by section 4261 that may apply to these facts.) §49.4262(c)-1 [Redesignated] Par. 18. Section 49.4262(c)-1 is redesignated as §49.4262-3. 1. In the first sentence of paragraph (a), remove “includes only the 48 States existing on July 25, 1956 (the date of the enactment of the Act of July 25, 1956 (Pub. L. 796, 84th Cong., 70 Stat. 644) and the District of Columbia” and add “means the District of Columbia and the States other than Alaska and Hawaii” in its place. 2. In paragraph (a), the last sentence is removed. 3. In paragraph (c), remove “six hours” wherever it appears and add “12 hours” in its place. 4. In paragraph (c), remove “6 hours” wherever it appears and add “12 hours” in its place. 5. In paragraph (c), remove “six-hour” wherever it appears and add “12-hour” in its place. 6. In paragraph (c)(2), remove “paragraph (a)(2) of §49.4264(c)-1” and add “§49.4263-3(a)(2)” in its place. 7. Adding paragraphs (d) and (e). The additions read as follows: §49.4262-3 Definitions. (d) Transportation. For purposes of the regulations in this subpart, the term transportation includes layover or waiting time and movement of the aircraft in deadhead service. (e) Applicability date. This section applies on and after the later of [date these regulations are published as final regulations in the Federal Register] or January 1, 2021. For rules that apply before that date, see 26 CFR part 49, revised as of April 1, 2020. §49.4263-5 [Redesignated] Par. 20. Section 49.4263-5 is redesignated as §49.4281-1. 2. In paragraph (c), adding a sentence at the end of the paragraph. §49.4281-1 Small aircraft on nonestablished lines. (a) In general. Amounts paid for the transportation of persons on a small aircraft of the type sometimes referred to as air taxis shall be exempt from the tax imposed under section 4261 of the Internal Revenue Code provided the aircraft has a maximum certificated takeoff weight of 6,000 pounds or less determined as provided in paragraph (b) of this section. The exemption does not apply, however, when the aircraft is operated on an established line or when the aircraft is a jet aircraft. (b) Maximum certificated takeoff weight. The term maximum certificated takeoff weight means the maximum certificated takeoff weight shown in the type certificate or airworthiness certificate issued by the Federal Aviation Administration. (c) * * * An aircraft is not considered as operated on an established line at any time during which the aircraft is being operated on a flight the sole purpose of which is sightseeing. (d) Jet aircraft. For purposes of this section, the term jet aircraft does not include any aircraft which is a rotorcraft (such as a helicopter) or propeller aircraft. Par. 23. Newly redesignated §49.4263-1 is revised to read as follows: §49.4263-1 Duty to collect the tax; payments made outside the United States. Where payment upon which tax is imposed by section 4261 of the Internal Revenue Code is made outside the United States for a prepaid order, exchange order, or similar order, the person furnishing the initial transportation pursuant to such order shall collect the applicable tax. See section 4291 and the regulations thereunder for cases where persons receiving payment must collect the tax. 1. In the first sentence of paragraph (a), remove “4264(b)” and add “4263(b) of the Internal Revenue Code (Code)” in its place. 2. In the last sentence of paragraph (a), remove “office of the district director for the district in which the person making the report is located,” and add “Commissioner” in its place. 3. In paragraph (b), add “of the Code” at the end of the paragraph. 4. In paragraph (c), remove “Illustration.” and add “Example.” in its place. 5. In the last sentence of paragraph (c), remove “office of the district director of internal revenue for the district in which the carrier is located,” and add in its place “Commissioner”. 1. Removing “a district director” wherever it appears and adding “Commissioner” in its place. 2. Revising paragraph (a). 3. In paragraph (b), removing the second sentence. 4. In paragraph (b), removing “4264” wherever it appears and adding “4263” in its place. 5. In paragraph (b), add “of the Code” after “4291”. The revisions read as follows: §49.4263-3 Special rule for the payment of tax. (a) In general—(1) For the rules applicable under section 4263(c) of the Internal Revenue Code, see §49.4261-1(b). §49.4264(d)-1 [Redesignated] Par. 28. Section 49.4264(d)-1 is redesignated as §49.4263-4. Par. 29. Newly redesignated §49.4263-4 is amended by removing “4264(d)” and adding “4263(d)” in its place. §49.4264(e)-1 [Redesignated] Par. 30. Section 49.4264(e)-1 is redesignated as §49.4263-5. §49.4264(f)-1 [Redesignated] Par. 31. Section 49.4264(f)-1 is redesignated as §49.4263-6. Par. 32. Newly redesignated §49.4263-6 is amended by removing and reserving paragraph (b). Par. 33. In § 49.4271-1, revise paragraphs (a) and (b) to read as follows: §49.4271-1 Tax on transportation of property by air. (a) Purpose of this section. Section 4271 of the Internal Revenue Code (Code) imposes a 6.25% tax on amounts paid within or without the United States for the taxable transportation of property (as defined in section 4272). This section sets forth rules as to the general applicability of the tax. This section also sets forth rules authorized by section 4272(b)(2) of the Code which exempt from tax payments for the transportation of property by air in the course of exportation (including shipment to a possession of the United States) by continuous movement, and in due course so exported. (b) Imposition of tax. (1) The tax imposed by section 4271 applies only to amounts paid to persons engaged in the business of transporting property by air for hire. (2) The tax imposed by section 4271 does not apply to amounts paid for the transportation of property by air if such transportation is furnished on an aircraft having a maximum certificated takeoff weight (as defined in section 4281(b) of the Code) of 6,000 pounds or less, unless such aircraft is operated on an established line or when such aircraft is a jet aircraft. The tax imposed by section 4271 also does not apply to any payment made by one member of an affiliated group (as defined in section 4282(b) of the Code) to another member of such group for services furnished in connection with the use of an aircraft if such aircraft is owned or leased by a member of the affiliated group and is not available for hire by persons who are not members of such group. Par. 34. Section 49.4271-2 is added to read as follows: §49.4271-2 Aircraft management services. For rules regarding the exemption for certain amounts paid by aircraft owners for aircraft management services, see §49.4261-10. §49.4282-1 [Reserved] Par. 35. Add and reserve §49.4282-1. (Filed by the Office of the Federal Register on July 29, 2005, 11:15 a.m., and published in the issue of the Federal Register for July 31, 2020, 85 F.R. 46032) Small Business Taxpayer Exceptions Under Sections 263A, 448, 460 and 471 ACTION: Notice of proposed rulemaking. SUMMARY: This document contains proposed regulations to implement legislative changes to sections 263A, 448, 460, and 471 of the Internal Revenue Code (Code) that simplify the application of those tax accounting provisions for certain businesses having average annual gross receipts that do not exceed $25,000,000, adjusted for inflation. This document also contains proposed regulations regarding certain special accounting rules for long-term contracts under section 460 to implement legislative changes applicable to corporate taxpayers. The proposed regulations generally affect taxpayers with average annual gross receipts of not more than $25 million (adjusted for inflation). Additionally, this document contains a request for comments regarding the application of section 460 (or other special methods of accounting) to a contract with income that is accounted for in part under section 460 (or other special method) and in part under section 451. DATES: Written or electronic comments or a request for a public hearing must be received by September 14, 2020. FOR FURTHER INFORMATION CONTACT: Concerning proposed §§1.460-1 through 1.460-6, Innessa Glazman, (202) 317-7006; concerning all other proposed regulations in this document, Anna Gleysteen, (202) 317-7007; concerning submission of comments and/or requests for a public hearing, Regina Johnson, (202) 317-5177 (not toll-free numbers). This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) to implement statutory amendments to sections 263A, 448, 460, and 471 of the Code made by section 13102 of Public Law No. 115-97 (131 Stat. 2054), commonly referred to as the Tax Cuts and Jobs Act (TCJA). These statutory amendments generally simplify the application of the method of accounting rules under those provisions to certain businesses (other than tax shelters) with average annual gross receipts that do not exceed $25,000,000, adjusted for inflation. This document also contains proposed amendments to the existing regulations under section 460 regarding the special accounting rules for long-term contracts to implement amendments to the Code applicable to corporate taxpayers made by TCJA sections 12001 (repealing the corporate alternative minimum tax imposed by section 55) and 14401 (adding the base erosion anti-abuse tax imposed by new section 59A). On August 20, 2018, the Treasury Department and the IRS issued Revenue Procedure 2018-40 (2018-34 I.R.B. 320), which provided administrative procedures for a taxpayer (other than a tax shelter under section 448(d)(3)) meeting the requirements of section 448(c) to obtain consent to change the taxpayer’s method of accounting to a method of accounting permitted by section 263A, 448, 460, or 471, as amended by the TCJA under the automatic change procedures of Revenue Procedure 2015-13 (2015-5 I.R.B. 419), as clarified and modified by Revenue Procedure 2015-33 (2015-24 I.R.B. 1067), as modified by Revenue Procedure 2016-1 (2016-1 I.R.B. 1), and Revenue Procedure 2017-59 (2017-48 I.R.B. 543). The revenue procedure also invited comments for future guidance regarding the implementation of the TCJA modifications to sections 263A, 448, 460, and 471. Two comments were received in response to Revenue Procedure 2018-40 and are discussed in the Explanation of Provisions. Finally, part 5 of the Explanation of Provisions requests comments regarding the effects of section 451(b) on the application of section 460, 467, or another special method of accounting, within the meaning of section 451(b)(2). On September 9, 2019, the Treasury Department and the IRS published proposed regulations under section 451(b) (REG-104870-18) in the Federal Register (84 FR 47191) in which comments were requested on the allocation of the transaction price for contracts that include items of income subject to section 451 and items of income that are attributable to long-term contract activities subject to section 460. One comment was received in response to this request, but was outside the scope of the rulemaking as it was received after the expiration of the comment period for REG-104870-18. As discussed in part 5 of the Explanation of Provisions, the Treasury Department and the IRS have considered that comment in requesting additional comments regarding the application of sections 451(b)(2) and 451(b)(4) to a contract with income that is accounted for in part under section 451 and in part under section 460, 467, or another special method of accounting. These proposed regulations provide guidance under sections 263A, 448, 460, and 471 to implement the TCJA’s amendments to those provisions. These proposed regulations also modify §§1.381(c)(5)-1 and 1.446-1 to reflect these statutory amendments. 1. Section 263A Small Business Taxpayer Exemption The uniform capitalization (UNICAP) rules of section 263A provide that, in general, the direct costs and the properly allocable share of the indirect costs of real or tangible personal property produced, or real or personal property described in section 1221(a)(1) acquired for resale, cannot be deducted but must either be capitalized into the basis of the property or included in inventory costs, as applicable. Certain property is exempted from the capitalization requirements of section 263A. For example, section 263(A)(c)(4) provides an exemption to the capitalization requirements of section 263A for any property produced by a taxpayer pursuant to a long-term contract. In addition, certain taxpayers are exempt from the capitalization requirements. Prior to the enactment of the TCJA, section 263A(b)(2)(B) and §1.263A-3(b)(1) provided that resellers with average annual gross receipts of $10,000,000 or less were not subject to the capitalization requirements (Section 263A small business reseller exemption). Section 13102(b) of the TCJA replaced the Section 263A small reseller exemption with a new general exemption from section 263A under new section 263A(i) for small business taxpayers (Section 263A small business taxpayer exemption). The Section 263A small business taxpayer exemption applies to any taxpayer (other than a tax shelter under section 448(a)(3)), meeting the gross receipts test of section 448(c), as amended by section 13102(a) of the TCJA and explained in greater detail in part 2 of this Explanation of Provisions (Section 448(c) gross receipts test). The proposed regulations remove the now obsolete Section 263A small reseller exemption provided in existing §1.263A-3(a)(2)(ii) and (b). These proposed regulations also modify existing §§1.263A-1, 1.263A-2, 1.263A-3, 1.263A-4, 1.263A-7, and 1.263A-8 to incorporate the Section 263A small business taxpayer exemption. A. Application of Section 448(c) Gross Receipts Test to Taxpayers That Are Not Corporations or Partnerships For purposes of the Section 263A small business taxpayer exemption, section 263A(i)(2) provides that the Section 448(c) gross receipts test is applied in the same manner as if each trade or business of the taxpayer were a corporation or partnership. Proposed §1.263A-1(j)(2)(ii) provides that in the case of a taxpayer other than a corporation or partnership, the Section 448(c) gross receipts test is applied by taking into account the amount of gross receipts derived from all trades or businesses of that taxpayer. Under the proposed regulations, amounts not related to a trade or business of that taxpayer, such as inherently personal amounts of an individual taxpayer, are generally excluded from gross receipts. Such excluded amounts include, in the case of an individual, items such as Social Security benefits, personal injury awards and settlements, disability benefits, and wages received as an employee that are reported on Form W-2. The exclusion for wages does not extend to guaranteed payments, which are not generally equivalent to salaries and wages. See Revenue Ruling 69-184 (1969-1 CB 45). These proposed regulations implementing the Section 263A small business taxpayer exemption are consistent with the proposed regulations implementing the Section 460 small business taxpayer exemption and Section 471 small business taxpayer exemption discussed later in this Explanation of Provisions, which incorporate statutory language similar to that in section 263A(i). A commenter responding to Revenue Procedure 2018-40 requested clarification on the application of the Section 448(c) gross receipts test to individuals, noting that it was unclear whether the individual owner is required to include the owner’s share of gross receipts from pass-through entities in the individual’s gross receipts. The commenter noted that including such amounts in the individual’s gross receipts would be distortive to the individual’s other trades or business reported on Schedules C, Profit or Loss From Business, Schedule E, Supplemental Income and Loss, and Schedule F, Profit or Loss From Farming, of the Form 1040, U.S. Individual Income Tax Return. The Treasury Department and the IRS note that section 263A(i) refers to section 448(c), and section 448(c)(2) expressly requires the aggregation rules of sections 52(a) or (b) and 414(m) or (o) to apply. Thus, the aggregation rules under section 52(a) or (b) or section 414(m) or (o) will always apply in connection with applying section 263A(i)(2). Under section 52, an individual taxpayer with two or more trades or businesses reported on the individual’s Schedule C or Schedule E of the individual’s Form 1040 is required to aggregate the gross receipts of those trades or businesses. Proposed §1.263A-1(j)(2)(ii) is consistent with these rules. Additionally, under section 263A(i)(2), each trade or business of the taxpayer is treated as if it were a corporation or partnership, and it is well-established under §1.448-1T(f) that a corporation or partnership includes in its gross receipts all receipts that are properly recognized under that corporation’s or partnership’s accounting method in that taxable year, regardless of the source of the receipts. Since corporations and partnerships do not have inherently personal items, the exclusion of such items from the individual’s trade or business gross receipts is not inconsistent with § 1.448-1T(f)(2)(iv). Consistent with section 263A(i), proposed §1.263A-1(j)(2)(iii) provides that when determining whether a taxpayer qualifies for the Section 263A small business taxpayer exemption, each partner in a partnership includes a share of partnership gross receipts in proportion to such partner’s distributive share of items of gross income that were taken into account by the partnership under section 703; similarly, each shareholder in an S corporation includes a pro rata share of the S corporation’s gross receipts taken into account by the S corporation under section 1363(b). B. Removal of Small Reseller Exception Prior to the TCJA, the Section 263A small reseller exception in section 263A(b)(2)(B) exempted from section 263A resellers with gross receipts of $10 million or less (small reseller gross receipts test). The TCJA removed the Section 263A small reseller exception provided in section 263A(b)(2)(B). Consistent with the TCJA, these proposed regulations remove existing §1.263A-3(a)(2)(ii) and modify existing §1.263A-3(b) by removing the small reseller gross receipts test. The Treasury Department and the IRS expect that most taxpayers who previously satisfied the small reseller gross receipts test will meet the Section 448(c) gross receipts test due to the increased dollar threshold in section 448(c), and therefore would be eligible to apply the small business taxpayer exemption under section 263A(i). The definition of gross receipts used for the small reseller gross receipts test under existing §1.263A-3(b) is applied for purposes of other simplifying conventions under the existing section 263A regulations. Since the TCJA removed the small reseller gross receipts test and added the Section 263A small business taxpayer exemption that refers to section 448(c), these proposed regulations update those simplifying conventions by cross referencing to the definition of gross receipts set forth in the proposed regulations under section 448 where applicable. Specifically, proposed §1.263A-3(a)(5) modifies the definition of gross receipts that is used to determine whether a reseller has de minimis production activities and proposed §1.263A-1(d)(3)(ii)(B)(1) modifies the definition of gross receipts used to permit certain taxpayers to use the simplified production method under §1.263A-2(b) by cross referencing to the definition of “gross receipts” for purposes of the Section 448(c) gross receipts test. C. Changes to the Uniform Interest Capitalization Rules Prior to the TCJA, section 263A(f)(1) required the capitalization of interest if the taxpayer produced certain types of property (designated property). The Section 263A small business taxpayer exception applies for all purposes of section 263A, including the requirement to capitalize interest under section 263A(f). Accordingly, these proposed regulations modify §1.263A-7 and §1.263A-8 to add new paragraphs to implement the Section 263A(i) small business taxpayer exemption for purposes of the requirement to capitalize interest. Additionally, existing §1.263A-9 contains an election that permits taxpayers whose average annual gross receipts do not exceed $10 million to use the highest applicable Federal rate as a substitute for the weighted average interest rate when tracing debt. Again, the Section 263A small business taxpayer exception applies for all purposes of section 263A, including the election for small business taxpayers who choose to capitalize interest under section 263A(f). Therefore, these proposed regulations modify §1.263A-9 to remove the $10 million gross receipts test in the definition of eligible taxpayer and replace it with the Section 448(c) gross receipts test. The Treasury Department and the IRS have determined that the use of a single gross receipts test under the section 263A (other than the pre-existing higher $50 million threshold for testing eligibility to apply the simplified production method) simplifies application of the UNICAP rules for taxpayers. D. Changes to §1.263A-4 for Farming Trades or Businesses Prior to the TCJA, section 263A(d)(3) permitted certain taxpayers to elect not to have the rules of section 263A apply to certain plants produced in a farming business conducted by the taxpayer. An electing taxpayer and any related person, as defined in §1.263A-4(d)(4)(iii), are required to apply the alternative depreciation system, as defined in section 168(g)(2), to property used in the taxpayer’s and any related persons’ farming business and placed in service in the taxable years in which the election was in effect. The Treasury Department and the IRS are aware that taxpayers that made an election under section 263A(d)(3) may also qualify for the Section 263A small business taxpayer exemption, and may prefer to apply that exemption rather than the election under section 263A(d)(3). Proposed §1.263A-4(d)(5) permits a taxpayer to revoke its section 263A(d)(3) election for any taxable year in which the taxpayer is eligible for and wants to apply the Section 263A small business taxpayer exemption by following applicable administrative guidance, such as Revenue Procedure 2020-13 (2020-11 IRB 515). In addition, some taxpayers may be eligible to apply the election under section 263A(d)(3) in a taxable year in which they cease to qualify for the Section 263A small business taxpayer exemption. Therefore, proposed §1.263A-4(d)(6) permits such a taxpayer to change its method of accounting from the exemption under section 263A(i) by making a section 263A(d)(3) election in the same taxable year by following applicable administrative guidance, such as Revenue Procedure 2020-13. Proposed §1.263A-4(d)(3)(i) is modified to remove the requirement that the election under section 263A(d)(3) by a partnership or S corporation be made by the partner, shareholder or member. The Treasury Department and the IRS believe that the inclusion of this requirement was a drafting error, as sections 703(b) and 1363(c) require the election to be made at the entity level. The TCJA added new section 263A(d)(2)(C), which provides a special temporary rule for citrus plants lost by reason of casualty. The provision, which expires in 2027, provides that section 263A does not apply to replanting costs paid or incurred by a taxpayer other than the owner if certain conditions are met. Proposed §1.263A-4(e)(5) is added to incorporate this special temporary rule. E. Costing Rules for Self-Constructed Assets One commenter stated that the costing rules for self-constructed property used in a taxpayer’s trade or business prior to the enactment of section 263A, which would apply to small business taxpayers choosing to apply the Section 263A small business taxpayer exemption, are not clear. The commenter asked for clarification of what costs a small business taxpayer is required to capitalize to its depreciable property if the taxpayer has chosen to apply the Section 263A small business taxpayer exemption. The Treasury Department and the IRS request further comments on specific clarifications needed regarding the costing rules that existed prior to the enactment of the UNICAP rules under section 263A. 2. Changes to the Regulations under Section 448 Section 448(a) generally prohibits C corporations, partnerships with a C corporation as a partner, and tax shelters from using the cash receipts and disbursements method of accounting (cash method). However, section 448(b)(3) provides that section 448(a) does not apply to C corporations and partnerships with a C corporation as a partner that meet the Section 448(c) gross receipts test. Prior to the TCJA’s enactment, a taxpayer met the gross receipts test of section 448(c) if, for all taxable years preceding the current taxable year, the average annual gross receipts of the taxpayer (or any predecessor) for any 3-taxable-year period did not exceed $5 million. If a taxpayer had not been in existence for the entire 3-taxable-year period, then the gross receipt test was applied on the basis of the period during which the taxpayer or trade or business was in existence. For a taxable year less than 12 months, the gross receipts of that short taxable year were annualized (short taxable year rule). Additionally, this gross receipts test also required the aggregation of gross receipts for all persons treated as a single employer under section 52(a) or (b) or section 414(m) or (o) (aggregation rule). Section 13102(a) of the TCJA amended the Section 448(c) gross receipts test to permit a taxpayer (other than a tax shelter) to meet the test if the taxpayer’s average annual gross receipts for the 3-taxable-year period ending with the year preceding the current taxable year does not exceed $25 million and indexed the $25 million threshold for inflation (Section 448 small business taxpayer exemption). Other rules in section 448(c), such as the short taxable year rule and the aggregation rule, were not altered by section 13102(a) of the TCJA. A. General rules of section 448(c) and Section 448(c) gross receipts test These proposed regulations modify existing §1.448-1 to clarify that it applies to taxable years beginning before January 1, 2018 for purposes of applying the restrictions on the use of the cash method by C corporations and partnerships with C corporation partners. Proposed §1.448-2 provides rules applicable for taxable years beginning after December 31, 2017. These rules are generally similar to the existing regulations under §1.448-1 and §1.448-1T of the Temporary Income Tax Regulations, including the short taxable year rule and the aggregation rule. However, for taxable years beginning after December 31, 2017, the proposed regulations update the rules to reflect the post-TCJA Section 448(c) gross receipts test. These proposed regulations also clarify that the gross receipts of a C corporation partner are included in the gross receipts of a partnership if the aggregation rules apply to the C corporation partner and the partnership. The Treasury Department and the IRS publish an annual revenue procedure for inflation-adjusted amounts and intend to include the inflation-adjusted section 448(c) dollar threshold in that revenue procedure. See, for example, Revenue Procedure 2019-44 (2019-47 IRB 1093). B. Tax Shelters Defined in Section 448(d)(3) Under section 448(a)(3), a tax shelter is prohibited from using the cash method. Section 448(d)(3) cross references section 461(i)(3) to define the term “tax shelter.” Section 461(i)(3)(B), in turn, includes a cross reference to the definition of “syndicate” in section 1256(e)(3)(B), which defines a syndicate as a partnership or other entity (other than a C corporation) if more than 35 percent of the losses of that entity during the taxable year are allocable to limited partners or limited entrepreneurs. Section 1.448-1T(b)(3) narrowed this definition by providing that a taxpayer is a syndicate only if more than 35 percent of its losses are allocated to limited partners or limited entrepreneurs. Consequently, a partnership or other entity (other than a C corporation) may be considered a syndicate only for a taxable year in which it has losses. These proposed regulations adopt the same definition of syndicate provided in §1.448-1T. One commenter expressed concern that the definition of syndicate is difficult to administer because many small business taxpayers may fluctuate between taxable income and loss between taxable years, thus their status as tax shelters may change each tax year. The commenter suggested that the Treasury Department and the IRS exercise regulatory authority under section 1256(e)(3)(C)(v) to provide that all the interests held in entities that meet the definition of a syndicate but otherwise meet the Section 448(c) gross receipts test be deemed as held by individuals who actively participate in the management of the entity, so long as the entities do not qualify to make an election as an electing real property business or electing farm business under section 163(j)(7)(B) or (C), respectively. The Treasury Department and the IRS decline to adopt this recommendation. The recommendation would allow a taxpayer that meets the Section 448(c) gross receipts test to completely bypass the “syndicate” portion of the tax shelter definition under section 448(d)(3). Neither the statutory language of section 448 nor the legislative history of the TCJA support limiting the application of the existing definition of tax shelter in section 448(d)(3) in this manner. The Treasury Department and the IRS are aware of practical concerns regarding the determination of tax shelter status for the taxable year. For example, a taxpayer may determine computationally that it is a syndicate under section 1256 after the close of the taxable year while preparing its Federal income tax return for the taxable year. However, a taxpayer that is a tax shelter is not permitted to use the cash method for that taxable year, but may no longer be able to timely file a Form 3115, Application for Change in Accounting Method, to change from the cash method to an appropriate method, such as an accrual method of accounting (accrual method) for that taxable year, or it may otherwise have time constraints in filing its Federal income tax return by the due date of the return (without extensions) for such taxable year. While these procedural constraints also existed prior to the TCJA, the TCJA’s modifications to several other sections of the Code to reference the section 448(d)(3) definition of tax shelter made the tax shelter status determination under section 448(c)(3) applicable to more taxpayers than prior to the TCJA, increasing the number of taxpayers affected by these procedural constraints. In light of the increased relevance of the definition of tax shelter under section 448(d)(3) after enactment of the TCJA, proposed §1.448-2(b)(2)(iii)(B) permits a taxpayer to elect to use the allocated taxable income or loss of the immediately preceding taxable year to determine whether the taxpayer is a syndicate for purposes of section 448(d)(3) for the current taxable year. A taxpayer that makes this election will know at the beginning of the taxable year whether it is a tax shelter for the current taxable year, alleviating concerns about the difficulties in timely determining whether it is a tax shelter under section 448(d)(3) and filing changes in method of accounting, if necessary. A taxpayer that makes this election must apply the rule to all subsequent taxable years, and for all purposes for which status as a tax shelter under section 448(d)(3) is relevant, unless the Commissioner permits a revocation of the election. Another commenter suggested a rule to provide relief to taxpayers that report negative taxable income in a taxable year solely because of a negative section 481(a) adjustment arising from an accounting method change and are consequently within the definition of tax shelter under section 448(d)(3), but that would otherwise meet the Section 448(c) gross receipts test. The suggested rule would deem such taxpayers to not be tax shelters for purposes of section 448(d)(3). The Treasury Department and the IRS decline to adopt this suggestion. No exception was provided in the TCJA to limit the application of the definition of tax shelter in section 448(d)(3) for taxpayers making an overall method change. The Treasury Department and the IRS continue to study the definition of tax shelter under section 448(d)(3) and request comments on whether additional relief is necessary. C. Procedures for Taxpayers Required to Change from the Cash Method Prior to its amendment by the TCJA, a taxpayer met the gross receipts test of section 448(c) if its average annual gross receipts did not exceed $5 million for all prior 3-taxable-year periods. Once a taxpayer’s average annual gross receipts had exceeded $5 million (first section 448 year), a taxpayer was prohibited under section 448 from using the cash method for all subsequent taxable years. The TCJA removed the requirement under section 448(c) that all prior taxable years of a taxpayer must satisfy the Section 448(c) gross receipts test for the taxpayer to qualify for the cash method for taxable years beginning after December 31, 2017. Thus, section 448 no longer permanently prevents a C corporation or a partnership with a C corporation partner from using the cash method for a year subsequent to a taxable year in which its gross receipts first exceed the dollar threshold for the Section 448(c) gross receipts test. Accordingly, the proposed regulations do not require taxpayers to meet the gross receipts test for all prior taxable years in order to satisfy the Section 448(c) gross receipts test. The term “first section 448 year” used in existing §1.448-1 no longer reflects the statutory language of section 448 and these proposed regulations remove this term for taxable years beginning after December 31, 2017. Proposed §1.448-2(g)(1) uses the term “mandatory section 448 year” to describe the first taxable year that a taxpayer is prevented by section 448 from using the cash method, or a subsequent taxable year in which the taxpayer is again prevented by section 448 from using the cash method after previously making a change in method of accounting that complied with section 448. Proposed §1.448-2(g)(3) requires a taxpayer that meets the Section 448(c) gross receipts test in the current taxable year to obtain the written consent of the Commissioner before changing to the cash method if the taxpayer had previously changed its overall method from the cash method during any of the five taxable years ending with the current taxable year. A taxpayer that makes multiple changes in its overall method of accounting within a short period of time may not be treating items of income and expense consistently from year to year, and a change back to the cash method within the five year period may not clearly reflect income, as required by §1.446-1(a)(2), even if section 448 otherwise does not prohibit the use of the cash method. The proposed regulations also do not contain specific procedures to make a method change from the cash method to a permissible method. The Treasury Department and the IRS have determined that providing a single procedure in administrative guidance, such as Revenue Procedure 2015-13 (or successor) and Revenue Procedure 2019-43 (2019-48 IRB 1107) (or successor) will reduce confusion for taxpayers to make voluntary changes in method of accounting to comply with section 448. Consequently, the proposed regulations provide that a taxpayer in a mandatory section 448 year must follow the applicable administrative procedures to change from the cash method to a permissible method. Section 460(a) provides that income from a long-term contract must be determined using the percentage-of-completion method (PCM). A long-term contract is defined in section 460(f) as generally any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into. Subject to special rules in section 460(b)(3), section 460(b)(1)(A) generally provides that the percentage of completion of a long-term contract is determined by comparing costs allocated to the contract under section 460(c) and incurred before the close of the taxable year with the estimated total contract costs. Section 460(b)(1)(B) generally provides that a taxpayer is required to pay or is entitled to receive interest determined under the look-back rules of section 460(b)(2) on the amount of any tax liability under chapter 1 of the Code that was deferred or accelerated as a result of overestimating or underestimating total allocable contract costs or contract price with respect to income from long-term contracts reported under the PCM. Section 56(a)(3) generally provides that for alternative minimum tax (AMT) purposes, the taxable income from a long-term contract (other than a home construction contract defined in section 460(e)(5)(A)) is determined under the PCM (as modified by section 460(b)). Section 460(e)(1)(A) provides an exemption from the requirement to use the PCM for home construction contracts. Prior to the TCJA, section 460(e)(1)(B) provided a separate exemption from the PCM for a long-term construction contract of a taxpayer who estimated that the contract would be completed within the 2-year period from the commencement of the contract (two-year rule), and whose average annual gross receipts for the 3-taxable-year period ending with the year preceding the year the contract was entered into did not exceed $10 million (Section 460(e) gross receipts test). The flush language of section 460(e)(1) provides that a home construction contract with respect to which the two-year rule and Section 460(e) gross receipts test are not met will be subject to section 263A, notwithstanding the general exemption under section 263A(c)(4) for property produced pursuant to a long-term contract (large homebuilder rule). Additionally, for AMT purposes, section 56(a)(3) provides in the case of contract described in section 460(e)(1), other than a home construction contract, the percentage of the contract completed is determined under section 460(b)(1) by using the simplified procedures for allocation of costs prescribed under section 460(b)(3). Section 13102(d) of the TCJA amended section 460(e)(1)(B) by removing the Section 460(e) gross receipts test and replacing it with the Section 448(c) gross receipts test, as amended by section 13102(a) of the TCJA, for the taxable year in which the contract is entered into. Thus, section 460(e)(1)(B), as modified by TCJA, provides a small contractor exemption for long-term construction contracts of a taxpayer other than a tax shelter that estimates that the contract will be completed within two years of the commencement of the contract and meets the Section 448(c) gross receipts test (Section 460 small contractor exemption). The Section 460 small contractor exemption. does not apply to home construction contracts, which remain exempt from required use of PCM under section 460(e)(1)(A). A. Application of the Section 448(c) Gross Receipts Test and Rules Applicable to Taxpayers Other Than a Corporation or Partnership Proposed §1.460-3(b) modifies the rules relating to the small contractor exemption by incorporating the requirement in section 460(e)(1)(B)(ii) that an eligible taxpayer must meet the Section 448(c) gross receipts test for the taxable year in which the contract is entered into. Section 460(e)(2), which has statutory language identical to that in section 263A(i)(2), provides that for a taxpayer that is not a corporation or partnership, the Section 448(c) gross receipts test is applied in the same manner as if each trade or business of the taxpayer were a corporation or a partnership. Proposed §1.460-3(b)(3)(ii)(A) through (D) provide guidance under section 460(e)(2) consistent with the rules in proposed §1.263A-1(j)(2). B. Home Construction Contract Rules The large homebuilder rule under section 460(e)(1) exempts home construction contracts from PCM but requires capitalization of costs under the UNICAP rules under section 263A. Consistent with section 460(e)(1), proposed §1.460-5(d)(3) provides that a taxpayer must capitalize the costs of home construction contracts under section 263A and the regulations under section 263A, unless the taxpayer estimates, when entering into the contract, that it will be completed within two years of the contract commencement date and the taxpayer satisfies the Section 448(c) gross receipts test for the taxable year in which the contract is entered into. C. Clarification of Method of Accounting Rules Section 460(e)(2)(B) provides that any change in method of accounting made pursuant to section 460(e)(1)(B)(ii) is treated as initiated by the taxpayer and made with the consent of the Secretary of the Treasury or his delegate (Secretary). The change is made on a cut-off basis for all similarly classified contracts entered into on or after the year of change. Revenue Ruling 92-28 (92-1 CB 153) held that within the same trade or business, a taxpayer may use different methods of accounting for contracts exempt under section 460(e)(1) and contracts subject to mandatory use of PCM under section 460(a). Accordingly, a taxpayer with both exempt contracts and nonexempt contracts within the same trade or business may use a method of accounting other than PCM for all exempt contracts, even though the taxpayer would be required to use PCM for the nonexempt contracts. A commenter requested clarification on the interaction of Revenue Ruling 92-28 with section 460(e)(2)(B). The commenter asked for clarification because Revenue Ruling 92-28 describes situations in which a taxpayer is not required to obtain consent to a change in method of accounting because it is either adopting a method of accounting for a new item (Situation 1: PCM for nonexempt long-term contracts) or returning to the use of a previously adopted method (Situation 2: completed contract method for contracts exempt because taxpayer’s average annual gross receipts have fallen below the threshold for the small contractor exemption). The Treasury Department and the IRS have determined that the holding in Revenue Ruling 92-28 remains correct, and that section 460(e)(2)(B) does not apply to Situations 1 and 2 in Revenue Ruling 92-28. In reconciling the statutory language of section 460(e)(2)(B) with section 446, the Treasury Department and the IRS interpret section 460(e)(2)(B) as applying to situations in which a taxpayer has been using PCM for exempt contracts and would like to change to a different exempt contract method. Accordingly, proposed §1.460-1(f)(3) incorporates the holding of Revenue Ruling 92-28 and provides that a taxpayer may adopt any permissible method of accounting for each classification of contract (that is, exempt and nonexempt). D. Look-Back Rules Section 460(b) provides that, upon the completion of any long-term contract, the look-back method is applied to amounts reported under the contract using PCM, whether for regular income tax purposes or for AMT purposes. Under the look-back method, taxpayers are required to pay interest if the taxpayer’s Federal income tax liability is deferred as a result of underestimating the total contract price or overestimating total contract costs. Alternatively, a taxpayer is entitled to receive interest if the taxpayer’s Federal income tax liability has been accelerated as a result of overestimating the total contract price or underestimating total contract costs. Any interest to be paid is based on a comparison of the difference between the Federal income tax liability actually reported by the taxpayer compared to the Federal income tax liability that would have been reported if the taxpayer had used actual contract prices and costs instead of estimated contract prices and costs in computing income under PCM. i. Look-Back Rules and AMT Section 12001 of the TCJA amended section 55(a) so that the AMT is no longer imposed on corporations for taxable years beginning after December 31, 2017. Consistent with section 12001 of the TCJA, proposed §1.460-6(c) reflects the changes to section 55(a) by providing that in applying the look-back method, alternative minimum taxable income is redetermined only for taxable years in which the AMT is applicable. Similarly, the recomputed tax liability for prior contract years includes the AMT only for the taxable years in which the AMT is applicable. Consequently, for taxable years beginning after December 31, 2017, for purposes of the look-back method, a corporation will not redetermine alternative minimum taxable income or recompute AMT liability. However, a corporation that has a contract that spans a period beginning before the TCJA (taxable years beginning before January 1, 2018) and ending after the TCJA (taxable years beginning after December 31, 2017), would be required to redetermine alternative minimum taxable income and recompute AMT for those taxable years beginning before January 1, 2018. ii. De Minimis Exception to Look-Back Rules Section 460(b)(3) provides an exception to the requirement to apply the look-back method. Under the exception, the look-back method need not be applied if the contract price does not exceed the lesser of $1,000,000 or one percent of the taxpayer’s average annual gross receipts for the prior 3-taxable-year period ending with the year preceding the taxable year in which the contract is completed, and the contract is completed within two years of the commencement of the contract. Proposed §1.460-3(b)(3) provides that, for purposes of this de minimis exception, gross receipts are determined in accordance with the regulations under section 448(c). iii. Look-Back Rules and the BEAT Proposed §1.460-6 is also updated to reflect the enactment of the base erosion anti-abuse tax (BEAT) imposed by section 59A. For any taxable year, the BEAT is a tax on each applicable taxpayer (see §1.59A-2) equal to the base erosion minimum tax amount (BEMTA) for that year. Generally, the taxpayer’s BEMTA equals the excess of (1) the applicable tax rate for the taxable year (BEAT rate) multiplied by the taxpayer’s modified taxable income under §1.59A-3(b) for the taxable year over (2) the taxpayer’s adjusted regular Federal income tax liability for that year. Proposed §1.460-6 applies the look-back method to re-determine the taxpayer’s modified taxable income under §1.59-3(b) and the taxpayer’s BEMTA for the taxable year. Specifically, the taxpayer must determine its modified taxable income and BEMTA for each year prior to the filing year that is affected by contracts completed or adjusted in the filing year as if the actual total contract price and costs had been used in applying the percentage of completion method. The Treasury Department and the IRS have proposed this rule because the income from long-term contracts determined using the PCM may be overestimated or underestimated, which may change the taxpayer’s modified taxable income or BETMA, or whether or not a taxpayer is an applicable taxpayer in a particular taxable year. Clarifying in the regulations under section 460 that the look-back method must take into account any application of the BEAT makes clear that section 460 provides taxpayers will pay or receive interest (whichever is the case) if their Federal income tax liability, including any BEAT liability, is deferred, eliminated, understated, or overstated as a result of the taxpayer’s estimation of the total contract price or total contract costs. 4. Section 471 Small Business Taxpayer Exemption Section 471(a) requires inventories to be taken by a taxpayer when, in the opinion of the Secretary, taking an inventory is necessary to determine the income of the taxpayer. Section 1.471-1 requires the taking of an inventory at the beginning and end of each taxable year in which the production, purchase, or sale of merchandise is an income-producing factor. Additionally, when an inventory is required to be taken, §1.446-1(c)(1)(iv) and (c)(2) require that an accrual method be used for purchases and sales. Section 13102(c) of the TCJA added new section 471(c) to remove the statutory requirement to take an inventory when the production, purchase, or sale of merchandise is an income-producing factor for a taxpayer (other than a tax shelter) meeting the Section 448(c) gross receipts test (Section 471 small business taxpayer exemption). The Section 471 small business taxpayer exemption provides that the requirements of section 471(a) do not apply to a taxpayer for that taxable year, and the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if the taxpayer either: (1) treats the taxpayer’s inventory as non-incidental materials and supplies, or (2) conforms the taxpayer’s inventory method to the taxpayer’s method of accounting for inventory reflected in an applicable financial statement as defined in section 451(b)(3) (AFS), or if the taxpayer does not have an AFS, in the taxpayer’s books and records prepared in accordance with the taxpayer’s accounting procedures. Section 471(c)(3) provides that in the case of a taxpayer that is not a corporation or partnership, the Section 448(c) gross receipts test is determined in the same manner as if each trade or business of such taxpayer were a corporation or partnership. A taxpayer’s method of accounting for inventory may not clearly reflect income if a taxpayer meets the Section 448(c) gross receipts test but does not take an inventory, and also does not either treat its inventory as non-incidental materials and supplies or in conformity with its AFS, or its books and records if it does not have an AFS. In such instances, the general rules under section 446 for analyzing whether a method of accounting clearly reflects income are applicable. These proposed regulations modify existing §1.471-1 by adding proposed §1.471-1(b) to implement the Section 471 small business taxpayer exemption under section 471(c). Proposed §1.471-1(b) provides guidance on the application of the Section 448(c) gross receipts test to taxpayers other than a corporation or partnership, the treatment of inventory as non-incidental materials and supplies, and the conforming of inventory to an AFS or the taxpayer’s books and records. A. Application of the Section 448(c) Gross Receipts Test to Taxpayers Other Than a Corporation or Partnership These proposed regulations provide guidance under section 471(c)(3), which has statutory language identical to section 263A(i)(2), consistent with the rules in proposed §1.263A-1(j)(2). See part 1.A of this Explanation of Provisions for discussion of the application of the Section 448(c) gross receipts test to individuals and other taxpayers that are not a corporation or partnership. B. Treatment of Inventory as Non-Incidental Materials and Supplies Section 471(c)(1)(B)(i) provides that a taxpayer, other than a tax shelter, that meets the Section 448(c) gross receipts test can treat its inventory as non-incidental materials and supplies. Prior to the TCJA, the Treasury Department and the IRS provided administrative relief for certain taxpayers from the requirements of section 471(a) with regard to purchases and sales of inventory. Under Revenue Procedure 2001-10 (2001-2 IRB 272), a taxpayer with average annual gross receipts that did not exceed $1 million was exempted from the requirements to use an accrual method under section 446 and to account for inventories under section 471. Similarly, under Revenue Procedure 2002-28 (2002-28 IRB 815), a “qualifying small business taxpayer,” as defined in section 4.01 of Revenue Procedure 2002-28, was also exempted from the requirements to use an accrual method under section 446 and to account for inventories under section 471. To qualify, a taxpayer must have had average annual gross receipts that did not exceed $10 million in certain industries, or reasonably determined that its principal business activity was the provision of services, or reasonably determined its principal business activity was the fabrication or modification of customized tangible personal property. Under both revenue procedures, a taxpayer was permitted to account for its inventory in the same manner as non-incidental materials and supplies under §1.162-3. Under § 1.162-3, materials and supplies that are not incidental are deductible only in the year in which they are actually consumed and used in the taxpayer’s business. For purposes of these revenue procedures, inventoriable items treated as non-incidental materials and supplies were treated as consumed and used in the taxable year the taxpayer provided the items to a customer. Thus, the costs of such inventoriable items were recovered by a cash basis taxpayer only in that year, or in the year in which the taxpayer actually paid for the goods, whichever was later. See section 4.02 of Revenue Procedure 2001-10 and section 4.05 of Revenue Procedure 2002-28. Section 471(c)(1)(B)(i) generally codified the treatment of inventory using the non-incidental materials and supplies method of accounting described in Revenue Procedure 2001-10 and Revenue Procedure 2002-28, with certain exceptions. Accordingly, proposed §1.471-1(b)(4) provides rules similar to the provisions of these revenue procedures, including that the items continue to be inventory property. The proposed regulations refer to inventory treated as non-incidental materials and supplies as “section 471(c) materials and supplies.” i. Definition of the Term “Used and Consumed” As explained previously and as noted in the Conference Report to the TCJA, an exception to the requirement to take an inventory was provided under Revenue Procedure 2001-10 and Revenue Procedure 2002-28. H.R. Rep. No. 115-466, at 378 fn. 638 and 639 (2017). Under that exception, a taxpayer was able to account for inventory as materials and supplies that are not incidental. The cost of non-incidental materials and supplies is deductible in the taxable year in which the materials and supplies are first used or consumed in the taxpayer’s operations. Id. at 378 fn. 640. As discussed in part 4.B of this Explanation of Provisions, the administrative guidance as in existence prior to the TCJA provided that inventory treated as non-incidental materials and supplies under §1.162-3 remained inventory property, the cost of which was recovered by a cash basis taxpayer when the items were provided to a customer, or when the taxpayer paid for the items, whichever was later. The Conference Report describes the TCJA as generally permitting the costs of non-incidental materials and supplies to be recovered in the taxable year that is “consistent with present law.” Id. at 380 fn. 657. The Treasury Department and IRS interpret section 471(c)(1)(B)(i) as generally codifying the administrative guidance existing at the time of enactment (that is, Revenue Procedure 2001-10 and Revenue Procedure 2002-28). Accordingly, proposed §1.471-1(b)(4)(i) provides that section 471(c) materials and supplies are used or consumed in the taxable year in which the taxpayer provides the item to a customer and the cost of such item is recovered in that year or the taxable year in which the taxpayer pays for or incurs (in the case of an accrual method taxpayer) such cost, whichever is later. One commenter requested that raw materials used in the production of finished goods be deemed “used or consumed” when the raw material is used during production instead of when the finished product is provided to a customer. Under this approach, a producer would be able to recover production costs earlier than allowed under the administrative guidance of Revenue Procedure 2001-10 and Revenue Procedure 2002-28. Further, under this approach, a producer would be permitted to recover costs earlier than a reseller. The Treasury Department and the IRS decline to adopt this suggestion. As discussed previously, the Treasury Department and the IRS interpret section 471(c)(1)(B)(i) and its legislative history generally as codifying the rules provided in the administrative guidance existing at the time the Act was enacted. Accordingly, proposed §1.471-1(b)(4) provides that section 471(c) materials and supplies are “used and consumed” in the taxable year the taxpayer provides the goods to a customer, and that the cost of goods is recovered in that year or the taxable year in which such cost is paid or incurred (in accordance with the taxpayer’s method of accounting), whichever is later. ii. De Minimis Safe Harbor under §1.263(a)-1(f) Section 1.263(a)-1(f) provides a regulatory de minimis safe harbor election through which an electing taxpayer may choose not to treat as a material or supply under §1.162-3(a) any amount paid in the taxable year for tangible property if the amount paid meets certain requirements, and instead to deduct the de minimis amount in accordance with its AFS, or books and records, if the taxpayer has no AFS. Section 1.263(a)-1(f)(2)(i) provides that the de minimis safe harbor election does not apply to amounts paid for property that is or is intended to be included in inventory property. Two commenters asked for clarification on whether a taxpayer using the non-incidental materials and supplies method under section 471(c)(1)(B)(i) may use the de minimis safe harbor election of §1.263(a)-1(f). As discussed in part 4.B of this Explanation of Provisions, the Treasury Department and the IRS continue to interpret inventory treated as non-incidental materials and supplies as remaining characterized as inventory property. Consequently, proposed §1.471-1(b)(4)(i) provides that inventory treated as section 471(c) non-incidental materials and supplies is not eligible for the de minimis safe harbor election under §1.263(a)-1(f). Extending the regulatory election under §1.263(a)-1(f) to encompass section 471(c) materials and supplies is outside the intended scope of the election and runs counter to section 471(c), which indicates section 471(c) materials and supplies are inventory property. iii. Identification and Valuation of Section 471(c) Materials and Supplies One commenter asked for guidance on how a taxpayer determines the cost basis of inventory items that are treated as non-incidental materials and supplies. Proposed §1.471-1(b)(4)(ii) provides guidance on how a taxpayer may identify and value section 471(c) materials and supplies. These identification and valuation methods would apply whether the taxpayer used the cash method or an accrual method. Consistent with Revenue Procedure 2002-28, and the legislative history to section 471(c), proposed §1.471-1(b)(4)(ii) permits taxpayers to determine the amount of their section 471(c) materials and supplies by using either a specific identification method, a first-in, first-out (FIFO) method, or an average cost method, provided that the method is used consistently. Taxpayers may not identify their inventory using a last-in, first-out (LIFO) method or value section 471(c) materials and supplies using a lower-of-cost-or-market (LCM) method. The Treasury Department and the IRS are aware that the purpose of the section 471(c) materials and supplies method is to provide simplification. Accounting methods using LIFO and LCM require sophisticated computations and are allowed under the more complex inventory rules of sections 471(a) and 472. Accordingly, these proposed regulations do not permit a taxpayer using the section 471(c) materials and supplies method to use either a LIFO method or the LCM method. iv. Direct Labor and Overhead Costs for Section 471(c) Materials and Supplies Commenters asked for clarification as to the treatment of direct labor and overhead costs for section 471(c) materials and supplies. Revenue Procedure 2001-10 and Revenue Procedure 2002-28 did not directly address whether direct labor and overhead costs for inventory treated as non-incidental materials and supplies were immediately deductible. The commenters argue that if inventories are treated as non-incidental materials and supplies, then all of the direct labor and overhead costs incurred in producing the goods are deductible when incurred. One commenter noted that prior to the enactment of section 263A, the costing rules for inventoriable goods produced by a taxpayer were governed by the full absorption method under §1.471-11, and §1.471-3, in the case of a reseller of inventory. The Treasury Department and the IRS have determined that under the section 471(c) materials and supplies method, the items retain their character as inventory property. Because the property remains characterized as inventory property, the costing rules in §1.471-11 and §1.471-3 are the applicable rules to determine which costs are to be included under the section 471(c) materials and supplies method. However, the Treasury Department and the IRS are aware that the purpose of section 471(c)(1)(A)(i) is to provide simplification for taxpayers. Accordingly, these proposed regulations provide that a taxpayer using the section 471(c) materials and supplies method is required to include only direct costs paid to produce or acquire the inventory treated as section 471(c) materials and supplies. These direct costs are not immediately deductible but are recovered in accordance with proposed §1.471-1(b)(4). Consistent with existing law, these proposed regulations provide that a taxpayer is not permitted to recover a cost that it otherwise would be neither permitted to recover nor deduct for Federal income tax purposes solely by reason of it being included in the costs of section 471(c) materials and supplies. C. Treatment of Inventory for an AFS Taxpayer A taxpayer, other than a tax shelter, that meets the Section 448(c) gross receipts test need not take an inventory under section 471(a) and may choose to treat its inventory as the inventory is reflected in the taxpayer’s AFS, or if the taxpayer does not have an AFS, as the inventory is treated in the taxpayer’s books and records prepared in accordance with the taxpayer’s accounting procedures. These proposed regulations provide guidance on the definition of AFS, the types and amounts of costs reflected in an AFS that can be recovered under section 471(c), and when such costs may be taken into account. The proposed regulations use the term “AFS section 471(c) method” to describe the permissible section 471(c)(1)(B)(ii) method for a taxpayer with an AFS (AFS taxpayer). i. Definition of AFS Section 471(c)(2) defines an AFS by cross-reference to section 451(b)(3). Consistent with the statute, proposed §1.471-1(b)(5)(ii) defines the term AFS in accordance with section 451(b)(3), and incorporates the definition provided in proposed §1.451-3(c)(1). The rules relating to additional AFS issues provided in §1.451-3(h) also apply to the AFS section 471(c) method. The proposed regulations also provide that a taxpayer has an AFS for the taxable year if all of the taxpayer’s taxable year is covered by an AFS. If a taxpayer’s AFS is prepared on the basis of a financial accounting year that differs from the taxpayer’s taxable year, proposed §1.471-1(b)(5)(ii) provides that a taxpayer determines its inventory for the mismatched reportable period by using a method of accounting described in proposed §1.451-3(h)(4). The Treasury Department and the IRS propose to require a taxpayer with an AFS that uses the AFS section 471(c) method to consistently apply the same mismatched reportable period method provided in proposed §1.451-3(h)(4) for purposes of its AFS section 471(c) method of accounting that is used for section 451. The Treasury Department and the IRS request comments on the consistency requirement and other issues related to the application of proposed §1.451-3(h) to the AFS section 471(c) method. ii. Types and Amounts of Costs Reflected in an AFS Proposed §1.471-1(b)(5) provides rules relating to the AFS section 471(c) method, including a description of the costs included in this method. The proposed regulations provide that an AFS taxpayer, other than a tax shelter, that meets the Section 448(c) gross receipts test may use the AFS section 471(c) method to account for its inventory costs for that taxable year. The proposed regulations also clarify that a taxpayer using the AFS section 471(c) method is maintaining inventory, but generally recovers the costs of inventory in accordance with its AFS inventory method and not by using an inventory method specified under section 471(a) and the regulations under section 471. Under the AFS section 471(c) method, the term “inventory costs” means the costs that a taxpayer capitalizes to property produced or property acquired for resale in its AFS. However, these proposed regulations clarify that the amount of an inventory cost in a taxpayer’s AFS may not properly reflect the amount recoverable under the taxpayer’s AFS section 471(c) method. These proposed regulations provide that a taxpayer is not permitted to recover a cost that it otherwise would be neither permitted to recover nor deduct for Federal income tax purposes solely by reason of it being an inventory cost in the taxpayer’s AFS inventory method. In addition, these proposed regulations provide that a taxpayer may not capitalize a cost to inventory any earlier than the taxable year in which the amount is paid or incurred under the taxpayer’s overall method of accounting for Federal income tax purposes (for example, if applicable, section 461(h) is met) or not permitted to be capitalized by another Code provision (for example, section 263(a)). As a result, a taxpayer may be required to reconcile any differences between its AFS and Federal income tax return treatment (book-tax adjustments) for all or a portion of a cost that was included in the taxpayer’s AFS inventory method under the AFS section 471(c) method. The Treasury Department and the IRS are aware that some taxpayers may interpret section 471(c)(1)(B)(ii) as permitting a taxpayer to capitalize a cost to inventory for Federal income tax purposes when that cost is included in the taxpayer’s AFS inventory method irrespective of: (1) whether the amount is deductible or otherwise recoverable for Federal income tax purposes; or (2) when the amount is capitalizable under the taxpayer’s overall method of accounting used for Federal income tax purposes. The Treasury Department and the IRS do not agree with this interpretation because section 471 is a timing provision. Section 471 is in subchapter E of chapter 1, Accounting Periods and Methods of Accounting. It is not in subchapter B of chapter 1, Computation of Taxable Income. A method of accounting determines when an item of income or expense is recognized, not whether it is deductible or recoverable through cost of goods sold or basis. Accordingly, the Treasury Department and the IRS view section 471(c)(1)(B)(ii) as an exemption from taking an inventory under section 471(a) for certain taxpayers that meet the Section 448(c) gross receipts test and not as an exemption from the application of Code provisions other than section 471(a). While Congress provided an exemption from the general inventory timing rules of section 471(a), Congress did not exempt these taxpayers from applying other Code provisions that determine the deductibility or recoverability of costs, or the timing of when costs are considered paid or incurred. For example, Congress did not modify or alter section 461 regarding when a liability is taken into account, or any of the provisions that disallow a deduction, in whole or in part, such as any disallowance under section 274, to exempt these taxpayers. Accordingly, these proposed regulations require an AFS taxpayer that uses the AFS section 471(c) method to make book-tax adjustments for costs capitalized in its AFS that are not deductible or otherwise recoverable, in whole or in part, for Federal income tax purposes or that are taken into account in a taxable year different than the year capitalized under the AFS as a result of another Code provision. D. Treatment of Inventory by Taxpayers Without an AFS Under section 471(c)(1)(B)(ii), a taxpayer, other than a tax shelter, that does not have an AFS and that meets the Section 448(c) gross receipts test is not required to take an inventory under section 471(a), and may choose to treat its inventory as reflected in the taxpayer’s books and records prepared in accordance with the taxpayer’s accounting procedures (non-AFS section 471(c) method). These proposed regulations permit a taxpayer without an AFS (non-AFS taxpayer) to follow its method of accounting for inventory used in its books and records that properly reflect its business activities for non-Federal income tax purposes. The proposed regulations clarify that a non-AFS taxpayer using the non-AFS section 471(c) method has inventory, but recovers the costs of inventory through its book method, rather than through an inventory method under section 471(a) and the regulations under section 471. Two comments received requested a definition of “books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.” The Treasury Department and the IRS decline to define books and records in these proposed regulations. It is well-established under existing law that the books and records of a taxpayer comprise the totality of the taxpayer’s documents and electronically-stored data. See, for example, United States v. Euge, 444 U.S. 707 (1980). See also Digby v. Comm’r, 103 T.C. 441 (1994), and §1.6001-1(a). A commenter specifically asked for clarification on whether books and records of the taxpayer include the accountant’s workpapers (whether recorded on paper, electronically or on other media). The Treasury Department and the IRS note that under existing law, these workpapers are generally considered part of the books and records of the taxpayer. United States v. Arthur Young & Co., 465 U.S. 805 (1984). The Treasury and the IRS interpret section 471(c)(1)(B)(ii) as a simplification of the inventory accounting rules in section 471(a) for certain small business taxpayers. Proposed §1.471-1(b)(6)(i) provides that under the non-AFS section 471(c) method, a taxpayer recovers the costs of inventory in accordance with the method used in its books and records and not by using an inventory method specified under section 471(a) and regulations under 471. A books and records method that determines ending inventory and cost of goods sold that properly reflects the taxpayer’s business activities for non-Federal income tax purposes is to be used under the taxpayer’s non-AFS section 471(a) method. For example, a taxpayer that performs a physical count that is used in determining inventory in the taxpayer’s books and records must use that count for purposes of the non-AFS section 471 method. Consistent with the rules applicable to AFS taxpayers, proposed §1.471-1(b)(6)(ii) clarifies that a non-AFS taxpayer is not permitted to recover a cost that it otherwise would not be permitted to recover or deduct for Federal income tax purposes solely by reason of it being an inventory cost in the taxpayer’s non-AFS inventory method. These proposed regulations provide that a taxpayer may not capitalize a cost to inventory any earlier than the taxable year in which the amount is paid or incurred under the taxpayer’s overall method of accounting for Federal income tax purposes (for example, if applicable, section 461(h) is met) or not permitted to be capitalized by another Code provision (for example, section 263(a)). See section 4.C.ii of this Explanation of Provisions. 5. Section 451 Allocation of Transaction Price As noted in the Background section of this preamble, section 13221(a) of the TCJA added a new section 451(b) to the Code effective for taxable years beginning after December 31, 2017. This provision provides that, for an accrual method taxpayer with an AFS, the all events test with respect to any item of gross income (or portion thereof) is not treated as met any later than when the item (or portion thereof) is included in revenue for financial accounting purposes on an AFS. Section 451(b)(1)(A) sets forth the general AFS Income Inclusion Rule, providing that, for an accrual method taxpayer with an AFS, the all events test with respect to an item of gross income, or portion thereof, is met no later than when the item, or portion thereof, is included as revenue in an AFS (AFS Income Inclusion Rule). However, section 451(b)(2) provides that the AFS Income Inclusion Rule does not apply with respect to any item of gross income the recognition of which is determined using a special method of accounting, “other than any provision of part V of subchapter P (except as provided in clause (ii) of paragraph (1)(B)).” In addition, section 451(b)(4) provides that for purposes of section 451(b), in the case of a contract which contains multiple performance obligations, the allocation of the transaction price to each performance obligation is equal to the amount allocated to each performance obligation for purposes of including such item in revenue in the taxpayer’s AFS. Additionally, section 451(c)(4)(D), which provides rules for allocating payments to each performance obligation for purposes of applying the advance payment rules under section 451(c), provides that for purposes of section 451(c), “rules similar to section 451(b)(4) shall apply.” The preamble to the proposed regulations under section 451(b) contained in REG-104870-18 (84 FR 47191) requested comments on the allocation of transaction price for contracts that include both income subject to section 451 and income subject to a special method of accounting provision (specifically section 460). One commenter suggested that the allocation provisions under section 460 and the regulations thereunder, and not section 451(b)(4), should control the amount of gross income from a long-term contract that is accounted for under section 460. The commenter notes that using this approach is appropriate in light of section 451(b)(2), which reflects Congress’s intent to not disturb the treatment of amounts for which a taxpayer uses a special method of accounting. The preamble to the proposed regulations under section 451(c) contained in REG-104554-18 (84 FR 47175) also included a similar request for comments for advance payment purposes; however, no comments were received in response to this request. In light of the comment in the preceding paragraph and the questions received from taxpayers and practitioners regarding this issue in the context of other special methods of accounting (for example, section 467), the Treasury Department and the IRS are considering a rule that addresses the application of sections 451(b)(2) and (4) to contracts with income that is accounted for in part under section 451 and in part under a special method of accounting provision. The Treasury Department and the IRS are also considering a similar rule that addresses the application of section 451(c)(4)(D) to certain payments received under such contracts. The Treasury Department and the IRS have determined that these rules would benefit from further notice and public comment. The Treasury Department and the IRS are considering a rule providing that if an accrual method taxpayer with an AFS has a contract with a customer that includes one or more items of gross income subject to a special method of accounting (as defined in proposed §1.451-3(c)(5)) and one or more items of gross income subject to section 451, the allocation rules under section 451(b)(4) do not apply to determine the amount of each item of gross income that is accounted for under the special method of accounting provision. Accordingly, the transaction price allocation rules in section 451(b)(4) and proposed §1.451-3(g)(1) (as contained in REG-104870-18) would apply to only the portion of the gross transaction price that is not accounted for under the special method of accounting provision (that is, the residual amount) and only to the extent the contract contains more than one performance obligation that is subject to section 451. To the extent such a contract contains more than one performance obligation that is subject to section 451, the residual amount would be allocated to each section 451 performance obligation in proportion to the amount allocated to each such performance obligation for purposes of including such item in revenue in the taxpayer’s AFS. The Treasury Department and the IRS request comments on this rule (section 451(b) special method allocation rule), including (i) whether taxpayers should be permitted to use the allocation rules under section 451(b)(4) to determine the amount of an item of gross income that is accounted for under a special method of accounting, (ii) whether a specific allocation standard should be provided for determining the amount of an item of gross income that is accounted for under a special method of accounting in situations where an allocation standard is not provided under the applicable special method of accounting rules, and (iii) whether alternative allocation options may be appropriate for allocating the residual amount to multiple performance obligations that are within the scope of section 451. The Treasury Department and the IRS are also considering a similar allocation rule for purposes of applying the advance payment rules under section 451(c). Specifically, the Treasury Department and the IRS are considering a rule providing that if an accrual method taxpayer with an AFS receives a payment that is attributable to one or more items of gross income that are described in proposed §1.451-8(b)(1)(i)(C) and one or more items of gross income that are subject to a special method of accounting (as defined in proposed §1.451-3(c)(5)), then the taxpayer must determine the portion of the payment allocable to the item(s) of gross income that are described in proposed §1.451-8(b)(1)(i)(C) by using an objective criteria standard (consistent with objective criteria standard under section 5.02(4) of Revenue Procedure 2004-34 (2004-22 IRB 991)). Under this rule a taxpayer that allocates the payment to each item of gross income in proportion to the total amount of each such item of gross income (as determined under the section 451(b) special method allocation rule that is described in the preceding paragraph), will be deemed to have meet the objective criteria standard. The Treasury Department and the IRS request comments on this rule, including whether alternative payment allocation approaches may be more appropriate (for example, an approach that permits the taxpayer to follow its AFS allocation). These regulations are proposed to be applicable for taxable years beginning on or after the date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register. For taxable years beginning before the date the Treasury Decision adopting these regulations as final is published in the Federal Register, see §§ 1.448-1, 1.448-2, 1.263A-0, 1.263A-1, 1.263A-2, 1.263A-3, 1.263A-4, 1.263A-7, 1.263A-8, 1.263A-9, 1.263A-15, 1.381-1, 1.446-1, 1.460-0, 1.460-1, 1.460-3, 1.460-4, 1.460-5, 1.460-6, and 1.471-1 as contained in 26 CFR part 1, April 1, 2019. However, for taxable years beginning after December 31, 2017, and before the date the Treasury Decision adopting these regulations as final regulations is published in the Federal Register, a taxpayer may rely on these proposed regulations, provided that the taxpayer follows all the applicable rules contained in the proposed regulations for each Code provision that the taxpayer chooses to apply. For example, a taxpayer using an accrual method with inventory subject to the capitalization rules of section 263A, may rely on proposed §1.448-2 to determine whether it must continue its use of its accrual method and proposed §1.263A-1 to determine its cost capitalizing rules, but may maintain its current inventory method rather than follow the proposed regulations under section 471. The IRS notices, revenue rulings, and revenue procedures cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. I. Paperwork Reduction Act Proposed §1.448-2(b)(2)(iii)(B) imposes a collection of information for an election to use prior year’s allocated taxable income or loss to determine whether a partnership or other entity (other than a C corporation) is a “syndicate” for purposes of section 448(d)(3) for the current tax year. The election is made by attaching a statement to the taxpayer’s original Federal income tax return for the current tax year. The election is binding for all subsequent taxable years, and can only be revoked with the consent of the Commissioner. The collection of information is voluntary for purposes of obtaining a benefit under the proposed regulations. The likely respondents are businesses or other for-profit institutions, and small businesses or organizations. Estimated total annual reporting burden: 199,289 hours Estimated average annual burden hours per respondent: 1 hour Estimated number of respondents: 199,289 Estimated annual frequency of responses: once. Other than the election statement, these proposed regulations do not impose any additional information collection requirements in the form of reporting, recordkeeping requirements or third-party disclosure statements. However, because the exemptions in sections 263A, 448, 460 and 471 are methods of accounting under the statute, taxpayers are required to request the consent of the Commissioner for a change in method of accounting under section 446(e) to implement the statutory exemptions. The IRS expects that these taxpayers will request this consent by filing Form 3115, Application for Change in Accounting Method. Taxpayers may request these changes using reduced filing requirements by completing only certain parts of Form 3115. See Revenue Procedure 2018-40 (2018-34 I.R.B. 320). Revenue Procedure 2018-40 provides procedures for a taxpayer to make a change in method of accounting using the automatic change procedures of Revenue Procedure 2015-13 (2015-5 IRB 419) in order to use the exemptions provided in sections 263A, 460 and/or 471. For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(c)) (PRA), the reporting burden associated with the collection of information for the election statement and Form 3115 will be reflected in the PRA submission associated with the income tax returns under the OMB control number 1545-0074 (in the case of individual filers of Form 3115) and 1545-0123 (in the case of business filers of Form 3115). In 2018, the IRS released and invited comment on a draft of Form 3115 in order to give members of the public the opportunity to benefit from certain specific provisions made to the Code. The IRS received no comments on the forms during the comment period. Consequently the IRS made the forms available in January 2019 for use by the public. The IRS notes that Form 3115 applies to changes of accounting methods generally and is therefore broader than sections 263A, 448, 460 and 471. As discussed above, the reporting burdens associated with the proposed regulations are included in the aggregated burden estimates for OMB control numbers 1545-0074 (in the case of individual filers of Form 3115), 1545-0123 (in the case of business filers of Form 3115 subject to Revenue Procedure 2019-43 and business filers that make the election under proposed §1.448-2(b)(2)(iii)(B)). The overall burden estimates associated with the OMB control numbers below are aggregate amounts related to the entire package of forms associated with the applicable OMB control number and will include, but not isolate, the estimated burden of the tax forms that will be created or revised as a result of the information collections in these proposed regulations. These numbers are therefore not specific to the burden imposed by these proposed regulations. The burdens have been reported for other income tax regulations that rely on the same information collections and the Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against overcounting the burdens imposed by tax provisions prior to the Act. No burden estimates specific to the forms affected by the proposed regulations are currently available. For the OMB control numbers discussed in the preceding paragraphs, the Treasury Department and the IRS estimate PRA burdens on a taxpayer-type basis rather than a provision-specific basis. Those estimates capture both changes made by the Act and those that arise out of discretionary authority exercised in the proposed regulations (when final) and other regulations that affect the compliance burden for that form. The Treasury Department and IRS request comment on all aspects of information collection burdens related to the proposed regulations, including estimates for how much time it would take to comply with the paperwork burdens described above for each relevant form and ways for the IRS to minimize paperwork burden. In addition, when available, drafts of IRS forms are posted for comment at https://appsirs.gov/app/picklist/lit/draft TaxForms.htm. IRS forms are available at https://www.irs.gov/forms-instructions. Forms will not be finalized until after they have been approved by OMB under the PRA. II. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency determines that a proposal is not likely to have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis (IRFA) of the proposed rules. The Treasury Department and the IRS have not determined whether the proposed rules, when finalized, will likely have a significant economic impact on a substantial number of small entities. The determination of whether the voluntary exemptions under sections 263A, 448, 460, and 471 will have a significant economic impact requires further study. However, because there is a possibility of significant economic impact on a substantial number of small entities, an IRFA is provided in these proposed regulations. The Treasury Department and the IRS invite comments on both the number of entities affected and the economic impact on small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel of Advocacy of the Small Business Administration for comment on its impact on small business. 1. Need for and Objectives of the Rule As discussed earlier in the preamble, these proposed regulations largely implement voluntary exemptions that relieve small business taxpayers from otherwise applicable restrictions and requirements under sections 263A, 448, 460, and 471. Section 448 provides a general restriction for C corporations and partnerships with C corporation partners from using the cash method of accounting, and sections 263A, 460 and 471 impose specific rules on uniform capitalization of direct and indirect production costs, the percentage of completion method for long-term contracts, and accounting for inventory costs, respectively. Section 13102 of TCJA provided new statutory exemptions from certain of these rules and expanded the scope of existing statutory exemptions from certain of these rules to reduce compliance burdens for small taxpayers. The proposed regulations clarify the exemption qualification requirements and provide guidance with respect to the applicable methods of accounting should a taxpayer choose to apply one or more exemptions. The objective of the proposed regulations is to provide clarity and certainty for small business taxpayers implementing the exemptions. Under the Code, small business taxpayers were able to implement these provisions for taxable years beginning after December 31, 2017 (or, in the case of section 460, for contracts entered into after December 31, 2017) even in the absence of these proposed regulations. Thus, the Treasury Department and the IRS expect that, at the time these proposed regulations are published, many small business taxpayers may have already implemented some aspects of the proposed regulations. 2. Affected Small Entities The voluntary exemptions under sections 263A, 448, 460 and 471 generally apply to taxpayers that meet the $25 million (adjusted for inflation) gross receipts test in section 448(c) and are otherwise subject to general rules under sections 263A, 448, 460, or 471. A. Section 263A The Treasury Department and the IRS expect that the addition of section 263A(i) will expand the number of small business taxpayers exempted from the requirement to capitalize costs, including interest, under section 263A. Under section 263A(i), taxpayers (other than tax shelters) that meet the $25 million (adjusted for inflation) gross receipts test in section 448(c) can choose to deduct certain costs that are otherwise required to be capitalized to the basis of property. Section 263A applies to taxpayers that are producers, resellers, and taxpayers with self-constructed assets. The Treasury Department and the IRS estimate that there are between 38,100 and 38,900 respondents with gross receipts of not more than $25 million (adjusted for inflation) that are eligible to change their method of accounting to no longer capitalize costs under section 263A. These estimates come from information collected on: Form 1125-A, Cost of Goods Sold, and attached to Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S. Return of Partnership Income or Form 1120-S, U.S. Income Tax Return for an S Corporation, on which the taxpayer also indicated it had additional section 263A costs. The Treasury Department and the IRS do not have readily available data to measure the prevalence of entities with self-constructed assets. In addition, these data also do not include other business entities, such as a business reported on Schedule C, Profit or Loss Form Business, of an individual’s Form 1040, U.S. Individual Income Tax Return. Under section 263A, as modified by the TCJA, small business entities that qualified for Section 263A small reseller exception will no longer be able to use this exception. The Treasury Department and the IRS estimate that nearly all taxpayers that qualified for the small reseller exception will qualify for the small business taxpayer exemption under section 263A(i) since the small reseller exception utilized a $10 million gross receipts test. The Treasury Department and the IRS estimate that there are between 38,100 and 38,900 respondents with gross receipts of not more than $25 million that are eligible for the exemption under section 263A(i). These estimates come from information collected on: Form 1125-A, Cost of Goods Sold, and attached to Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S. Return of Partnership Income or Form 1120-S, U.S. Income Tax Return for an S Corporation on which the taxpayer also indicated it had additional section 263A costs. These data provide an upper bound for the number of taxpayers affected by the repeal of the small reseller exception and enactment of section 263A(i) because the data includes taxpayers that were not previously eligible for the small reseller exception, such as producers and taxpayers with gross receipts of more than $10 million. The proposed regulations modify the $50 million gross receipts test in §1.263A-1(d)(3)(ii)(B)(1) by using the section 448 gross receipts test. The $50 million gross receipts amount is used by taxpayers to determine whether they are eligible to treat negative adjustments as additional section 263A costs for purposes of the simplified production method (SPM) under section 263A. The Treasury Department and the IRS do not have readily available data to measure the prevalence of entities using the SPM. Proposed §1.263A-9 modifies the current regulation to increase the eligibility threshold to $25 million for the election permitting taxpayers to use the highest applicable Federal rate as a substitute for the weighted average interest rate when tracing debt for purposes of capitalizing interest under section 263A(f). The Treasury Department and the IRS estimate that there are between 38,100 and 38,900 respondents with gross receipts of not more than $25 million that are eligible to make this election. These estimates come from information collected on: Form 1125-A, Cost of Goods Sold, attached to Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S. Return of Partnership Income or Form 1120-S, U.S. Income Tax Return for an S Corporation, on which the taxpayer also indicated it had additional section 263A costs. The Treasury Department and the IRS expect that many taxpayers eligible to make the election for purposes of section 263A(f) will instead elect the small business exemption under section 263A(i). Additionally, taxpayers who chose to apply section 263A even though they qualify for the small business exemption under 263A(i) may not have interest expense required to be capitalized under section 263A(f). As a result, although these data do not include taxpayers with self-constructed assets that are eligible for the election, the Treasury Department and the IRS estimate that this data provides an upper bound for the number of eligible taxpayers. B. Section 448 The Treasury Department and the IRS expect that the changes to section 448(c) by the TCJA will expand the number of taxpayers permitted to use the cash method. Section 448(a) provides that C corporations, partnerships with C corporations as partners, and tax shelters are not permitted to use the cash method of accounting; however section 448(c), as amended by the TCJA, provides that C corporations or partnerships with C corporations as partners, other than tax shelters, are not restricted from using the cash method if their average annual gross receipts are $25 million (adjusted for inflation) or less. Prior to the amendments made by the TCJA, the applicable gross receipts threshold was $5 million. Section 448 does not apply to S corporations, partnerships without a C corporation partner, or any other business entities (including sole proprietorships reported on an individual’s Form 1040). The Treasury Department and the IRS estimate that there are between 587,000 and 595,000 respondents with gross receipts of not more than $5 million presently using an accrual method, and between 70,000 and 73,000 respondents with gross receipts of more than $5 million but not more than $25 million that are permitted to use to the cash method. These estimates come information collected on Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S. Return of Partnership Income and Form 1120-S, U.S. Income Tax Return for an S Corporation. Under the proposed regulations, taxpayers that would meet the gross receipts test of section 448(c) and seem to be eligible to use the cash method but for the definition of “syndicate” under section 448(d)(3), may elect to use the allocated taxable income or loss of the immediately preceding taxable year to determine whether the taxpayer is a “syndicate” for purposes of section 448(d)(3) for the current taxable year. The Treasury Department and IRS estimate that 199,289 respondents may potentially make this election. This estimate comes from information collected on the Form 1065, U.S. Return of Partnership Income and Form 1120-S, U.S. Income Tax Return for an S Corporation, and the Form 1125-A, Cost of Goods Sold, attached to the Forms 1065 and 1120-S . The Treasury Department and the IRS estimate that these data provide an upper bound for the number of eligible taxpayers because not all taxpayers eligible to make the election will choose to do so. C. Section 460 The Treasury Department and the IRS expect that the modification of section 460(e)(1)(B) by the TCJA will expand the number of taxpayers exempted from the requirement to apply the percentage-of-completion method to long-term construction contracts. Under section 460(e)(1)(B), as modified by the TCJA, taxpayers (other than a tax shelters) that meet the $25 million (adjusted for inflation) gross receipts test in section 448(c) are not required to use PCM to account for income from a long-term construction contract expected to be completed in two years. Prior to the modification of section 460(e)(1)(B) by the TCJA, a separate $10 million dollar gross receipts test applied. The Treasury Department and the IRS estimate that there are between 15,400 and 18,000 respondents with gross receipts of between $10 million and $25 million who are eligible to change their method of accounting to apply the modified exemption. This estimate comes from information collected on the Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S. Return of Partnership Income and Form 1120-S, U.S. Income Tax Return for an S Corporation in which the taxpayer indicated its principal business activity was construction (NAICS codes beginning with 23). These data available do not distinguish between long-term contracts and other contracts, and also do not include other business entities that do not file Form 1120, U.S. Corporation Income Tax Return, Form 1065, U.S. Return of Partnership Income, and Form 1120-S, U.S. Income Tax Return for an S Corporation, such as a business reported on Schedule C, Profit or Loss from Business, of an individual’s Form 1040, U.S. Individual Income Tax Return. D. Section 471 The Treasury Department and the IRS expect that the addition of section 471(c) will expand the number of taxpayers exempted from the requirement to take inventories under section 471(a). Under section 471(c), taxpayers (other than tax shelters) that meet the $25 million (adjusted for inflation) gross receipts test in section 448(c) can choose to apply certain simplified inventory methods rather than those otherwise required by section 471(a). The Treasury Department and the IRS estimate that there are between 3,200,000 and 3,400,000 respondents with gross receipts of not more than $25 million that are exempted from the requirement to take inventories, and will treat their inventory either as non-incidental materials and supplies, or conform their inventory method to the method reflected in their AFS, or if they do not have an AFS, in their books and records. This estimate comes from data collected on the Form 1125-A, Cost of Goods Sold. Within that set of taxpayers, the Treasury Department and the IRS estimate that there are between 10,500 and 11,300 respondents that may choose to conform their method of accounting for inventories to their method for inventory reflected in their AFS. This estimate comes from IRS-collected data on taxpayers that filed the Form 1125-A, Cost of Goods Sold, in addition to a Schedule M3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More, that indicated they had an AFS. These data provide a lower bound because they do not include other business entities, such as a business reported on Schedule C, Profit or Loss from Business, of an individual’s Form 1040, U.S. Individual Income Tax Return, that are not required to file the Form 1125-A, Cost of Goods Sold. 3. Impact of the Rule As discussed earlier in the preamble, section 448 provides a general restriction for C corporations, partnerships with C corporation partners, and tax shelters from using the cash method of accounting, and sections 263A, 460 and 471 impose specific rules on uniform capitalization of direct and indirect production costs, the percentage of completion method for long-term contracts, and accounting for inventory costs, respectively. Section 13102 of TCJA provided new statutory exemptions and expanded the scope of existing statutory exemptions from these rules to reduce compliance burdens for small taxpayers (e.g., reducing the burdens associated with applying complex accrual rules under section 451 and 461, maintaining inventories, identifying and tracking costs that are allocable to property produced or acquired for resale, identifying and tracking costs that are allocable to long-term contracts, applying the look-back method under section 460, etc.). For example, a small business taxpayer with average gross receipts of $20 million may pay an accountant an annual fee to perform a 25 hour analysis to determine the section 263A costs that are capitalized to inventory produced during the year. If this taxpayer chooses to apply the exemption under section 263A and these proposed regulations, it will no longer need to pay an accountant for the annual section 263A analysis. The proposed regulations implementing these exemptions are completely voluntary because small business taxpayers may continue using an accrual method of accounting, and applying sections 263A, 460 and 471 if they so choose. Thus, the exemptions increase the flexibility small business taxpayers have regarding their accounting methods relative to other businesses. The proposed regulations provide clarity and certainty for small business taxpayers implementing the exemptions. 4. Projected Reporting, Recordkeeping, and Other Compliance Requirements The Treasury Department and the IRS have not performed an analysis with respect to the projected reporting, recordkeeping, and other compliance requirements associated with the statutory exemptions under sections 263A, 448, 460, and 471 and the proposed regulations implementing these exemptions. However, the Treasury Department and the IRS anticipate that the statutory exemptions and the proposed regulations implementing these exemptions will reduce the reporting, recordkeeping, and other compliance requirements of affected taxpayers relative to the requirements that exist under the general rules in sections 263A, 448, 460, and 471. 5. Alternatives Considered As described in more detail earlier in the preamble, the Treasury Department and the IRS considered a number of alternatives under the proposed regulations. For example, in providing rules related to inventory exemption in Section 471(c)(1)(B)(i), which permits the taxpayer to treat its inventory as non-incidental materials and supplies, the Treasury Department and the IRS considered whether inventoriable costs should be recovered by (i) using an approach similar to the approach set forth under Revenue Procedure 2001-10 (2001-2 IRB 272) and Revenue Procedure 2002-28 (2002-28 IRB 815), which provided that inventory treated as non-incidental materials and supplies was “used and consumed,” and thus recovered through costs of goods sold by a cash basis taxpayer, when the inventory items were provided to a customer, or when the taxpayer paid for the items, whichever was later, or (ii) using an alternative approach that treated inventory as “used and consumed” and thus recovered through costs of goods sold by the taxpayer, in a taxable year prior to the year in which the inventory item is provided to the customer (e.g., in the taxable year in which an inventory item is acquired or produced). The alternative approach described in (ii) would produce a savings equal the amount of the cost recovery multiplied by an applicable discount rate (determined based on the number of years the cost of goods sold recovery would be accelerated under this alternative). The Treasury Department and the IRS interpret section 471(c)(1)(B)(i) and its legislative history generally as codifying the rules provided in the administrative guidance existing at the time TCJA was enacted. Based on this interpretation, the Treasury Department and the IRS have determined that section 471(c) materials and supplies are “used and consumed” in the taxable year the taxpayer provides the goods to a customer, and are recovered through costs of goods sold in that year or the taxable year in which the cost of the goods is paid or incurred (in accordance with the taxpayer’s method of accounting), whichever is later. The Treasury Department and the IRS do not believe this approach creates or imposes undue burdens on taxpayers. 6. Duplicate, Overlapping, or Relevant Federal Rules The proposed rules would not conflict with any relevant federal rules. As discussed above, the proposed regulations merely implement voluntary exemptions that relieve small business taxpayers from otherwise applicable restrictions and requirements under sections 263A, 448, 460, and 471. III. Executive Order 13132: Federalism Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This final rule does not have federalism implications and does not impose substantial, direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the “ADDRESSES” heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any electronic comments submitted, and to the extent practicable any paper comments submitted, will be made available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register. Announcement 2020-4, 2020-17 I.R.B. 667 (April 20, 2020), provides that until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities. The principal author of these proposed regulations is Anna Gleysteen, IRS Office of the Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Par. 2. Section 1.263A-0 is amended by: 1. Revising the entry in the table of contents for §1.263A-1(b)(1). 2. Redesignating the entries in the table of contents for §1.263A-1(j), (k), and (l) as the entries for §1.263A-1(k), (l), and (m). 3. Adding a new entry in the table of contents for §1.263A-1(j). 4. Revising the newly designated entries for §1.263A-1(k), (l), and (m). 5. Revising the entries in the table of contents for §1.263A-3(a)(2)(ii). 6. Adding entries for §1.263A-3(a)(5) and revising the entry for §1.263A-3(b). 7. Redesignating the entries in the table of contents for §1.263A-4(a)(3) and (4) as the entries for §1.263A-4(a)(4) and (5). 8. Adding in the table of contents a new entry for §1.263A-4(a)(3). 9. Revising the entry in the table of contents for §1.263A-4(d) introductory text. 10. Redesignating the entry in the table of contents for §1.263A-4(d)(5) as the entry for §1.263A-4(d)(7). 11. Adding in the table of contents a new entry for §1.263A-4(d)(5). 12. Adding an entry in the table of contents for §1.263A-4(d)(6). 13. Adding an entry in the table of contents for §1.263A-4(e)(5). 14. Revising the entry in the table of contents for §1.263A-4(f) introductory text. 15. Adding an entry in the table of contents for §1.263A-4(g). 16. Revising the entry in the table of contents for §1.263A-7(a)(4). §1.263A-0 Outline of regulations under section 263A. §1.263A-1 Uniform Capitalization of Costs. (1) Small business taxpayers. (j) Exemption for certain small business taxpayers. (1) In general. (2) Application of the section 448(c) gross receipts test. (i) In general. (ii) Gross receipts of individuals, etc. (iii) Partners and S corporation shareholders. (iv) Examples. (A) Example 1 (B) Example 2 (3) Change in method of accounting. (ii) Prior section 263A method change. (k) Special rules (1) Costs provided by a related person. (i) In general (ii) Exceptions (2) Optional capitalization of period costs. (ii) Period costs eligible for capitalization. (3) Trade or business application (4) Transfers with a principal purpose of tax avoidance. [Reserved] (l) Change in method of accounting. (2) Scope limitations. (3) Audit protection. (4) Section 481(a) adjustment. (5) Time for requesting change. (m) Effective/applicability date. §1.263A-3 Rules Relating to Property Acquired for Resale. (2) * * * (ii) Exemption for small business taxpayers. (5) De minimis production activities. (ii) Definition of gross receipts to determine de minimis production activities. (iii) Example. (b) [Reserved]. §1.263A-4 Rules for Property Produced in a Farming Business. (3) Exemption for certain small business taxpayers. (d) Election not to have section 263A apply under section 263A(d)(3). (5) Revocation of section 263A(d)(3) election in order to apply exemption under section 263A(i). (6) Change from applying exemption under section 263A(i) to making a section 263A(d)(3) election. (e) * * * (5) Special temporary rule for citrus plants lost by reason of casualty. (f) Change in method of accounting. (g) Effective date. (2) Changes made by Tax Cuts and Jobs Act (Pub. L. No. 115-97). §1.263A-7 Changing a method of accounting under section 263A. (4) Applicability dates. (ii) Changes made by Tax Cuts and Jobs Act (Pub. L. No. 115-97). 1. Revising the paragraph (a)(2) subject heading. 2. In paragraph (a)(2)(i), revising the second sentence and adding a new third sentence. 3. Revising paragraph (b)(1). 4. In the second sentence of paragraph (d)(3)(ii)(B)(1), the language “§1.263A-3(b)” is removed and the language “§1.263A-1(j)” is added in its place. 5. Redesignating paragraphs (j) through (l) as paragraphs (k) through (m). 6. Adding a new paragraph (j). (2) Applicability dates. (i) * * *In the case of property that is inventory in the hands of the taxpayer, however, these sections are applicable for taxable years beginning after December 31, 1993. The small business taxpayer exception described in paragraph (b)(1) of this section and set forth in paragraph (j) of this section is applicable for taxable years beginning after December 31, 2017. * * * (1) Small business taxpayers. For taxable years beginning after December 31, 2017, see section 263A(i) and paragraph (j) of this section for an exemption for certain small business taxpayers from the requirements of section 263A. (j) Exemption for certain small business taxpayers—(1) In general. A taxpayer, other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3), that meets the gross receipts test under section 448(c) and §1.448-2(c) (section 448(c) gross receipts test) for any taxable year (small business taxpayer) is not required to capitalize costs under section 263A to any real or tangible personal property produced, and any real or personal property described in section 1221(a)(1) acquired for resale, during that taxable year. (2) Application of the section 448(c) gross receipts test—(i) In general. In the case of any taxpayer that is not a corporation or a partnership, and except as provided in paragraphs (j)(2)(ii) and (iii) of this section, the section 448(c) gross receipts test is applied in the same manner as if each trade or business of the taxpayer were a corporation or partnership. (ii) Gross receipts of individuals, etc. Except when the aggregation rules of section 448(c)(2) apply, the gross receipts of a taxpayer other than a corporation or partnership are the amount derived from all trades or businesses of such taxpayer. Amounts not related to a trade or business are excluded from the gross receipts of the taxpayer. For example, an individual taxpayer’s gross receipts do not include inherently personal amounts, such as personal injury awards or settlements with respect to an injury of the individual taxpayer, disability benefits, Social Security benefits received by the taxpayer during the taxable year, and wages received as an employee that are reported on Form W-2. (iii) Partners and S corporation shareholders. Except when the aggregation rules of section 448(c)(2) apply, each partner in a partnership includes a share of the partnership’s gross receipts in proportion to such partner’s distributive share (as determined under section 704) of items of gross income that were taken into account by the partnership under section 703. Similarly, a shareholder of an S corporation includes such shareholder’s pro rata share of S corporation gross receipts taken into account by the S corporation under section 1363(b). (iv) Examples. The operation of this paragraph (j) is illustrated by the following examples: (A) Example 1. Taxpayer A is an individual who operates two separate and distinct trades or business that are reported on Schedule C, Profit or Loss from Business, of A’s Federal income tax return. For 2020, one trade or business has annual average gross receipts of $5 million, and the other trade or business has average annual gross receipts of $35 million. Under paragraph (j)(2)(ii) of this section, for 2020, neither of A’s trades or businesses meets the gross receipts test of paragraph (j)(2) of this section ($5 million + $35 million = $40 million, which is greater than the inflation-adjusted gross receipts test amount for 2020, which is $26 million). (B) Example 2. Taxpayer B is an individual who operates three separate and distinct trades or business that are reported on Schedule C of B’s Federal income tax return. For 2020, Business X is a retail store with average annual gross receipts of $15 million, Business Y is a dance studio with average annual gross receipts of $6 million, and Business Z is a car repair shop with average annual gross receipts of $12 million. Under paragraph (j)(2)(ii) of this section, B’s gross receipts are the combined amount derived from all three of B’s trades or businesses. Therefore, for 2020, X, Y and Z do not meet the gross receipts test of paragraph (j)(2)(i) of this section ($15 million + $6 million + $12 million = $33 million, which is greater than the inflation-adjusted gross receipts test amount for 2020, which is $26 million). (3) Change in method of accounting—(i) In general. A change from applying the small business taxpayer exemption under paragraph (j) of this section to not applying the exemption under this paragraph (j), or vice versa, is a change in method of accounting under section 446(e) and §1.446-1(e). A taxpayer obtains the consent of the Commissioner to change its method of accounting to comply with paragraph (j) of this section by following the applicable administrative procedures to obtain the consent of the Commissioner to change a method of accounting under section 446(e) as published in the Internal Revenue Bulletin (See Revenue Procedure 2015-13, 2015-5 IRB 419 (or successor) (see also §601.601(d)(2) of this chapter)). If an item of income or expense is not treated consistently from year to year, that treatment may not clearly reflect income, notwithstanding the application of this section. For rules relating to the clear reflection of income and the pattern of consistent treatment of an item, see section 446 and §1.446-1. (ii) Prior section 263A method change. A taxpayer that otherwise meets the requirements of paragraph (j) of this section, and that had previously changed its method of accounting to capitalize costs under section 263A because it no longer met the section 448(c) gross receipts test, may not change its method of accounting under section 263A to apply the exemption under paragraph (j) of this section without the consent of the Commissioner. Taxpayers must follow the administrative procedures to obtain the consent of the Commissioner to change a method of accounting under section 446(e) as published in the Internal Revenue Bulletin (See Revenue Procedure 2015-13, 2015-5 IRB 419 (or successor) (see also §601.601(d)(2) of this chapter)). For rules relating to the clear reflection of income and the pattern of consistent treatment of an item, see section 446 and §1.446-1. 1. Adding a sentence at the end of paragraph (a) introductory text. 2. Revising paragraph (a)(1)(ii)(C). 3. Revising the paragraph (g) subject heading. 4. Adding paragraph (g)(4). The additions and revisions read as follows: §1.263A-2 Rules relating to property produced by the taxpayer. (a) * * * For taxable years beginning after December 31, 2017, see §1.263A-1(j) for an exception in the case of a small business taxpayer that meets the gross receipts test of section 448(c) and §1.448-2(c). (ii) * * * (C) Home construction contracts. Section 460(e)(1) provides that section 263A applies to a home construction contract unless that contract will be completed within two years of the contract commencement date and, for contracts entered into after December 31, 2017, in taxable years ending after December 31, 2017, the taxpayer meets the gross receipts test of section 448(c) and §1.448-2(c) for the taxable year in which such contract is entered into. (g) Applicability dates.* * * (4) The rules set forth in the last sentence of the introductory text of paragraph (a) of this section and in paragraph (a)(1)(ii)(C) of this section apply for taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. Par. 5. Section 1.263A-3 is amended: 1. In paragraph (a)(1), by revising the second sentence. 2. By revising paragraphs (a)(2)(ii) and (iii). 4. In paragraph (a)(3), by removing the language “small reseller” and adding in its place the language “small business taxpayer”. 5. In paragraph (a)(4)(ii), by removing the language “(within the meaning of paragraph (a)(2)(iii) of this section)” and adding in its place the language “(within the meaning of paragraph (a)(5) of this section)”. 6. By adding paragraph (a)(5). 7. By removing and reserving paragraph (b). 8. By revising paragraph (f). (1) * * *However, for taxable years beginning after December 31, 2017, a small business taxpayer, as defined in §1.263A-1(j), is not required to apply section 263A in that taxable year.* * * (ii) Exemption for certain small business taxpayers. For taxable years beginning after December 31, 2017, see §1.263A-1(j) for an exception in the case of a small business taxpayer that meets the gross receipts test of section 448(c) and §1.448-2(c). (iii) De minimis production activities. See paragraph (a)(5) of this section for rules relating to an exception for resellers with de minimis production activities. (5) De minimis production activities—(i) In general. In determining whether a taxpayer’s production activities are de minimis, all facts and circumstances must be considered. For example, the taxpayer must consider the volume of the production activities in its trade or business. Production activities are presumed de minimis if— (A) The gross receipts from the sale of the property produced by the reseller are less than 10 percent of the total gross receipts of the trade or business; and (B) The labor costs allocable to the trade or business’s production activities are less than 10 percent of the reseller’s total labor costs allocable to its trade or business. (ii) Definition of gross receipts to determine de minimis production activities. Gross receipts has the same definition as for purposes of the gross receipts test under §1.448-2(c), except that gross receipts are measured at the trade-or-business level rather than at the single-employer level. (iii) Example: Reseller with de minimis production activities. Taxpayer N is in the retail grocery business. In 2019, N’s average annual gross receipts for the three previous taxable years are greater than the gross receipts test of section 448(c). Thus, N is not exempt from the requirement to capitalize costs under section 263A. N’s grocery stores typically contain bakeries where customers may purchase baked goods produced by N. N produces no other goods in its retail grocery business. N’s gross receipts from its bakeries are 5 percent of the entire grocery business. N’s labor costs from its bakeries are 3 percent of its total labor costs allocable to the entire grocery business. Because both ratios are less than 10 percent, N’s production activities are de minimis. Further, because N’s production activities are incident to its resale activities, N may use the simplified resale method, as provided in paragraph (a)(4)(ii) of this section. (f) Applicability dates. (1) Paragraphs (d)(3)(i)(C)(3), (d)(3)(i)(D)(3), and (d)(3)(i)(E)(3) of this section apply for taxable years ending on or after January 13, 2014. (2) The rules set forth in the second sentence of paragraph (a)(1) of this section, paragraphs (a)(2)(ii) and (iii) of this section, the third sentence of paragraph (a)(3) of this section, and paragraphs (a)(4)(ii) and (a)(5) of this section apply for taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. 1. In paragraph (a)(1), by revising the last sentence. 2. In paragraph (a)(2)(ii)(A)(1), by removing the language “section 464(c)” and adding in its place the language with “section 461(k)”. 3. By redesignating paragraphs (a)(3) and (4) as paragraphs (a)(4) and (5) respectively. 4. By adding new paragraph (a)(3). 5. By revising the paragraph (d) subject heading. 6. In paragraph (d)(1), by revising the last sentence and adding a new last sentence. 7. In paragraph (d)(3)(i), by removing the last sentence. 8. By revising paragraph (d)(3)(ii). 9. By redesignating paragraph (d)(5) as paragraph (d)(7). 10. By adding new paragraph (d)(5) 11. By adding paragraphs (d)(6) and (e)(5). 12. By redesignating paragraph (f) as paragraph (g). 13. By adding new paragraph (f). 15. By revising the subject headings for newly redesignated paragraphs (g) and (g)(1), and revising newly designated paragraph (g)(2). (1) * * *Except as provided in paragraphs (a)(2), (a)(3), and (e) of this section, taxpayers must capitalize the costs of producing all plants and animals unless the election described in paragraph (d) of this section is made. (3) Exemption for certain small business taxpayers. For taxable years beginning after December 31, 2017, see §1.263A-1(j) for an exception in the case of a small business taxpayer that meets the gross receipts test of section 448(c) and §1.448-2(c). (d) Election not to have section 263A apply under section 263A(d)(3)—(1) * * * Except as provided in paragraph (d)(5) and (6) of this section, the election is a method of accounting under section 446. An election made under section 263A(d)(3) and this paragraph (d) is revocable only with the consent of the Commissioner. (ii) Nonautomatic election. Except as provided in paragraphs (d)(5) and (6) of this section, a taxpayer that does not make the election under this paragraph (d) as provided in paragraph (d)(3)(i) of this section must obtain the consent of the Commissioner to make the election by filing a Form 3115, Application for Change in Method of Accounting, in accordance with §1.446-1(e)(3). (5) Revocation of section 263A(d)(3) election in order to apply exemption under section 263A(i). A taxpayer that elected under section 263A(d)(3) and paragraph (d)(3) of this section not to have section 263A apply to any plant produced in a farming business that wants to revoke its section 263A(d)(3) election, and in the same taxable year, apply the small business taxpayer exemption under section 263A(i) and §1.263A-1(j) may revoke the election in accordance with the applicable administrative guidance as published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter). A revocation of the taxpayer’s section 263A(d)(3) election under this paragraph (d)(5) is not a change in method of accounting under sections 446 and 481 and §§1.446-1 and 1.481-1 through 1.481-5. (6) Change from applying exemption under section 263A(i) to making a section 263A(d)(3) election. A taxpayer whose method of accounting is to not capitalize costs under section 263A based on the exemption under section 263A(i), that becomes ineligible to use the exemption under section 263A(i), and is eligible and wants to elect under section 263A(d)(3) for this same taxable year to not capitalize costs under section 263A for any plant produced in the taxpayer’s farming business, must make the election in accordance with the applicable administrative guidance as published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter). An election under section 263A(d)(3) made in accordance with this paragraph (d)(6) is not a change in method of accounting under sections 446 and 481 and §§1.446-1 and 1.481-1 through 1.481-5. (5) Special temporary rule for citrus plants lost by reason of casualty. Section 263A(d)(2)(A) provides that if plants bearing an edible crop for human consumption were lost or damaged while in the hands of the taxpayer by reason of freezing temperatures, disease, drought, pests, or casualty, section 263A does not apply to any costs of the taxpayer of replanting plants bearing the same type of crop (whether on the same parcel of land on which such lost or damaged plants were located or any other parcel of land of the same acreage in the United States). The rules of this paragraph (e)(5) apply to certain costs that are paid or incurred after December 22, 2017, and on or before December 22, 2027, to replant citrus plants after the loss or damage of citrus plants. Notwithstanding paragraph (e)(2) of this section, in the case of replanting citrus plants after the loss or damage of citrus plants by reason of freezing temperatures, disease, drought, pests, or casualty, section 263A does not apply to replanting costs paid or incurred by a taxpayer other than the owner described in section 263A(d)(2)(A) if— (i) The owner described in section 263A(d)(2)(A) has an equity interest of not less than 50 percent in the replanted citrus plants at all times during the taxable year in which such amounts were paid or incurred and the taxpayer holds any part of the remaining equity interest; or (ii) The taxpayer acquired the entirety of the equity interest in the land of that owner described in section 263A(d)(2)(A) and on which land the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land. (f) Change in method of accounting. Except as provided in paragraphs (d)(5) and (6) of this section, any change in a taxpayer’s method of accounting necessary to comply with this section is a change in method of accounting to which the provisions of sections 446 and 481 and §1.446-1 through 1.446-7 and §1.481-1 through §1.481-3 apply. (g) Applicability dates—(1) In general.* * * (2) Changes made by Tax Cuts and Jobs Act (Pub. L. No. 115-97). Paragraphs (a)(3), (d)(5), (d)(6), and (e)(5) of this section apply for taxable years ending on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. Except as otherwise provided in this paragraph (g), for taxable years beginning before [date the Treasury Decision adopting these regulations as final is published in the Federal Register], see §1.263A-4 as contained in 26 CFR part 1, revised April 1, 2019. Par. 7. §1.263A-7 is amended: 1. By revising paragraph (a)(3)(i). 2. By redesignating paragraph (a)(4) as paragraph (a)(4)(i). 3. By adding a paragraph (a)(4) subject heading. 4. By revising the newly designated paragraph (a)(4)(i) subject heading. 5. By adding paragraph (a)(4)(ii). 6. In paragraph (b)(1), by removing the language “Rev. Proc. 97-27 (1997-21 I.R.B.10)” and adding in its place the language “Revenue Procedure 2015-13 (2015-5 IRB 419)”. 7. In paragraph (b)(2)(ii), by removing the language “Rev. Proc. 2002-9 (2002-1 C.B. 327) and Rev. Proc. 97-27 (1991-1 C.B. 680)” and adding the language “applicable administrative procedures” in its place. (i) For taxable years beginning after December 31, 2017, resellers of real or personal property or producers of real or tangible personal property whose average annual gross receipts for the immediately preceding 3-taxable-year period (or lesser period if the taxpayer was not in existence for the three preceding taxable years, annualized as required) exceed the gross receipts test of section 448(c) and the accompanying regulations where the taxpayer was not subject to section 263A in the prior taxable year; (4) Applicability dates—(i) In general.* * * (ii) Changes made by Tax Cuts and Jobs Act (Pub. L. No. 115-97). Paragraph (a)(3)(i) of this section applies to taxable years ending on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. Except as otherwise provided in this paragraph (a)(4), for taxable years beginning before [date the Treasury Decision adopting these regulations as final is published in the Federal Register], see §1.263A-7(a)(3)(i) as contained in 26 CFR part 1, revised April 1, 2019. Par. 8. Section 1.263A-8 is amended by adding a sentence to the end of paragraph (a)(1) to read as follows: §1.263A-8 Requirement to capitalize interest. (a)* * * (1)* * *However, a taxpayer, other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3), that meets the gross receipts test of section 448(c) for the taxable year is not required to capitalize costs, including interest, under section 263A. See §1.263A-1(j). Par. 9. Section 1.263A-9 is amended by adding a sentence at the end of paragraph (e)(2) to read as follows: §1.263A-9 The avoided cost method. (e)* * * (2)* * *A taxpayer is an eligible taxpayer for a taxable year for purposes of this paragraph (e) if the taxpayer is a small business taxpayer, as defined in §1.263A-1(j). Par. 10. Section 1.263A-15 is amended by adding paragraph (a)(4) to read as follows: §1.263A-15 Effective dates, transitional rules, and anti-abuse rule. (4) The last sentence of each of §1.263A-8(a)(1) and §1.263A-9(e)(2) apply to taxable years beginning on or after [date the Treasury decision adopting these proposed regulations as final is published in the Federal Register]. Except as otherwise provided in this paragraph (a)(4), for taxable years beginning before [date the Treasury decision adopting these regulations as final is published in the Federal Register], see §1.263A-8(a)(1) and §1.263A-9(e)(2) as contained in 26 CFR part 1, revised April 1, 2019. §1.381(c)(5)-1 [Amended] Par. 11. Section 1.381(c)(5)-1 is amended: 1. In paragraph (a)(6), by designating Examples 1 and 2 as paragraphs (a)(6)(i) and (ii), respectively. 2. In newly-designated paragraphs (a)(6)(i) and (ii), by redesignating the paragraphs in the first column as the paragraphs in the second column: Old Paragraphs New Paragraphs (a)(6)(i)(i) and (ii) (a)(6)(i)(A) and (B) (a)(6)(ii)(i) and (ii) (a)(6)(ii)(A) and (B) 3. In newly designated paragraphs (a)(6)(ii)(A) and (B), by removing the language “small reseller” and adding in its place the language “small business taxpayer” everywhere it appears. Par. 12. §1.446-1 is amended: 1. In paragraph (a)(4)(i), by revising the first sentence. 2. By revising paragraph (c)(2)(i). 3. By adding paragraph (c)(3). §1.446-1 General rule for methods of accounting. (i) Except in the case of a taxpayer qualifying as a small business taxpayer for the taxable year under section 471(c), in all cases in which the production, purchase or sale of merchandise of any kind is an income-producing factor, merchandise on hand (including finished goods, work in progress, raw materials, and supplies) at the beginning and end of the year shall be taken into account in computing the taxable income of the year. * * * (c) * * * (i) In any case in which it is necessary to use an inventory, the accrual method of accounting must be used with regard to purchases and sales unless: (A) The taxpayer qualifies as a small business taxpayer for the taxable year under section 471(c), or (B) Otherwise authorized under paragraph (c)(2)(ii) of this section. (3) Applicability date. The first sentence of paragraph (a)(4)(i) of this section and paragraph (c)(2)(i) of this section apply to taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. For taxable years beginning before [date the Treasury Decision adopting these regulations as final is published in the Federal Register], see §1.446-1(c) as contained in 26 CFR part 1, revised April 1, 2019. Par. 13. Section1.448-1 is amended by adding new first and second sentences to paragraphs (g)(1) and (h)(1) to read as follows: §1.448-1 Limitation on the use of the cash receipts and disbursements method of accounting. (g) * * * (1) * * *The rules provided in paragraph (g) of this section apply to taxable years beginning before January 1, 2018. See §1.448-2 for rules relating to taxable years beginning after December 31, 2017.* * * (h) * * * (1) * * *The rules provided in paragraph (h) of this section apply to taxable years beginning before January 1, 2018. See §1.448-2 for rules relating to taxable years beginning after December 31, 2017.* * * §1.448-2 [Redesignated as §1.448-3] Par. 14. Section 1.448-2 is redesignated as §1.448-3. Par. 15. A new §1.448-2 is added to read as follows: §1.448-2 Limitation on the use of the cash receipts and disbursements method of accounting for taxable years beginning after December 31, 2017. (a) Limitation on method of accounting—(1) In general. The rules of this section relate to the limitation on the use of the cash receipts and disbursements method of accounting (cash method) by certain taxpayers applicable for taxable years beginning after December 31, 2017. For rules applicable to taxable years beginning before January 1, 2018, see §§1.448-1 and 1.448-1T. (2) Limitation rule. Except as otherwise provided in this section, the computation of taxable income using the cash method is prohibited in the case of a: (i) C corporation; (ii) Partnership with a C corporation as a partner, or a partnership that had a C corporation as a partner at any time during the partnership’s taxable year beginning after December 31, 1986; or (iii) Tax shelter. (3) Treatment of combination methods—(i) In general. For purposes of this section, the use of a method of accounting that records some, but not all, items on the cash method is considered the use of the cash method. Thus, a C corporation that uses a combination of accounting methods including the use of the cash method is subject to this section. (ii) Example. The following example illustrates the operation of this paragraph (a)(3). In 2020, A is a C corporation with average annual gross receipts for the prior three taxable years of greater than $30 million, is not a tax shelter under section 448(a)(3) and does not qualify as a qualified personal service corporation, as defined in paragraph (e) of this section. For the last 20 years, A used an accrual method for items of income and expenses related to purchases and sales of inventory, and the cash method for items related to its provision of services. A is using a combination of accounting methods that include the cash method. Thus, A is subject to section 448. A is prohibited from using the cash method for any item for 2020 and is required to change to a permissible method. (b) Definitions. For purposes of this section— (1) C corporation—(i) In general. The term C corporation means any corporation that is not an S corporation (as defined in section 1361(a)(1)). For example, a regulated investment company (as defined in section 851) or a real estate investment trust (as defined in section 856) is a C corporation for purposes of this section. In addition, a trust subject to tax under section 511(b) is treated, for purposes of this section, as a C corporation, but only with respect to the portion of its activities that constitute an unrelated trade or business. Similarly, for purposes of this section, a corporation that is exempt from Federal income taxes under section 501(a) is treated as a C corporation only with respect to the portion of its activities that constitute an unrelated trade or business. Moreover, for purposes of determining whether a partnership has a C corporation as a partner, any partnership described in paragraph (a)(2)(ii) of this section is treated as a C corporation. Thus, if partnership ABC has a partner that is a partnership with a C corporation, then, for purposes of this section, partnership ABC is treated as a partnership with a C corporation partner. (ii) [Reserved] (2) Tax shelter—(i) In general. The term tax shelter means any— (A) Enterprise, other than a C corporation, if at any time (including taxable years beginning before January 1, 1987) interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or state agency having the authority to regulate the offering of securities for sale; (B) Syndicate, within the meaning of paragraph (b)(2)(iii) of this section, or (C) Tax shelter, within the meaning of section 6662(d)(2)(C). (ii) Requirement of registration. For purposes of paragraph (b)(2)(i)(A) of this section, an offering is required to be registered with a Federal or state agency if, under the applicable Federal or state law, failure to register the offering would result in a violation of the applicable Federal or state law; this rule applies regardless of whether the offering is in fact registered. In addition, an offering is required to be registered with a Federal or state agency if, under the applicable Federal or state law, failure to file a notice of exemption from registration would result in a violation of the applicable Federal or state law, regardless of whether the notice is in fact filed. However, an S corporation is not treated as a tax shelter for purposes of section 448(d)(3) or this section merely by reason of being required to file a notice of exemption from registration with a state agency described in section 461(i)(3)(A), but only if all corporations offering securities for sale in the state must file such a notice in order to be exempt from such registration. (iii) Syndicate—(A) In general. For purposes of paragraph (b)(2)(i)(B) of this section, the term syndicate means a partnership or other entity (other than a C corporation) if more than 35 percent of the losses of such entity during the taxable year (for taxable years beginning after December 31, 1986) are allocated to limited partners or limited entrepreneurs. For purposes of this paragraph (b)(2)(iii), the term limited entrepreneur has the same meaning given such term in section 461(k)(4). In addition, in determining whether an interest in a partnership is held by a limited partner, or an interest in an entity or enterprise is held by a limited entrepreneur, section 461(k)(2) applies in the case of the trade or business of farming (as defined in paragraph (d)(2) of this section), and section 1256(e)(3)(C) applies in all other cases. Moreover, for purposes of paragraph (b)(2) of this section, the losses of a partnership, entity, or enterprise (entities) means the excess of the deductions allowable to the entities over the amount of income recognized by such entities under the entities’ method of accounting used for Federal income tax purposes (determined without regard to this section). For this purpose, gains or losses from the sale of capital assets or assets described in section 1221(a)(2) are not taken into account. (B) Election to test the allocation of losses from prior taxable year. For purposes of paragraph (b)(2)(iii)(A) of this section, to determine if more than 35 percent of the losses of a venture are allocated to limited partners or limited entrepreneurs, instead of using the current taxable year’s allocation of losses, entities may elect to use the allocations made in the immediately preceding taxable year instead of using the current taxable year’s allocation. An election under this paragraph (b)(2)(iii)(B) applies to the first taxable year for which the election is made and to all subsequent taxable years, unless the Commissioner of Internal Revenue or his delegate (Commissioner) permits a revocation of the election in accordance with this paragraph. An election under this paragraph (b)(2)(iii)(B) may never be revoked earlier than the fifth taxable year following the first taxable year for which the election was made unless extraordinary circumstances are demonstrated to the satisfaction of the Commissioner. Once an election has been revoked, a new election under this paragraph (b)(2)(iii)(B) cannot be made until the fifth taxable year following the taxable year for which the previous election was revoked unless extraordinary circumstances are demonstrated to the satisfaction of the Commissioner. A taxpayer making this election must attach a statement to its timely filed Federal income tax return (including extension) that this election is made beginning with that taxable year. If such a statement is not attached, the election is not valid and has no effect for any purpose. No late elections will be permitted. Further, an election cannot be made by filing an amended Federal income tax return. In addition to section 448, this election also applies for purposes of all provisions of the Code that refer to section 448(a)(3) to define tax shelter. An election made under this paragraph (b)(2)(iii)(B) may only be revoked with the written consent of the Commissioner. Requests for consent must follow the applicable administrative procedures for requesting a letter ruling (for example, see Revenue Procedure 2020-1, 2020-01 IRB 1 (or its successor)). (C) Example. Taxpayer B is a calendar year limited partnership, with no active management from its limited partner. In 2019, B is profitable and allocates 80 percent of its profits to its general partner and 20 percent of its profits to its limited partner. In 2020, B has a loss and allocates 60 percent of losses to its general partner and 40 percent of its losses to its limited partner. In 2020 B makes an election under paragraph (b)(2)(iii)(B) of this section to use its prior year allocated amounts. For 2020, B is not a syndicate because B is treated as having allocated 20 percent of its profits to its limited partner in 2020 for purposes of paragraph (b)(2)(iii) of this section. For 2021, B is a syndicate because B is treated as having allocated 40 percent of its losses to its limited partner for purposes of paragraph (b)(2)(iii) of this section. (iv) Presumed tax avoidance. For purposes of (b)(2)(i)(C) of this section, marketed arrangements in which persons carrying on farming activities using the services of a common managerial or administrative service will be presumed to have the principal purpose of tax avoidance if such persons use borrowed funds to prepay a substantial portion of their farming expenses (for example, payment for farm supplies that will not be used or consumed until a taxable year subsequent to the taxable year of payment). (v) Taxable year tax shelter must change accounting method. A tax shelter must change from the cash method for the taxable year that it becomes a tax shelter, as determined under paragraph (b)(2) of this section. (vi) Determination of loss amount. For purposes of section 448(d)(3), the amount of losses to be allocated under section 1256(e)(3)(B) is calculated without regard to section 163(j). (c) Exception for entities with gross receipts not in excess of the amount provided in section 448(c)—(1) In general. Except in the case of a tax shelter, this section does not apply to any C corporation or partnership with a C corporation as a partner for any taxable year if such corporation or partnership (or any predecessor thereof) meets the gross receipts test of paragraph (c)(2) of this section. (2) Gross receipts test—(i) In general. A corporation meets the gross receipts test of this paragraph (c)(2) if the average annual gross receipts of such corporation for the 3 taxable years (or, if shorter, the taxable years during which such corporation was in existence, annualized as required) ending with such prior taxable year does not exceed the gross receipts test amount provided in paragraph (c)(2)(v) of this section (section 448(c) gross receipts test). In the case of a C corporation exempt from Federal income taxes under section 501(a), or a trust subject to tax under section 511(b) that is treated as a C corporation under paragraph (b)(1) of this section, only gross receipts from the activities of such corporation or trust that constitute unrelated trades or businesses are taken into account in determining whether the gross receipts test is satisfied. A partnership with a C corporation as a partner meets the gross receipts test of paragraph (c)(2) of this section if the average annual gross receipts of such partnership for the 3 taxable years (or, if shorter, the taxable years during which such partnership was in existence annualized as required) ending with such prior year does not exceed the gross receipts test amount of paragraph (c)(2)(v) of this section. Except as provided in paragraph (c)(2)(ii) of this section, the gross receipts of the corporate partner are not taken into account in determining whether a partnership meets the gross receipts test of paragraph (c)(2) of this section. (ii) Aggregation of gross receipts. The aggregation rules in §1.448-1T(f)(2)(ii) apply for purposes of aggregating gross receipts for purposes of this section. (iii) Treatment of short taxable year. The short taxable year rules in §1.448-1T(f)(2)(iii) apply for purposes of this section. (iv) Determination of gross receipts. The determination of gross receipts rules in §1.448-1T(f)(2)(iv) apply for purposes of this section. (v) Gross receipts test amount—(A) In general. For purposes of paragraph (c) of this section, the term gross receipts test amount means $25,000,000, adjusted annually for inflation in the manner provided in section 448(c)(4). The inflation adjusted gross receipts test amount is published annually in guidance published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii) of this chapter). (B) Example. Taxpayer A, a C corporation, is a plumbing contractor that installs plumbing fixtures in customers’ homes or businesses. A’s gross receipts for the 2017-2019 taxable years are $20 million, $16 million, and $30 million, respectively. A’s average annual gross receipts for the three taxable-year period preceding the 2020 taxable year is $22 million (($20 million + $16 million + $30 million) / 3 = $22 million. A may use the cash method for its trade or business for the 2020 taxable year because its average annual gross receipts for the preceding three taxable years is not more than the gross receipts test amount of paragraph (c)(2)(vi) of this section, which is $26 million for 2020. (d) Exception for farming businesses—(1) In general. Except in the case of a tax shelter, this section does not apply to any farming business. A taxpayer engaged in a farming business and a separate non-farming business is not prohibited by this section from using the cash method with respect to the farming business, even though the taxpayer may be prohibited by this section from using the cash method with respect to the non-farming business. (2) Farming business—(i) In general. For purposes of paragraph (d) of this section, the term farming business means— (A) The trade or business of farming as defined in section 263A(e)(4) (including the operation of a nursery or sod farm, or the raising or harvesting of trees bearing fruit, nuts or other crops, or ornamental trees), (B) The raising, harvesting, or growing of trees described in section 263A(c)(5) (relating to trees raised, harvested, or grown by the taxpayer other than trees described in paragraph (d)(2)(i)(A) of this section), (C) The raising of timber, or (D) Processing activities which are normally incident to the growing, raising, or harvesting of agricultural products. (ii) Example. Assume a taxpayer is in the business of growing fruits and vegetables. When the fruits and vegetables are ready to be harvested, the taxpayer picks, washes, inspects, and packages the fruits and vegetables for sale. Such activities are normally incident to the raising of these crops by farmers. The taxpayer will be considered to be in the business of farming with respect to the growing of fruits and vegetables, and the processing activities incident to the harvest. (iii) Processing activities excluded from farming businesses—(A) In general. For purposes of this section, a farming business does not include the processing of commodities or products beyond those activities normally incident to the growing, raising, or harvesting of such products. (B) Examples. (1) Example 1. Assume that a C corporation taxpayer is in the business of growing and harvesting wheat and other grains. The taxpayer processes the harvested grains to produce breads, cereals, and similar food products which it sells to customers in the course of its business. Although the taxpayer is in the farming business with respect to the growing and harvesting of grain, the taxpayer is not in the farming business with respect to the processing of such grains to produce breads, cereals, and similar food products which the taxpayer sells to customers. (2) Example 2. Assume that a taxpayer is in the business of raising livestock. The taxpayer uses the livestock in a meat processing operation in which the livestock are slaughtered, processed, and packaged or canned for sale to customers. Although the taxpayer is in the farming business with respect to the raising of livestock, the taxpayer is not in the farming business with respect to the meat processing operation. (e) Exception for qualified personal service corporation. The rules in §1.448-1T(e) relating to the exception for qualified personal service corporations apply for taxable years beginning after December 31, 2017. (f) Effect of section 448 on other provisions. Except as provided in paragraph (b)(2)(iii)(B) of this section, nothing in section 448 shall have any effect on the application of any other provision of law that would otherwise limit the use of the cash method, and no inference shall be drawn from section 448 with respect to the application of any such provision. For example, nothing in section 448 affects the requirement of section 447 that certain corporations must use an accrual method of accounting in computing taxable income from farming, or the requirement of §1.446-1(c)(2) that, in general, an accrual method be used with regard to purchases and sales of inventory. Similarly, nothing in section 448 affects the authority of the Commissioner under section 446(b) to require the use of an accounting method that clearly reflects income, or the requirement under section 446(e) that a taxpayer secure the consent of the Commissioner before changing its method of accounting. For example, a taxpayer using the cash method may be required to change to an accrual method of accounting under section 446(b) because such method clearly reflects the taxpayer’s income, even though the taxpayer is not prohibited by section 448 from using the cash method. Similarly, a taxpayer using an accrual method of accounting that is not prohibited by section 448 from using the cash method may not change to the cash method unless the taxpayer secures the consent of the Commissioner under section 446(e). (g) Treatment of accounting method change and rules for section 481(a) adjustment—(1) In general. Any taxpayer to whom section 448 applies must change its method of accounting in accordance with the provisions of this paragraph (g). In the case of any taxpayer required by this section to change its method of accounting for any taxable year, the change shall be treated as a change initiated by the taxpayer. A taxpayer must change to an overall accrual method of accounting for the first taxable year the taxpayer is subject to this section or a subsequent taxable year in which the taxpayer is newly subject to this section after previously making a change in method of accounting that complies with section 448 (mandatory section 448 year). A taxpayer may have more than one mandatory section 448 year. For example, a taxpayer may exceed the gross receipts test of section 448(c) in non-consecutive taxable years. If the taxpayer complies with the provisions of paragraph (g)(3) of this section for its mandatory section 448 year, the change shall be treated as made with the consent of the Commissioner. The change shall be implemented pursuant to the applicable administrative procedures to obtain the automatic consent of the Commissioner to change a method of accounting under section 446(e) as published in the Internal Revenue Bulletin (See Revenue Procedure 2015-13, 2015-5 IRB 419 (or successor) (see §601.601(d)(2) of this chapter)). This paragraph (g) applies only to a taxpayer who changes from the cash method as required by this section. This paragraph (g) does not apply to a change in method of accounting required by any Code section (or applicable regulation) other than this section. (2) Section 481(a) adjustment. The amount of the net section 481(a) adjustment and the adjustment period necessary to implement a change in method of accounting required under this section are determined under §1.446-1(e) and the applicable administrative procedures to obtain the Commissioner’s consent to change a method of accounting as published in the Internal Revenue Bulletin (see also §601.601(d)(2) of this chapter). (3) Prior change in overall method of accounting under this section. A taxpayer that otherwise meets the requirements of paragraph (c) of this section, and that had during any of the five taxable years ending with the taxable year changed its overall method of accounting from the cash method because it no longer met the gross receipts test of section 448(c) provided under paragraph (c) of this section or because it was a tax shelter as provided under paragraph (b)(2) of this section, may not change its overall method of accounting back to the cash method without the written consent of the Commissioner. Requests for consent must follow the applicable administrative procedures to obtain the written consent of the Commissioner to change a method of accounting under section 446(e) as published in the Internal Revenue Bulletin (see also §601.601(d)(2) of this chapter). For rules relating to the clear reflection of income and the pattern of consistent treatment of an item, see section 446 and §1.446-1. (h) Applicability dates. The rules of this section apply for taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. Par. 16. Newly redesignated § 1.448-3 is amended by revising paragraphs (a)(2) and (h) to read as follows: §1.448-3 Nonaccrual of certain amounts by service providers. (2) The taxpayer meets the gross receipts test of section 448(c) and §1.448-1T(f)(2) (in the case of taxable years beginning before January 1, 2018), or §1.448-2(c) (in the case of taxable years beginning after December 31, 2017) for all prior taxable years. (h) Applicability dates. (1) Except as provided in paragraph (h)(2) of this section, this section is applicable for taxable years ending on or after August 31, 2006. (2) The rules of paragraph (a)(2) of this section apply for taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. For taxable years beginning before [date the Treasury Decision adopting these regulations as final is published in the Federal Register], see §1.448-2 as contained in 26 CFR part 1, revised April 1, 2019. Par. 17. Section 1.460-0 is amended by: 1. Adding an entry for §1.460-1(h)(3). 2. Revising the entries for §1.460-3(b)(3), §1.460-3(b)(3)(i) and (ii), and adding entries for §1.460-3(b)(3)(ii)(A), (B), (C) and (D). 3. Removing the entry for §1.460-3(b)(3)(iii). 4. Adding entries for §1.460-3(d), §1.460-4(i), and §1.460-6(k). §1.460-0 Outline of regulations under section 460. §1.460-1 Long-term contracts. (3) Changes made by Tax Cuts and Jobs Act (Pub. L. 115-97). §1.460-3 Long-term construction contracts. (3) Gross receipts test of section 448(c) (ii) Application of gross receipts test (A) In general (B) Gross receipts of individuals, etc. (C) Partners and S corporation shareholders (D) Examples (1) Example 1. (d) Applicability dates. §1.460-4 Methods of Accounting for long-term contracts. (i) Applicability date. §1.460-6 Look-back method. (k) Applicability date. § 1.460-1 [Amended] Par. 18. Section 1.460-1 is amended by adding three sentences to the end of paragraph (f)(3) and adding paragraph (h)(3) to read as follows: (f) * * * (3) * * * A taxpayer may adopt any permissible method of accounting for each classification of contract. Such adoption is not a change in method of accounting under section 446 and the accompanying regulations. For example, a taxpayer that has had only contracts classified as nonexempt long-term contracts and has used the PCM for these contracts may adopt an exempt contract method in the taxable year it first enters into an exempt long-term contract. (3) Changes made by Tax Cuts and Jobs Act (Pub. L. 115-97). Paragraph (f)(3) of this section, and §1.460-5(d)(1) and (d)(3), apply for taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. Par. 19. Section 1.460-3 is amended by revising paragraphs (b)(1)(ii) and (b)(3) and adding paragraph (d) to read as follows: (ii) Other construction contract, entered into after December 31, 2017, in a taxable year ending after December 31, 2017, by a taxpayer, other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting (cash method) under section 448(a)(3), who estimates at the time such contract is entered into that such contract will be completed within the 2-year period beginning on the contract commencement date, and who meets the gross receipts test described in paragraph (b)(3) of this section. (3) Gross receipts test of section 448(c)—(i) In general. A taxpayer, other than a tax shelter prohibited from using the cash method under section 448(a)(3), satisfies the gross receipts test of this paragraph (b)(3) if it meets the gross receipts test of section 448(c) and §1.448-2(c)(2). (ii) Application of gross receipts test—(A) In general. In the case of any taxpayer that is not a corporation or a partnership, and except as provided in paragraphs (b)(3)(ii)(B) and (C) of this section, the gross receipts test of section 448(c) and the accompanying regulations are applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership. (B) Gross receipts of individuals, etc. Except when the aggregation rules of section 448(c)(2) apply, the gross receipts of a taxpayer other than a corporation or partnership are the amount derived from all trades or businesses of such taxpayer. Amounts not related to a trade or business are excluded from the gross receipts the taxpayer. For example, an individual taxpayer’s gross receipts do not include inherently personal amounts, such as personal injury awards or settlements with respect to an injury of the individual taxpayer, disability benefits, Social Security benefits received by the taxpayer during the taxable year, and wages received as an employee that are reported on Form W-2. (C) Partners and S corporation shareholders. Except when the aggregation rules of section 448(c)(2) apply, each partner in a partnership includes a share of partnership gross receipts in proportion to such partner’s distributive share (as determined under section 704) of items of gross income that were taken into account by the partnership under section 703. Similarly, a shareholder includes the pro rata share of S corporation gross receipts taken into account by the S corporation under section 1363(b). (D) Example. The operation of this paragraph (b)(3) is illustrated by the following examples: (1) Example 1. Taxpayer A is an individual who operates two separate and distinct trades or business that are reported on Schedule C, Profit or Loss from Business, of A’s Federal income tax return. For 2020, one trade or business has annual average gross receipts of $5 million, and the other trade or business has average annual gross receipts of $35 million. Under paragraph (b)(3)(ii)(B) of this section, for 2020, neither of A’s trades or businesses meets the gross receipts test of paragraph (b)(3) of this section ($5 million + $35 million = $40 million, which is greater than the inflation-adjusted gross receipts test amount for 2020, which is $26 million). (2) Example 2. Taxpayer B is an individual who operates three separate and distinct trades or business that are reported on Schedule C of B’s Federal income tax return. For 2020, Business X is a retail store with average annual gross receipts of $15 million, Business Y is a dance studio with average annual gross receipts of $6 million, and Business Z is a car repair shop with average annual gross receipts of $12 million. Under paragraph (b)(3)(ii)(B) of this section, B’s gross receipts are the combined amount derived from all three of B’s trades or businesses. Therefore, for 2020, X, Y and Z do not meet the gross receipts test of paragraph (b)(3)(i) of this section ($15 million + $6 million + $12 million = $33 million, which is greater than the inflation-adjusted gross receipts test amount for 2020, which is $26 million). (d) Applicability Dates. Paragraphs (b)(1)(ii) and (b)(3) of this section apply, for taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. For contracts entered into before January 1, 2018, see §1.460-3(b)(1)(ii) and (b)(3) as contained in 26 CFR part 1, revised April 1, 2019. Par. 20. Section 1.460-4 is amended by revising the first sentence of paragraph (f)(1) and adding paragraph (i) to read as follows: (1) * * *Under section 56(a)(3), a taxpayer subject to the AMT must use the PCM to determine its AMTI from any long-term contract entered into on or after March 1, 1986, that is not a home construction contract, as defined in §1.460–3(b)(2).* * * (i) Applicability date. Paragraph (f)(1) of this section applies for taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. For taxable years beginning before January 1, 2018, see §1.460-4(f)(1) as contained in 26 CFR part 1, revised April 1, 2019. Par. 21. Section 1.460-5 is amended: 1. In paragraph (d)(1), by removing the language “(concerning contracts of homebuilders that do not satisfy the $10,000,000 gross receipts test described in §1.460–3(b)(3) or will not be completed within two years of the contract commencement date)”. 2. By revising paragraph (d)(3). The revision reads as follows: §1.460-5 Cost allocation rules. (d) * * * (3) Large homebuilders. A taxpayer must capitalize the costs of home construction contracts under section 263A, unless the taxpayer estimates, when entering into the contract, that it will be completed within two years of the contract commencement date, and the taxpayer satisfies the gross receipts test of section 448(c) described in §1.460-3(b)(3) for the taxable year in which the contract is entered into. 1. In paragraph (b)(2) introductory text, by removing the language “section 460(e)(4)” and adding in its place the language “section 460(e)(3)”. 2. By revising the first and last sentences of paragraph (b)(2)(ii). 3. By designating the undesignated text after paragraph (b)(3)(ii) as paragraph (b)(3)(iii). 4. In newly designated paragraph (b)(3)(iii), by adding a sentence to the end of the paragraph. 5. In paragraph (c)(1)(i), by revising the fifth sentence. 6. In paragraph (c)(2)(i), by revising the third sentence . 7. In paragraph (c)(2)(iv), by revising the first sentence. 8. In paragraph (c)(3)(ii), by revising the first sentence. 9. In paragraph (c)(3)(vi), by revising the first sentence. 10. In paragraph (d)(2)(i), by removing the language “whether or not the taxpayer would have been subject to the alternative minimum tax” and adding in its place the language “for taxpayers subject to the alternative minimum tax without regard to whether tentative minimum tax exceeds regular tax for the redetermination year”. 11. By revising paragraph (d)(4)(i)(A). 12. By designating paragraph (h)(8)(ii) Example 7 as paragraph (h)(8)(iii). 13. By revising newly designated paragraph (h)(8)(iii). 14. By adding paragraph (k). (ii) is not a home construction contract but is estimated to be completed within a 2–year period by a taxpayer, other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3), who meets the gross receipts test of section 448(c) and §1.460-3(b)(3) for the taxable year in which such contract is entered into. * * *The look-back method, however, applies to the alternative minimum taxable income from a contract of this type, for those taxpayers subject to the AMT in taxable years prior to the filing taxable year in which the look-back method is required, unless the contract is exempt from required use of the percentage of completion method under section 56(a)(3). (iii) * * *For contracts entered into after December 31, 2017, in a taxable year ending after December 31, 2017, a taxpayer’s gross receipts are determined in the manner required by regulations under section 448(c). (c)* * * (1)* * * (i)* * * Based on this reapplication, the taxpayer determines the amount of taxable income (and, when applicable, alternative minimum taxable income and modified taxable income under section 59A(c)) that would have been reported for each year prior to the filing year that is affected by contracts completed or adjusted in the filing year if the actual, rather than estimated, total contract price and costs had been used in applying the percentage of completion method to these contracts, and to any other contracts completed or adjusted in a year preceding the filing year. * * * (i) * * *The taxpayer then must determine the amount of taxable income (and, when applicable, alternative minimum taxable income and modified taxable income under section 59A(c)) that would have been reported for each affected tax year preceding the filing year if the percentage of completion method had been applied on the basis of actual contract price and contract costs in reporting income from all contracts completed or adjusted in the filing year and in any preceding year. * * * (iv)* * * In general, because income under the percentage of completion method is generally reported as costs are incurred, the taxable income and, when applicable, alternative minimum taxable income and modified taxable income under section 59A(c), are recomputed only for each year in which allocable contract costs were incurred. * * * (ii)* * * Under the method described in this paragraph (c)(3) (actual method), a taxpayer first must determine what its regular and, when applicable, its alternative minimum tax and base erosion minimum tax liability would have been for each redetermination year if the amounts of contract income allocated in Step One for all contracts completed or adjusted in the filing year and in any prior year were substituted for the amounts of contract income reported under the percentage of completion method on the taxpayer’s original return (or as subsequently adjusted on examination, or by amended return). * * * (vi)* * *For purposes of Step Two, the income tax liability must be redetermined by taking into account all applicable additions to tax, credits, and net operating loss carrybacks and carryovers. Thus, the taxes, if any, imposed under sections 55 and 59A (relating to alternative and base erosion minimum tax, respectively) must be taken into account. * * * (i) * * * (A) General rule. The simplified marginal impact method is required to be used with respect to income reported from domestic contracts by a pass-through entity that is either a partnership, an S corporation, or a trust, and that is not closely held. With respect to contracts described in the preceding sentence, the simplified marginal impact method is applied by the pass-through entity at the entity level. The pass-through entity determines the amount of any hypothetical underpayment or overpayment for a redetermination year using the highest rate of tax in effect for corporations under section 11. However, for redetermination years beginning before January 1, 2018, the pass-through entity uses the highest rates of tax in effect for corporations under section 11 and section 55(b)(1). Further, the pass-through entity uses the highest rates of tax imposed on individuals under section 1 and section 55(b)(1) if, at all times during the redetermination year involved (that is, the year in which the hypothetical increase or decrease in income arises), more than 50 percent of the interests in the entity were held by individuals directly or through 1 or more pass-through entities. (h)* * * (iii) Example 7. X, a calendar year C corporation, is engaged in the construction of real property under contracts that are completed within a 24-month period. Its average annual gross receipts for the prior 3-taxable-year period does not exceed $25,000,000. As permitted by section 460(e)(1)(B), X uses the completed contract method (CCM) for regular tax purposes. However, X is engaged in the construction of commercial real property and, for years beginning before January 1, 2018, is required to use the percentage of completion method (PCM) for alternative minimum tax (AMT) purposes. Assume that for 2017, 2018, and 2019, X has only one long-term contract, which is entered into in 2017 and completed in 2019 and that in 2017 X’s average annual gross receipts for the prior 3-taxable-years do not exceed $10,000,000. Assume further that X estimates gross income from the contract to be $2,000, total contract costs to be $1,000, and that the contract is 25 percent complete in 2017 and 70 percent complete in 2018, and 5 percent complete in 2019. In 2019, the year of completion, gross income from the contract is actually $3,000, instead of $2,000, and costs are actually $1,000. Because X was required to use the PCM for 2017 for AMT purposes, X must apply the look-back method to its AMT reporting for that year. X has elected to use the simplified marginal impact method. For 2017, X’s income using estimated contract price and costs is as follows: Table 1 to paragraph (h)(8)(iii) Estimates 2017 Gross Income $500 = ($2,000 x 25%) Deductions $(250) = ($1,000 x 25%) Contract Income–PCM $250 (A) When X files its federal income tax return for 2019, the contract completion year, X applies the look-back method. For 2017, X’s income using actual contract price and costs is as follows: Table 2 to paragraph (h)(8)(iii)(A) (B) Accordingly, the reallocation of contract income under the look-back method results in an increase of income for AMT purposes for 2017 of $250 ($500-$250). Under the simplified marginal impact method, X applies the highest rate of tax under section 55(b)(1) to this increase, which produces a hypothetical underpayment for 2017 of $50 (.20 x $250). Interest is charged to X on this $50 underpayment from the due date of X’s 2017 return until the due date of X’s 2019 return. X, a C corporation, is not subject to the AMT in 2018. X does not compute alternative minimum taxable income or use the PCM in that year. Accordingly, look-back does not apply to 2018. (k) Applicability date. Paragraphs (b)(2), (b)(2)(ii), (b)(3)(ii), (c)(1)(i), (c)(2)(i), (c)(2)(iv), (c)(3)(ii), (c)(3)(vi), (d)(2)(i), (d)(4)(i)(A), and (h)(8)(iii) of this section, apply for taxable years beginning on or after [date the Treasury decision adopting these proposed regulations as final is published in the Federal Register]. For taxable years beginning before January 1, 2018, see §§1.460-6(b)(2), 1.460-6(b)(2)(ii), 1.460-6(b)(3)(ii), 1.460-6(c)(1)(i), 1.460-6(c)(2)(i) and (iv), 1.460-6(c)(3)(ii) and (vi), 1.460-6(d)(2)(i), 1.460-6(d)(4)(i)(A), and 1.460-6(h)(8)(iii) as contained in 26 CFR part 1, revised April 1, 2019. Par. 23. §1.471-1 is amended by: 1. Designating the undesignated paragraph as paragraph (a). 2. Adding a heading to newly designated paragraph (a) and revising the first sentence. 3. Adding paragraph (b). §1.471-1 Need for inventories. (a) In general. Except as provided in paragraph (b) of this section, in order to reflect taxable income correctly, inventories at the beginning and end of each taxable year are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor. * * * (b) Exemption for certain small business taxpayers—(1) In general. Paragraph (a) of this section shall not apply to a taxpayer, other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting (cash method) under section 448(a)(3), in any taxable year if the taxpayer meets the gross receipts test provided in paragraph (b)(2) of this section, and uses as a method of accounting for its inventory a method that is described in paragraph (b)(3) of this section. (2) Gross receipts test—(i) In general. A taxpayer, other than a tax shelter prohibited from using the cash method under section 448(a)(3), meets the gross receipts test of paragraph (b)(1) of this section if it meets the gross receipts test of section 448(c) and §1.448-2(c). The gross receipts test applies to determine whether a taxpayer is eligible to use the exemption provided in paragraph (b) of this section even if the taxpayer is not otherwise subject to section 448(a). (ii) Application of the gross receipts test—(A) In general. In the case of any taxpayer that is not a corporation or partnership, and except as otherwise provided in paragraphs (b)(2)(ii)(B) and (C) of this section, the gross receipts test of section 448(c) and the accompanying regulations are applied in the same manner as each trade or business of the taxpayer were a corporation or partnership. (B) Gross receipts of individuals, etc. Except when the aggregation rules of section 448(c)(2) apply, the gross receipts of a taxpayer other than a corporation or partnership are the amount derived from all trades or businesses of such taxpayer. Amounts not related to a trade or businesses are excluded from the gross receipts of the taxpayer. For example, an individual taxpayer’s gross receipts do not include inherently personal amounts, such as: personal injury awards or settlements with respect to an injury of the individual taxpayer, disability benefits, Social Security benefits received by the taxpayer during the taxable year, and wages received as an employee that are reported on Form W-2. (C) Partners and S corporation shareholders—(1) In general. Except when the aggregation rules of section 448(c)(2) apply, each partner in a partnership includes a share of the partnership’s gross receipts in proportion to such partner’s distributive share (as determined under section 704) of items of gross income that were taken into account by the partnership under section 703. Similarly, a shareholder includes the pro rata share of S corporation gross receipts taken into account by the S corporation under section 1363(b). (2) [Reserved] (D) Examples. The operation of this paragraph (b)(2) is illustrated by the following examples: (1) Example 1. Taxpayer A, a calendar year S corporation, is a reseller and maintains inventories. In 2017, 2018, and 2019, S’s gross receipts were $10 million, $11 million, and $13 million respectively. A is not prohibited from using the cash method under section 448(a)(3). For 2020, A meets the gross receipts test of paragraph (b)(2) of this section. (2) Example 2. Taxpayer B operates two separate and distinct trades or businesses that are reported on Schedule C, Profit or Loss from Business, of B’s Federal income tax return. For 2020, one trade or business has annual average gross receipts of $5 million, and the other trade or business has average annual gross receipts of $35 million. Under paragraph (b)(2)(ii)(B) of this section, for 2020, neither of B’s trades or businesses meets the gross receipts test of paragraph (b)(2) of this section ($5 million + $35 million = $40 million, which is greater than the inflation-adjusted gross receipts test amount for 2020, which is $26 million). (3) Example 3. Taxpayer C is an individual who operates three separate and distinct trades or business that are reported on Schedule C of C’s Federal income tax return. For 2020, Business X is a retail store with average annual gross receipts of $15 million, Business Y is a dance studio with average annual gross receipts of $6 million, and Business Z is a car repair shop with average annual gross receipts of $12 million. Under paragraph (b)(2)(ii)(B) of this section, C’s gross receipts are the combined amount derived from all three of C’s trades or businesses. Therefore, for 2020, X, Y and Z do not meet the gross receipts test of paragraph (b)(2)(i) of this section ($15 million + $6 million + $12 million = $33 million, which is greater than the inflation-adjusted gross receipts test amount for 2020, which is $26 million). (3) Methods of accounting under the small business taxpayer exemption. A taxpayer eligible to use, and that chooses to use, the exemption described in paragraph (b) of this section may account for its inventory by either: (i) Accounting for its inventory items as non-incidental materials and supplies, as described in paragraph (b)(4) of this section; or (ii) Using the method for each item that is reflected in the taxpayer’s applicable financial statement (AFS) (AFS section 471(c) inventory method); or, if the taxpayer does not have an AFS for the taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures, as defined in paragraph (b)(6)(ii) of this section (non-AFS section 471(c) inventory method). (4) Inventory treated as non-incidental materials and supplies—(i) In general. Inventory treated as non-incidental materials and supplies (section 471(c) materials and supplies) is recovered through costs of goods sold only in the taxable year in which such inventory is actually used or consumed in the taxpayer’s business, or in the taxable year in which the taxpayer pays for or incurs the costs of the items, whichever is later. Section 471 materials and supplies are used or consumed in the taxable year in which the taxpayer provides the items to its customer. Inventory treated as non-incidental materials and supplies under this paragraph (b)(4) is not eligible for the de minimis safe harbor election under §1.263(a)-1(f)(2). (ii) Identification and valuation of section 471(c) materials and supplies. A taxpayer may determine the amount of the section 471(c) materials and supplies that are recoverable through costs of goods sold by using either a specific identification method, a first-in, first-out (FIFO) method, or an average cost method, provided that method is used consistently. See §1.471-2(d). A taxpayer that uses the section 471 materials and supplies method may not use any other method described in the regulations under section 471, or the last-in, first-out (LIFO) method described in section 472 and the accompanying regulations, to either identify section 471(c) materials and supplies, or to value those section 471(c) materials and supplies. The inventory costs includible in the section 471(c) materials and supplies method are the direct costs of the property produced or property acquired for resale. However, an inventory cost does not include a cost for which a deduction would be disallowed, or that is not otherwise recoverable but for paragraph (b)(4) of this section, in whole or in part, under a provision of the Internal Revenue Code. (iii) Allocation methods. The section 471 materials and supplies method may allocate the costs of such inventory items by using specific identification or using any reasonable method. (iv) Example. Taxpayer D is a baker that reports its baking trade or business on Schedule C, Profit or Loss From Business, of the Form 1040, Individual Tax Return, and D’s baking business has average annual gross receipts for the 3-taxable years prior to 2019 of less than $100,000. D meets the gross receipts test of section 448(c) and is not prohibited from using the cash method under section 448(a)(3) in 2019. Therefore, D qualifies as a small business taxpayer under paragraph (b)(2) of this section. D uses the overall cash method, and the section 471(c) non-incidental materials and supplies method. D purchases $50 of peanut butter in November 2019. In December 2019, D uses all of the peanut butter to bake cookies available for immediate sale. D sells the peanut butter cookies to customers in January 2020. The peanut butter cookies are used or consumed under paragraph (b)(4)(i) of this section in January 2020 when the cookies are sold to customers, and D may recover the cost of the peanut butter in 2020. (5) AFS section 471(c) method—(i) In general. A taxpayer that meets the gross receipts test described in paragraph (b)(2) of this section and that has an AFS for such taxable year may use the AFS section 471(c) method described in this paragraph to account for its inventory costs for the taxable year. For purposes of the AFS section 471(c) method, an inventory cost is a cost that a taxpayer capitalizes to property produced or property acquired for resale in its AFS. However, an inventory cost does not include a cost that is neither deductible nor otherwise recoverable but for paragraph (b)(5) of this section, in whole or in part, under a provision of the Internal Revenue Code (for example, section 162(c), (e), (f), (g), or 274). In lieu of the inventory method described in section 471(a), a taxpayer using the AFS section 471(c) method recovers its inventory costs in accordance with the inventory method used in its AFS. (ii) Definition of AFS. The term AFS is defined in section 451(b)(3) and the accompanying regulations. See §1.451-3(c)(1). The rules relating to additional AFS issues provided in §1.451-3(h) apply to the AFS section 471(c) method. A taxpayer has an AFS for the taxable year if all of the taxpayer’s taxable year is covered by an AFS. (iii) Timing of inventory costs. Notwithstanding the timing rules used in the taxpayer’s AFS, the amount of any inventoriable cost may not be capitalized or otherwise taken into account for Federal income tax purposes any earlier than the taxable year during which the amount is paid or incurred under the taxpayer’s overall method of accounting, as described in §1.446-1(c)(1). For example, in the case of an accrual method taxpayer, inventoriable costs must satisfy the all events test, including economic performance, of section 461. See §1.446-1(c)(1)(ii) and section 461 and the accompanying regulations. (iv) Example. H is a calendar year C corporation that is engaged in the trade or business of selling office supplies and providing copier repair services. H meets the gross receipts test of section 448(c) and is not prohibited from using the cash method under section 448(a)(3) for 2019 or 2020. For Federal income tax purposes, H chooses to account for purchases and sales of inventory using an accrual method of accounting and for all other items using the cash method. For AFS purposes, H uses an overall accrual method of accounting. H uses the AFS section 471(c) method of accounting. In H’s 2019 AFS, H incurred $2 million in purchases of office supplies held for resale and recovered the $2 million as cost of goods sold. On January 5, 2020, H makes payment on $1.5 million of these office supplies. For purposes of the AFS section 471(c) method of accounting, H can recover the $2 million of office supplies in 2019 because the amount has been included in cost of goods sold in its AFS inventory method and section 461 has been satisfied. (6) Non-AFS section 471(c) method—(i) In general. A taxpayer that meets the gross receipts test described in paragraph (b)(2) of this section for a taxable year and that does not have an AFS, as defined in paragraph (b)(5)(ii) of this section, for such taxable year may use the non-AFS section 471(c) method to account for its inventories for the taxable year in accordance with this paragraph (b)(6). The non-AFS section 471(c) method is the method of accounting used for inventory in the taxpayer’s books and records that properly reflect its business activities for non-tax purposes and are prepared in accordance with the taxpayer’s accounting procedures. For purposes of the non-AFS section 471(c) method, an inventory cost is a cost that the taxpayer capitalizes to property produced or property acquired for resale in its books and records, except as provided in paragraph (b)(6)(ii) of this section. In lieu of the inventory method described in section 471(a), a taxpayer using the non-AFS section 471(c) method recovers its costs through its book inventory method of accounting. A taxpayer that has an AFS for such taxable year may not use the non-AFS section 471(c) method. (ii) Timing and amounts of costs. Notwithstanding the timing of costs reflected in the taxpayer’s books and records, a taxpayer may not deduct or recover any costs that have not been paid or incurred under the taxpayer’s overall method of accounting, as described in §1.446-1(c)(1), or that are neither deductible nor otherwise recoverable but for the application of this paragraph (b)(6), in whole or in part, under a provision of the Internal Revenue Code (for example, section 162(c), (e), (f), (g) or 274). For example, in the case of an accrual method taxpayer or a taxpayer using an accrual method for purchases and sales, inventory costs must satisfy the all events test, including economic performance, under section 461(h). See §1.446-1(c)(1)(ii), and section 461 and the accompanying regulations. (iii) Examples. The following examples illustrate the rules of paragraph (b)(6) of this section. (A) Example 1. Taxpayer E is a C corporation that is engaged in the retail trade or business of selling beer, wine, and liquor. In 2019, E has average annual gross receipts for the prior 3-taxable-years of less than $15 million, and is not otherwise prohibited from using the cash method under section 448(a)(3). E does not have an AFS for the 2019 taxable year. E is eligible to use the non-AFS section 471(c) method of accounting. E uses the overall cash method, and the non-AFS section 471(c) method of accounting for Federal income tax purposes. In E’s electronic bookkeeping software, E treats all costs paid during the taxable year as presently deductible. As part of its regular business practice, E’s employees take a physical count of inventory on E’s selling floor and its warehouse on December 31, 2019, and E also makes representations to its creditor of the amount of inventory on hand for specific categories of product it sells. E may not expense all of its costs paid during the 2019 taxable year because its books and records do not accurately reflect the inventory records used for non-tax purposes in its regular business activity. E must use the physical inventory count taken at the end of 2019 to determine its ending inventory. E may include in cost of goods sold for 2019 those inventory costs that are not properly allocated to ending inventory. (B) Example 2. F is a C corporation that is engaged in the manufacture of baseball bats. In 2019, F has average annual gross receipts for the prior 3-taxable-years of less than $25 million, and is not otherwise prohibited from using the cash method under section 448(a)(3). F does not have an AFS for the 2019 taxable year. For Federal income tax purposes, F uses the overall cash method of accounting, and the non-AFS section 471(c) method of accounting. For its books and records, F uses an overall accrual method and maintains inventories. In December 2019, F’s financial statements show $500,000 of direct and indirect material costs. F pays its supplier in January 2020. Under paragraph (b)(6)(ii) of this section, F recovers its direct and indirect material costs in 2020. (7) Effect of section 471(c) on other provisions. Nothing in section 471(c) shall have any effect on the application of any other provision of law that would otherwise apply, and no inference shall be drawn from section 471(c) with respect to the application of any such provision. For example, a taxpayer that includes inventory costs in its AFS is required to satisfy section 461 before such cost can be included in cost of goods sold for the taxable year. Similarly, nothing in section 471(c) affects the requirement under section 446(e) that a taxpayer secure the consent of the Commissioner before changing its method of accounting. If an item of income or expense is not treated consistently from year to year, that treatment may not clearly reflect income, notwithstanding the application of this section. (8) Method of accounting. A change in the method of treating inventory under this paragraph (b) is a change in method of accounting under section 446 and the accompanying regulations. A taxpayer may change its method of accounting only with the consent of the Commissioner as required under section 446(e) and §1.446-1. For example, if a taxpayer is using the AFS section 471(c) method or non-AFS section 471(c) method, and that taxpayer changes the method of accounting for inventory in its AFS, or its books and records, respectively, is required to secure the consent of the Commissioner before using this new method for Federal income tax purposes. However, a change from having an AFS to not having an AFS, or vice versa, without a change in the underlying method for inventory for financial reporting purposes is not a change in method of accounting under section 446(e). For rules relating to the clear reflection of income and the pattern of consistent treatment of an item, see section 446 and §1.446-1. (c) Applicability dates. This section applies for taxable years beginning on or after [date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register]. For taxable years beginning before January 1, 2018, see §1.471-1 as contained in 26 CFR part 1, revised April 1, 2019. Sunita Lough Deputy Commissioner of Services and Enforcement. (Filed by the Office of the Federal Register on July 30, 2020, 4:15 p.m., and published in the issue of the Federal Register for August 5, 2020, 85 F.R. 47508) Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the effect: Amplified describes a situation where no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the fact situation set forth therein. Thus, if an earlier ruling held that a principle applied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare with modified, below). Clarified is used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguished describes a situation where a ruling mentions a previously published ruling and points out an essential difference between them. Modified is used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare with amplified and clarified, above). Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revoked describes situations where the position in the previously published ruling is not correct and the correct position is being stated in a new ruling. Superseded describes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example, modified and superseded describes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously published ruling is first modified and then, as modified, is superseded. Supplemented is used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series. Suspended is used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. The following abbreviations in current use and formerly used will appear in material published in the Bulletin. A—Individual. Acq.—Acquiescence. B—Individual. BE—Beneficiary. BK—Bank. B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cumulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Cooperative. Ct.D.—Court Decision. CY—County. D—Decedent. DC—Dummy Corporation. DE—Donee. Del. Order—Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Employer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduciary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Foreign International Sales Company. FPH—Foreign Personal Holding Company. F.R.—Federal Register. FUTA—Federal Unemployment Tax Act. FX—Foreign corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grantee. GP—General Partner. GR—Grantor. IC—Insurance Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—Nonacquiescence. O—Organization. P—Parent Corporation. PHC—Personal Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Partnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Real Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsidiary. S.P.R.—Statement of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Transferee. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpayer. TR—Trust. TT—Trustee. U.S.C.—United States Code. X—Corporation. Y—Corporation. Z—Corporation. Bulletin 2020–34 2020-8 2020-32 I.R.B. 2020-32 244 2020-10 2020-33 I.R.B. 2020-33 385 2020-43 2020-27 I.R.B. 2020-27 1 2020-50 2020-28 I.R.B. 2020-28 35 Proposed Regulations: REG-119307-19 2020-28 I.R.B. 2020-28 44 REG-112339-19 2020-30 I.R.B. 2020-30 155 Revenue Procedures: Revenue Rulings: Treasury Decisions: 9899 2020-29 I.R.B. 2020-29 62 9900 2020-30 I.R.B. 2020-30 143 Treasury Decisions:—Continued 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2019–27 through 2019–52 is in Internal Revenue Bulletin 2019–52, dated December 27, 2019. The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletins are available at www.irs.gov/irb/. If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave. NW, IR-6230 Washington, DC 20224. Page Last Reviewed or Updated: 14-Aug-2020 About IRS Operations and Budget Tax Statistics Find a Local Office Taxpayer Bill of Rights Taxpayer Advocate Service Independent Office of Appeals IRS Notices and Letters Whistleblower Office U.S. Treasury Treasury Inspector General for Tax Administration

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professional_accounting

TAX / PERSONAL FINANCIAL PLANNING Valuing Art for Tax Purposes Beauty may be in the eye of the beholder, but art valuation requires reason and objectivity. BY ALAN BREUS Forensic and Valuation Services Even people who don’t collect art probably own a painting or sculpture or two. At some point, one of two things is likely to happen: One, the artwork will be given away, perhaps as a noncash charitable contribution for which the owner will claim an itemized deduction, or as a taxable gift. Or, two, it will wind up as part of the owner’s estate, the value of which may be subject to estate tax. In any case, if the item is worth more than $5,000, the IRS will require more than a casual listing of what the taxpayer originally paid for it or an uneducated guess as to its current value. And even the best-researched taxpayer appraisal could be countered by the IRS’ own appraisal, perhaps resulting in far different values. Thus it’s important for CPAs advising taxpayers in such circumstances to be familiar with the requirements for appraisals and IRS policies and procedures for valuing artwork. The amounts at stake are often high. In 2006, U.S. individual taxpayers claimed itemized deductions for charitable contributions of 147,896 items of art and collectibles worth more than $1.22 billion, more than the value of donated mutual funds (“Individual Noncash Contributions, 2006,” Statistics of Income Bulletin, Summer 2009). The average value of an artwork contribution, at $8,263, was much greater than for other tangible personal property, including vehicles. While the value of artwork and collectibles in taxable estates or those given as gifts subject to gift or generation-skipping transfer tax each year is unknown, it likely is many times greater than the amount claimed in income tax deductions for noncash contributions. Still other tax-related valuations crop up in the context of theft or casualty loss deductions. In all these circumstances, a qualified appraisal that can be successfully defended in a return examination is essential. CPAs may also be involved in valuing artwork in nontax situations, such as equitable division of property in a divorce or other settlement. While CPAs don’t necessarily need to be up on the finer points of the market for late 19th or early 20th century Impressionist paintings, they do need to be able to assess whether an art appraisal is needed and if it will likely pass muster with the IRS. In whatever context, tax-related appraisals determine fair market value, which is not necessarily the value that might be posted in a shop or gallery, since there is no certainty that an item would sell at the retail asking price. A record of sales of similar items (comparables) must be available from a gallery, auction house or by private sale memoranda to substantiate this valuation. Fair market value has occasionally relied on the income approach, where the object is either in the process of or can reasonably be expected to be leased or rented to a user by an institution or individual in the business of leasing or renting art. Fair market value is a gross valuation that includes all fees and sales commissions. IRS STATEMENT OF VALUE In certain situations where taxpayers need or desire a degree of certainty that the IRS will accept their art valuation before filing a return, they may have the IRS value it beforehand. As with a private letter ruling, taxpayers may rely on such a statement of value, as long as it is issued to them and not to another taxpayer and it does not reflect any misrepresentations or material inaccuracies on the part of the taxpayer. This process is available for items of art appraised at $50,000 or more that were or will be transferred as charitable contributions or included in the taxable value of an estate or taxable gift. The IRS may issue a statement for items appraised at less than $50,000 if the request includes at least one item appraised at $50,000 or more and the IRS determines that such a statement would be in the best interest of efficient tax administration. See Revenue Procedure 96-15 for full details; general requirements include a $2,500 filing fee for up to three items and $250 per each additional item. The request must include a taxpayer’s qualified appraisal and may not be submitted more than 60 days before a charitable donation or estate or gift valuation date. Taxpayers must attach the statement of value to the relevant return, whether or not the IRS agrees with their appraisal. The taxpayer may submit the return with a different value than that of the IRS statement but must include additional information supporting it. COMMON VALUATION ISSUES IN ART APPRAISAL Artwork valuations are reviewed by the IRS’ Office of Art Appraisal Services and may be referred to the Commissioner’s Art Advisory Panel. The Art Advisory Panel assists the IRS by reviewing and evaluating appraisals submitted in support of the fair market value claimed for works of art involved in income, estate and gift tax cases. All taxpayer cases selected for audit that contain artwork with a taxpayer-claimed appraised value of $20,000 or more per item must be referred to the panel (see Internal Revenue Manual §§ 4.48.2 and 8.18.1.3). The panel consists of 25 non-compensated art experts who are not told of the tax consequences, that is, whether an item is a charitable contribution (for which the taxpayer would benefit from a higher appraisal) or from an estate (for which the taxpayer would benefit from a lower appraisal). The panel’s determinations become the position of the IRS (see sidebar, “IRS Panel’s Valuation Often Differs From Taxpayers’,” below). CAUSES OF ART VALUATION DISPUTES WITH THE IRS Volatile markets. While the “old masters” continue to have a gradual and orderly increase in value, a significant number of contemporary prints, paintings and installations have fallen to less than half their value from previous years, with the current auction market having also lost 30% or more of its sales volume (more pieces are being left unsold at the auction block). Appraisers must be keenly aware of the market, for the sake of clients, as well as themselves, considering the penalties they could now face with the addition to the IRC of section 6695A by the Pension Protection Act of 2006. See “The Appraiser” later in this article. Authenticity. It’s not uncommon for a taxpayer and the IRS to disagree whether an artwork is genuine. Donors or CPAs are not necessarily expected to spot fakes, so they should, where indicated, check to see that the appraiser has consulted scholars, museum curators, dealers, auction houses, families of artists and catalogues raisonnés (a comprehensive list of works by an artist). The appraiser is required to make every reasonable effort to gather all available information relative to the appraised object. But in some cases, taxpayers, the IRS and courts have been unable to agree on whether a work is authentic. In George O. Doherty and Emelia A. Doherty v. Commissioner, 16 F.3d 338 (9th Cir., 1994), two of the foremost authorities on the paintings of Charles M. Russell could not resolve the question of authenticity of a donated painting. In 1969, the Dohertys bought “Attacking Stagecoach,” which may or may not have been painted by Russell, for $10,000. They donated an undivided 40% interest in the painting to the Charles M. Russell Museum in Great Falls, Mont., in tax year 1982 and the remaining 60% in tax year 1983. In those years, they claimed charitable contribution tax deductions in the amounts of $140,000 and $210,000. The IRS, backed by its expert, maintained that the painting was a forgery and worth only $100. The court noted that the credentials of the two sides’ experts were beyond question, yet they had reached different conclusions. The court said that it could not rule on authentication and concluded that the painting had a value of $30,000, recognizing the fact that even if the painting were authentic, the dispute had affected its fair market value. Many methods are available to determine and support declarations of authenticity, some of them highly scientific. An article in the Chronicle of Higher Education (Sept. 5, 2008) described the work of C. Richard Johnson Jr., a Cornell professor of electrical and computer engineering who has developed high-resolution scans of a painter’s work that allow appraisers to analyze features such as texture and brushstroke patterns. Also, carbon dating can support or rule out the credibility of many “old dynasty” Buddhas and other wooden icons or plant- or animal-based artifacts. Provenance and title. Appraisers and tax advisers shouldn’t overlook the necessity that the taxpayer possess a clear title of ownership for the art being donated, to show that it didn’t, for instance, mysteriously disappear from a gallery years ago. Owners have in many cases unwittingly purchased previously stolen artworks. In even less straightforward situations, art can also be subject to claims of cultural patrimony; for example, it might be claimed that an artwork was illegally imported, plundered from an archaeological site or even illegally seized by a government, such as works confiscated by the Nazi regime during the Holocaust. Again, it is not the responsibility of the appraiser to judge the validity of the dispute. However, if appraisers, while pursuing their due diligence, learn of such a claim, they must report it to the appropriate authorities and cease the appraisal process immediately. It is appropriate to check with the International Foundation for Art Research (ifar.org) and The Art Loss Register (artloss.com) if there is a questionable provenance or break in the chain of title. Blockage discount. The concept of a blockage discount in art is borrowed from business valuation. It describes the reduction in value when similar items are presented for sale at the same time. In art, the concept was first applied to the estate of artist David Smith, who left as part of his estate assets over 400 sculptures. The estate convinced the Tax Court that, as a group, the sculptures should be devalued, as there would not be enough ready and able buyers willing to pay full price if the items were offered for sale at the same time. The agreed-upon discount was 37%. Since that decision in 1975, the Service or the Tax Court has recognized blockage discounts of artworks for gift tax purposes (Calder v. Commissioner, 85 TC 713 (1985)). It was also applied in Estate of Georgia T. O’Keeffe v. Commissioner, TC Memo 1992-210. The executors of the artist’s estate sought a 75% discount for the artworks remaining in her estate under the rationale that, with their large number and range in values, monetizing the estate would result in “flooding the market,” thereby reducing their overall instant fair market value. The Service agreed with the estate’s undiscounted valuation of the remaining collection at $72.76 million but applied a much smaller discount based on a three-tiered formula developed by the Art Advisory Panel. The Service allowed no discount for works valued at more than $500,000; a 20% discount for works valued between $500,000 and $200,000; and a 50% discount on all other works in the estate. The court rejected this approach and came up with its own valuation of $36.4 million, for an overall discount of 50% of the agreed-upon collection’s value. THE APPRAISER For appraisals that result in a substantial tax valuation misstatement, substantial estate or gift tax undervaluation (within the meaning of section 6662(g)) or gross valuation misstatement (within the meaning of section 6662(h)), the appraiser can be liable for a penalty. The amount is the lesser of: (1) The greater of $1,000 or 10% of the amount of an underpayment attributable to the misstatement, or (2) 125% of the gross income received by the appraiser for preparing the appraisal. Although personal property appraising has no legally established licensure, the professional associations act as the general accrediting bodies, while amendments by the Pension Protection Act of 2006 heightened requirements for a qualified appraisal and appraiser for tax purposes (see “Life Insurance: What’s It Worth? (And Who Says?)” JofA, Jan. 2008, page 32). The appraisers of fine art who are most acceptable to insurance companies and the IRS carry credentials that they have earned through prescribed academic study, experience and apprenticeship, during which many of their appraisals have been peer-evaluated and examined. Upon completing this process they are awarded certification and membership in a professional association such as the Appraisers Association of America, the International Society of Appraisers or the American Society of Appraisers. All professional appraisal associations endorse the use of the Uniform Standards of Professional Appraisal Practice (USPAP). Qualified appraisals for tax purposes must be conducted in a manner “consistent with [USPAP’s] substance and principles” (IRS Notice 2006-96). These standards were developed by the Appraisal Foundation, in Washington, D.C., which oversees all appraisal disciplines, including real property, personal property and business valuation. It was founded in 1987 and was named by Congress in 1989 as the source for appraisal standards and appraiser qualifications in the aftermath of the savings and loan crisis. USPAP compliance is now required by all of the major fine arts appraisal associations, with a compulsory 15-hour course of study as well as required examinations with recertification every five years. APPRAISER FEES Most appraisal professionals set their fees on an hourly or per-diem basis. In most cases, the appraiser is able to give the client a broad idea of the time needed to complete the job. Professional appraisers may choose other methods of billing, such as on a per-object basis, but all professional associations prohibit their members from billing based on a percentage of the eventual appraised value of the piece or collection. Percentage billing is also prohibited by the IRS (Treas. Reg. § 1.170A-13(c)(6)). AN INFORMED DECISION The professional art and artifact appraiser must produce a complete analysis of artwork for tax purposes to establish its value and thus minimize the potential of an IRS challenge. The volatility and unpredictable nature of the art market, with its ever-changing tastes and styles, as well as price and value corrections, can make agreeing on a valuation challenging. However, understanding the appraisal process allows both the taxpayer who owns art and his or her CPA tax adviser the opportunity to make the most informed decision. IRS Panel’s Valuation Often Differs From Taxpayers’ In 2008, the most recent year for which a report is available (tinyurl.com/29o4vqg), the IRS Art Advisory Panel reviewed 179 cases involving 973 items with an aggregate taxpayer valuation of $230 million. The panel recommended acceptance of 41.4% of the appraisals reviewed and recommended adjustments of 56.2% of the appraisals. Another 2.4% of the reviewed items required postponement of a determination pending additional study by the panel’s staff. The panel reported aggregate results of its reviews for estate and gift cases separately from charitable deduction cases: Estate and Gift Cases The panel reviewed 803 total items with total taxpayer claims of $114.5 million. Of these, it concluded reviews of 782 items (percentages are of total estate and gift items): Reviews Concluded Taxpayers claimed ............... $110 million Panel recommended ............... $148.51 million Accepted 267 (33%) $54.1 million Adjusted 515 (64%) Adjusted up 456 (57%) $46.42 million to $88.47 million Difference: ............... $42.05 million Adjusted down 59 (7%) $9.5 million to $6 million ............... –$3.54 million The panel reviewed 170 total items with total taxpayer claims of $115.4 million. Of these, it concluded reviews of 168 items (percentages are of total charitable contribution items): Taxpayers claimed ............... $114.5 million Panel recommended ............... $114.7 million Adjusted 32 (19%) 10 (6%) $5.5 million to $14.6 million ............... $9.1 million 22 (13%) $17.49 million to $8.64 million Artworks are often donated for a charitable deduction for income tax purposes or valued as a gift or part of a taxable estate. CPAs need to make sure that clients have obtained a qualified appraisal of a fair market value that can be successfully defended in a return examination. For items of art valued at $50,000 or more, taxpayers may rely upon a statement of value from the IRS, in a procedure similar to that for obtaining a private letter ruling. Tax returns selected for audit that involve artwork with a taxpayer-claimed appraised value of $20,000 or more are reviewed by the IRS Art Advisory Panel of experts. The panel may accept the taxpayer’s qualified appraisal or recommend a different value. In 2008, the panel adjusted estate and gift valuations upward in the majority of the cases it considered, by an aggregate of 91% of taxpayer-submitted values. Causes of valuation disputes with the IRS can include art market volatility and questions of an artwork’s authenticity and legitimacy of its provenance. Also, the IRS has challenged blockage discounts applied by taxpayers to collections of artworks. As with other tax-related valuations of personal property, a qualified appraisal prepared by a qualified appraiser is essential. Credentials for fine art appraising usually include membership in a professional association and adherence to the substance and principles of the Uniform Standards of Professional Appraisal Practice. Alan Breus ([email protected]) is principal of The Breus Group of San Jose, Calif. To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at [email protected] or 919-402-4434. AICPA RESOURCES JofA article “Life Insurance: What’s It Worth? (And Who Says?)” Jan. 2008, page 32 Use journalofaccountancy.com to find past articles. In the search box, click “Open Advanced Search” and then search by title. CPE self-study Estate Planning Essentials: Tax Relief for Your Clients’ Estates (#745111) Advanced Estate Planning: Practical Strategies for Your Clients (#736981SNF) AICPA Advanced Estate Planning Conference, July 26–28, Washington, D.C. For more information or to make a purchase or register, go to cpa2biz.com or call the Institute at 888-777-7077. The Tax Adviser and Tax Section The Tax Adviser is available at a reduced subscription price to members of the Tax Section, which provides tools, technologies and peer interaction to CPAs with tax practices. More than 23,000 CPAs are Tax Section members. The Section keeps members up to date on tax legislative and regulatory developments. Visit the Tax Center at aicpa.org/tax. The current issue of The Tax Adviser is available at aicpa.org/pubs/taxadv. PFP Member Section and PFS credential Membership in the Personal Financial Planning (PFP) Section provides access to specialized resources in the area of personal financial planning, including complimentary access to Forefield Advisor. Visit the PFP Center at aicpa.org/PFP. Members with a specialization in personal financial planning may be interested in applying for the Personal Financial Specialist (PFS) credential. Information about the PFS credential is also available at aicpa.org/PFS. Find us on Facebook | Follow us on Twitter

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Analog Devices, Inc. Notice and Proxy Statement SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant x Filed by a Party other than the Registrant o Check the appropriate box: o Preliminary Proxy Statement x Definitive Proxy Statement o Definitive Additional Materials o Soliciting Material Under Rule 14a-12 o Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if Other Than the Registrant) Payment of Filing Fee (Check the appropriate box): x No fee required. o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: o Fee paid previously with preliminary materials: o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. 1) Amount previously paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: [ANALOG LOGO] Dear Stockholder: You are cordially invited to attend our Annual Meeting of Stockholders to be held at 10:00 a.m. on Tuesday, March 11, 2003, at the Hilton Hotel at Dedham Place, Dedham, Massachusetts. Fiscal 2002 was an extremely challenging year for the semiconductor industry and for Analog Devices. Despite the severity of economic conditions that we encountered, we are proud to report that we have emerged from 2002 a stronger company than when the downturn began approximately two years ago. Recognizing that new products are the fuel that will power ADI’s growth as the economy recovers, we have continued to fund our new product development programs at record levels throughout the downturn. We have selectively added talented engineers to our world-renowned design engineering teams, made critical infrastructure cost improvements, and continued to gain market share throughout this difficult industry environment. You can learn more about the actions we have taken to ensure our long-term competitiveness in this year’s Annual Report to Stockholders, which is enclosed with these proxy materials. The corporate governance practices of corporations have recently come under intense public scrutiny. We want to assure you that corporate governance has been, and continues to remain, an important area of focus for ADI’s senior executives and our Board of Directors. Over the past few months, we have taken several steps to further improve our governance practices. Information on these changes, as well as further information on our corporate governance practices, can be found on the investor relations section of our website at www.analog.com. In addition, we have nominated two highly qualified, experienced and independent individuals for election to our Board of Directors. We urge you to support these directors with your vote FOR their election. Upon their election, ADI will have an even stronger, more independent Board of Directors to represent your interests. We would also like to bring to your attention a stockholder proposal submitted by the United Brotherhood of Carpenters and Joiners of America. They have proposed that the Board of Directors establish a policy of expensing in ADI’s annual income statement all future stock options issued by ADI. For the reasons set forth in more detail in the body of the accompanying proxy statement, we urge you to support your directors’ unanimous recommendation against approval of the stockholder proposal. Please carefully review the attached proxy materials and take the time to cast your vote. [-s- RAY STATA] [-s- JERALD G. FISHMAN] Ray Stata Chairman of the Board Jerald G. Fishman President and Chief Executive Officer ONE TECHNOLOGY WAY NORWOOD, MASSACHUSETTS 02062-9106 NOTICE OF 2003 ANNUAL MEETING OF STOCKHOLDERS To Be Held On March 11, 2003 To our Stockholders: The 2003 Annual Meeting of Stockholders of Analog Devices, Inc. will be held at the Hilton at Dedham Place, 25 Allied Drive, Dedham, Massachusetts 02026, on Tuesday, March 11, 2003 at 10:00 a.m. local time. At the meeting, stockholders will consider and vote on the following matters: 1. The election of three members to our Board of Directors to serve as Class I directors, each for a term of three years. 2. The ratification of the selection by our directors of Ernst & Young LLP as our independent auditors for the 2003 fiscal year. 3. The consideration of the stockholder proposal described in the accompanying proxy statement. The stockholders will also act on any other business that may properly come before the meeting. Stockholders of record at the close of business on January 24, 2003 are entitled to vote at the meeting. Your vote is important regardless of the number of shares you own. Whether you expect to attend the meeting or not, please complete, sign, date and promptly return the enclosed proxy card in the postage-prepaid envelope we have provided. You can also authorize the voting of your shares over the Internet or by telephone as provided in the instructions set forth on the proxy card. Your prompt response is necessary to assure that your shares are represented at the meeting. You can change your vote and revoke your proxy at any time before the polls close at the meeting by following the procedures described in the accompanying proxy statement. All stockholders are cordially invited to attend the meeting. By order of the Board of Directors, MARK G. BORDEN PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS INFORMATION ABOUT THE ANNUAL MEETING AND VOTING What is the purpose of the annual meeting? Who can vote? How many votes do I have? Is my vote important? How can I vote? Can I change my vote after I have mailed my proxy card or after I have authorized the voting of my shares over the Internet or by telephone? Can I vote if my shares are held in “street name”? How do I vote my 401(k) shares? What constitutes a quorum? What vote is required for each item? How will votes be counted? Who will count the votes? Will my vote be kept confidential? How does the Board of Directors recommend that I vote on the proposals? Will any other business be conducted at the meeting or will other matters be voted on? Where can I find the voting results? How and when may I submit a stockholder proposal for the 2004 annual meeting? What are the costs of soliciting these proxies? How can I obtain an Annual Report on Form 10-K? Whom should I contact if I have any questions? Householding of Annual Meeting Materials Security Ownership of Certain Beneficial Owners and Management Section 16(a) Beneficial Ownership Reporting Compliance PROPOSAL 1 -- ELECTION OF DIRECTORS Nominees for Class I Directors (Terms to Expire at the 2006 Annual Meeting) Class II Directors (Terms Expire at the 2004 Annual Meeting) Class III Directors (Terms Expire at the 2005 Annual Meeting) Retiring Directors Board of Directors Meetings and Committees Nominating and Corporate Governance Committee Report of the Audit Committee Independent Auditors Fees and Other Matters Financial Information Systems Design and Implementation Fees All Other Fees Directors’ Compensation Certain Relationships and Related Transactions INFORMATION ABOUT EXECUTIVE COMPENSATION Summary Compensation Option Grants in Fiscal 2002 Aggregated Option Exercises During Fiscal 2002 and Fiscal Year-End Option Values Option Program Description Securities Authorized for Issuance Under Equity Compensation Plans 2001 Broad-Based Stock Option Plan Severance and Other Agreements Deferred Compensation Plan Report of the Compensation Committee Compensation Philosophy Executive Compensation Program Chief Executive Officer Fiscal 2002 Compensation Compliance with Internal Revenue Code Section 162(m) Compensation Committee Interlocks and Insider Participation Comparative Stock Performance Graph PROPOSAL 2 -- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS PROPOSAL 3 -- STOCKHOLDER PROPOSAL TO ESTABLISH A POLICY OF EXPENSING FUTURE STOCK OPTION GRANTS Union’s Supporting Statement Board of Directors’ Response ELECTRONIC VOTING APPENDIX A AUDIT COMMITTEE CHARTER PROXY CARD PROPOSAL 1 — ELECTION OF DIRECTORS PROPOSAL 2 — RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS PROPOSAL 3 — STOCKHOLDER PROPOSAL TO ESTABLISH A POLICY OF EXPENSING FUTURE STOCK OPTION GRANTS APPENDIX A — AUDIT COMMITTEE CHARTER This proxy statement contains information about the 2003 Annual Meeting of Stockholders of Analog Devices, Inc. The meeting is scheduled to be held on Tuesday, March 11, 2003, beginning at 10:00 a.m. local time, at the Hilton at Dedham Place, 25 Allied Drive, Dedham, Massachusetts, 02026. This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Analog Devices for use at the annual meeting and at any adjournment of that meeting. All proxies will be voted in accordance with the instructions they contain. If no instruction is specified on a proxy it will be voted in favor of Proposals 1 and 2 and against Proposal 3 set forth in the notice of the meeting. A stockholder may revoke any proxy at any time before it is exercised by giving our clerk written notice to that effect. Our Annual Report to Stockholders for the fiscal year ended November 2, 2002 is being mailed to stockholders with the mailing of these proxy materials on or about February 7, 2003. A copy of our Annual Report on Form 10-K for the fiscal year ended November 2, 2002 as filed with the Securities and Exchange Commission, except for exhibits, will be furnished without charge to any stockholder upon written or oral request to Analog Devices, Inc., Attention of Maria Tagliaferro, Director, Corporate Communications, Analog Devices, Inc., One Technology Way, Norwood, MA 02062; telephone: 781-461-3282. We sometimes refer to Analog Devices, Inc. in this proxy statement as Analog Devices or ADI. At the annual meeting, stockholders will consider and vote on the following matters: 3. The consideration of one stockholder proposal. To be able to vote, you must have been a stockholder of record at the close of business on January 24, 2003. This date is the record date for the annual meeting. Stockholders of record at the close of business on January 24, 2003 are entitled to vote at the annual meeting. The number of outstanding shares entitled to vote at the meeting is 364,015,486 shares of our common stock. Each share of our common stock that you owned on the record date entitles you to one vote on each matter that is voted on. Your vote is important regardless of how many shares you own. Please take the time to vote. Take a moment to read the instructions below. Choose the way to vote that is easiest and most convenient for you and cast your vote as soon as possible. You can vote in one of four ways. You can vote by mail, you can authorize the voting of your shares over the Internet, you can authorize the voting of your shares by telephone or you can vote in person at the meeting. You may vote by mail. You may vote by completing and signing the proxy card that accompanies this proxy statement and promptly mailing it in the enclosed postage-prepaid envelope. You do not need to put a stamp on the enclosed envelope if you mail it in the United States. The shares you own will be voted according to the instructions on the proxy card you mail. If you return the proxy card, but do not give any instructions on a particular matter described in this proxy statement, the shares you own will be voted in accordance with the recommendations of our Board of Directors. Your Board of Directors recommends that you vote FOR Proposals 1 and 2 and AGAINST Proposal 3. You may vote over the Internet. If you have Internet access, you may authorize the voting of your shares from any location in the world by following the “Vote-by-Internet” instructions set forth on the enclosed proxy card. You may vote by telephone. You may authorize the voting of your shares by following the “Vote-by-Telephone” instructions set forth on the enclosed proxy card. You may vote in person. If you attend the meeting, you may vote by delivering your completed proxy card in person or you may vote by completing a ballot. Ballots will be available at the meeting. Yes. You can change your vote and revoke your proxy at any time before the polls close at the meeting by doing any one of the following things: • signing another proxy with a later date; • giving our clerk a written notice before or at the meeting that you want to revoke your proxy; or • voting in person at the meeting. Your attendance at the meeting alone will not revoke your proxy. If the shares you own are held in “street name” by a bank or brokerage firm, your bank or brokerage firm, as the record holder of your shares, is required to vote your shares according to your instructions. In order to vote your shares, you will need to follow the directions your bank or brokerage firm provides you. Many banks and brokerage firms also offer the option of voting over the Internet or by telephone, instructions for which would be provided by your bank or brokerage firm on your vote instruction form. Under the rules of the New York Stock Exchange, if you do not give instructions to your bank or brokerage firm, it will still be able to vote your shares with respect to certain “discretionary” items, but will not be allowed to vote your shares with respect to certain “non-discretionary” items. In the case of non-discretionary items, the shares will be treated as “broker non-votes.” If your shares are held in street name, you must bring an account statement or letter from your brokerage firm or bank showing that you are the beneficial owner of the shares as of the record date in order to be admitted to the meeting on March 11, 2003. To be able to vote your shares held in street name at the meeting, you will need to obtain a proxy card from the holder of record. If you participate in The Investment Partnership of Analog Devices, you may vote an amount of shares of common stock equivalent to the interest in our common stock credited to your account as of the record date. Fidelity Management Trust Company will send you a proxy card that identifies the number of shares of our common stock in the Analog Devices Stock Fund that you may direct Fidelity to vote on your behalf. The proxy card should be signed and returned in the enclosed envelope to EquiServe Trust Company, N.A., our transfer agent and registrar. EquiServe Trust Company, N.A. will notify Fidelity of the manner in which you have voted your shares on the proxy card. Fidelity will vote the shares in the manner directed on the proxy card. If EquiServe Trust Company, N.A. does not receive a signed proxy card from you by 5:00 p.m. eastern standard time on March 6, 2003, there can be no assurance that Fidelity will be able to follow your instructions. If you fail to timely submit your proxy card to EquiServe Trust Company, N.A., Fidelity will vote your shares of common stock held in the Analog Devices Stock Fund in the same manner, proportionally, as it votes the other shares of common stock for which proper and timely voting instructions of other plan participants have been received by Fidelity. In order for business to be conducted at the meeting, a quorum must be present. A quorum consists of the holders of a majority of the shares of common stock issued, outstanding and entitled to vote at the meeting, or at least 182,007,744 shares. Shares of common stock represented in person or by proxy (including “broker non-votes” and shares that abstain or do not vote with respect to one or more of the matters to be voted upon) will be counted for the purpose of determining whether a quorum exists. “Broker non-votes” are shares that are held in “street name” by a bank or brokerage firm that indicates on its proxy that it does not have discretionary authority to vote on a particular matter. If a quorum is not present, the meeting will be adjourned until a quorum is obtained. Election of directors. The three nominees receiving the highest number of votes cast at the meeting will be elected, regardless of whether that number represents a majority of the votes cast. Other matters. The affirmative vote of a majority of the total number of votes cast at the meeting is needed to approve other matters to be voted on at the meeting. Each share of common stock will be counted as one vote according to the instructions contained on a proper proxy card, whether executed by you directly or through Internet or telephonic authorization, or on a ballot voted in person at the meeting. Shares will not be voted in favor of a matter, and will not be counted as voting on a matter, if they either (1) abstain from voting on a particular matter, or (2) are broker non-votes. As a result, abstentions and broker non-votes will have no effect on the outcome of voting at the meeting. The votes will be counted, tabulated and certified by our transfer agent and registrar, EquiServe Trust Company, N.A. A representative of EquiServe Trust Company, N.A. will serve as the inspector of elections at the meeting. Yes, your vote will be kept confidential and we will not disclose your vote, unless (1) we are required to do so by law (including in connection with the pursuit or defense of a legal or administrative action or proceeding), or (2) there is a contested election for the Board of Directors. The inspector of elections will forward any written comments that you make on the proxy card to management without providing your name, unless you expressly request disclosure on your proxy card. Your Board of Directors recommends that you vote: FOR the election of the three nominees to serve as Class I directors on the Board of Directors, each for a term of three years; FOR the ratification of the selection by our directors of Ernst & Young LLP as our independent auditors for the 2003 fiscal year; and AGAINST approval of the stockholder proposal. The Board of Directors does not know of any other matters that may come before the meeting. Under our by-laws, the deadline for stockholders to notify us of any proposals or nominations for director to be presented for action at the annual meeting has passed. If any other matter properly comes before the meeting, the persons named in the proxy card that accompanies this proxy statement, whether executed by you directly or through Internet or telephonic authorization, will exercise their judgment in deciding how to vote, or otherwise act, at the meeting with respect to that matter or proposal. We will report the voting results in our quarterly report on Form 10-Q for the second quarter of fiscal 2003, which we expect to file with the Securities and Exchange Commission in June 2003. If you are interested in submitting a proposal for inclusion in the proxy statement for the 2004 annual meeting, you need to follow the procedures outlined in Rule 14a-8 of the Securities Exchange Act of 1934. To be eligible for inclusion, we must receive your stockholder proposal intended for inclusion in the proxy statement for the 2004 annual meeting of stockholders at our principal corporate offices in Norwood, Massachusetts as set forth below no later than October 10, 2003. If a stockholder wishes to present a proposal before the 2004 annual meeting of stockholders, but does not wish to have the proposal considered for inclusion in the proxy statement and proxy card, the stockholder must also give written notice to us at the address noted below. The required notice must be given by December 24, 2003. If a stockholder fails to provide timely notice of a proposal to be presented at the 2004 annual meeting of stockholders, the proxies designated by our Board of Directors will have discretionary authority to vote on that proposal. Any proposals or notices should be sent to: Maria Tagliaferro Email: [email protected] We will bear the costs of solicitation of proxies. We have engaged Georgeson Shareholder Communications, Inc. to assist us with the solicitation of proxies. We expect to pay Georgeson less than $15,000 for their services. In addition to solicitations by mail, Georgeson and our directors, officers and regular employees may solicit proxies by telephone, email and personal interviews without additional remuneration. Brokers, custodians and fiduciaries will be requested to forward proxy soliciting material to the owners of shares of our common stock they hold in their names. We will reimburse banks and brokers for their reasonable out-of-pocket expenses incurred in connection with the distribution of proxy materials. Our annual report is available on our website at www.analog.com. If you would like a copy of our annual report on Form 10-K for the fiscal year ended November 2, 2002, we will send you one without charge. Please contact: If you have any questions about the annual meeting or your ownership of our common stock, please contact Maria Tagliaferro, our director of corporate communications, at the address or telephone number listed above. Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of our proxy statement and annual report to stockholders may have been sent to multiple stockholders in your household. We will promptly deliver a separate copy of either document to you if you call or write us at the following address or telephone number: Investor Relations Department, Analog Devices, Inc., One Technology Way, Norwood, Massachusetts 02062, telephone: 781-461-3282. If you want to receive separate copies of the proxy statement or annual report to stockholders in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker, or other nominee record holder, or you may contact us at the above address and telephone number. The following table contains information regarding the beneficial ownership of our common stock as of December 31, 2002 by: • the stockholders we know to beneficially own more than 5% of our outstanding common stock; • each director and nominee for director; • each executive officer named in the Summary Compensation Table; and • all of our directors, nominees for director and executive officers as a group. Percent of Number of Shares Common Shares Acquirable Total Stock Name and Address of Beneficially Within Beneficial Beneficially Beneficial Owner(1) Owned(2) 60 Days(3) Ownership Owned(4) 5% Stockholders: FMR Corp.(5) 52,801,890 0 52,801,890 14.5 % Massachusetts Financial Services Company(6) 22,847,565 0 22,847,565 6.3 % 500 Boylston Street Directors, Nominees for Director and Executive Officers: James A. Champy 0 0 0 * John L. Doyle 16,528 128,484 145,012 * Jerald G. Fishman Charles O. Holliday, Jr. 440 58,484 58,924 * Joel Moses(7) 7,896 58,484 66,380 * F. Grant Saviers 0 65,484 65,484 * Kenton J. Sicchitano Ray Stata(8) 5,200,435 268,623 5,469,058 1.5 % Lester C. Thurow Samuel H. Fuller Brian P. McAloon Joseph E. McDonough Franklin Weigold 103,831 39,020 142,851 * All directors, nominees for director and executive officers as a group (18 persons, consisting of 11 officers, 5 non-employee directors and 2 non-employee director nominees)(9) 5,729,012 2,880,712 8,609,724 2.4 % * Less than 1% of the outstanding common stock. (1) Unless otherwise indicated, the address of each beneficial owner listed is c/o Analog Devices, Inc., One Technology Way, Norwood, MA 02062. (2) For each person, the “Number of Shares Beneficially Owned” column may include shares of common stock attributable to the person because of that person’s voting or investment power or other relationship. (3) The number of shares of common stock beneficially owned by each person is determined under rules promulgated by the Securities and Exchange Commission, or SEC. Under these rules, a person is deemed to have “beneficial ownership” of any shares over which that person has or shares voting or investment power, plus any shares that the person may acquire within 60 days, including through the exercise of stock options. For each person named in the table, the number in the “Shares Acquirable Within 60 Days” column consists of shares covered by stock options that may be exercised within 60 days after December 31, 2002. Unless otherwise indicated, each person in the table has sole voting and investment power over the shares listed. The inclusion in the table of any shares, however, does not constitute an admission of beneficial ownership of those shares by the named stockholder. (4) The percent ownership for each stockholder on December 31, 2002 is calculated by dividing (1) the total number of shares beneficially owned by the stockholder by (2) 363,754,360 shares plus any shares acquirable (including stock options exercisable) by that stockholder within 60 days after December 31, 2002. (5) FMR Corp., or FMR, filed with the SEC on November 14, 2002 a Form 13F-HR reporting the above stock ownership as of September 30, 2002. FMR reports that it has sole voting authority with respect to 4,254,889 shares and shared investment discretion with each of Fidelity Management & Research Company and FMR Co., Inc. with respect to 48,700,151 shares, shared investment discretion with Fidelity Management Trust Company with respect to 4,100,070 shares, shared investment discretion with Strategic Advisers Incorporated with respect to 400 shares, and shared investment discretion with Fidelity Investors Management, LLC with respect to 1,269 shares. (6) Massachusetts Financial Services Company, or MFS, filed with the SEC on November 14, 2002 a Form 13F-HR reporting the above stock ownership as of September 30, 2002. MFS reports that it has sole voting authority with respect to 21,565,999 shares. MFS also reports that it has sole investment discretion with respect to 22,683,295 shares and shared investment discretion with respect to 164,270 shares. (7) Includes 650 shares held by Mr. Moses’ wife, as to which Mr. Moses disclaims beneficial ownership. (8) Includes 1,145,709 shares held by Mr. Stata’s wife and 593,756 shares held in charitable trusts for the benefit of Mr. Stata’s children, as to which Mr. Stata disclaims beneficial ownership. Also includes 2,514,588 shares held in charitable lead trusts. (9) All beneficial owners as a group disclaim beneficial ownership of a total of 1,740,115 shares. Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and the holders of more than 10% of our common stock to file with the SEC initial reports of ownership of our common stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Officers, directors and 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of our records and written representations by the persons required to file these reports, all filing requirements of Section 16(a) were satisfied with respect to our most recent fiscal year. Our Board of Directors is divided into three classes, with one class being elected each year and members of each class holding office for a three-year term. Our Board of Directors currently consists of seven members, three of whom are Class I directors (with terms expiring at the 2003 annual meeting), two of whom are Class II directors (with terms expiring at the 2004 annual meeting), and two of whom are Class III directors (with terms expiring at the 2005 annual meeting). At the 2003 annual meeting, stockholders will have an opportunity to vote for the nominees for Class I directors, James A. Champy, Kenton J. Sicchitano and Lester C. Thurow. Mr. Thurow is currently serving as a Class I director and has been a director since 1988. Joel Moses, a director of Analog Devices since 1982, and Charles O. Holliday, Jr., a director of Analog Devices since 1997, are retiring from our Board of Directors, and therefore are not standing for re-election. Mr. Champy and Mr. Sicchitano have been nominated for election to fill the vacancies resulting from Messrs. Moses and Holliday’s retirement from our Board of Directors. The persons named in the enclosed proxy card will vote to elect these three nominees as Class I directors, unless you withhold authority to vote for the election of any or all nominees by marking the proxy card (whether executed by you or through Internet or telephonic voting) to that effect. Each of the nominees has indicated his willingness to serve, if elected. However, if any of the nominees should be unable or unwilling to serve, the proxies may be voted for a substitute nominee designated by our Board of Directors or our Board of Directors may reduce the number of directors. The following table and paragraphs provide information as of the date of this proxy statement about each member of our Board of Directors, including the nominees for Class I directors. The information presented includes information each director has given us about his age, all positions he holds with us, his principal occupation and business experience for the past five years, and the names of other publicly held companies of which he serves as a director. Information about the number of shares of common stock beneficially owned by each director, directly or indirectly, as of December 31, 2002, appears under the heading “Security Ownership of Certain Beneficial Owners and Management.” There are no family relationships among any of the directors, nominees for director and executive officers of Analog. JAMES A. CHAMPY, Director Nominee Mr. Champy, age 60, has been a Vice President and director of Perot Systems Corporation, a technology services and business solutions company, since 1996. Mr. Champy also serves as a trustee of the Massachusetts Institute of Technology, commonly known as MIT. KENTON J. SICCHITANO, Director Nominee Mr. Sicchitano, age 58, has been retired since June 2001. He joined Price Waterhouse LLP, a predecessor firm of PricewaterhouseCoopers LLP, in 1970 and became a partner in 1979. PricewaterhouseCoopers LLP, or PwC, is a public accounting firm. At the time of his retirement, Mr. Sicchitano was the Global Managing Partner of Independence and Regulatory Matters for PwC. During his thirty-year tenure with PwC, Mr. Sicchitano held various positions including the Global Managing Partner of Audit/ Business Advisory Services and the Global Managing Partner responsible for Audit/ Business Advisory, Tax/ Legal and Financial Advisory Services. Mr. Sicchitano also serves as a director of PerkinElmer, Inc. At various times from 1986 to 1995, he served as a director and/or officer of a number of not-for-profit organizations, including President of the Harvard Business School Association of Boston, Treasurer of the Harvard Club of Boston, Board of Directors, Harvard Alumni Association, Board of Directors and Chair of Finance Committee, New England Deaconess Hospital and Board of Directors, New England Aquarium. Mr. Sicchitano is a Certified Public Accountant. LESTER C. THUROW, Director since 1988 Mr. Thurow, age 64, has been a Professor of Management and Economics at MIT since 1968 and, from 1987 to 1993, was the Dean of MIT’s Sloan School of Management. Mr. Thurow also serves as a director of E*TRADE Group, Inc. and Taiwan Semiconductor Manufacturing Company. Our Board of Directors recommends that you vote FOR the election of Messrs. Champy, Sicchitano and Thurow. JERALD G. FISHMAN, President and Chief Executive Officer; Director since 1991 Mr. Fishman, age 57, has been our President and Chief Executive Officer since November 1996 and he served as our President and Chief Operating Officer from November 1991 to November 1996. Mr. Fishman served as our Executive Vice President from 1988 to November 1991. He served as our Group Vice President-Components from 1982 to 1988. Mr. Fishman also serves as a director of Cognex Corporation and Xilinx Corporation. F. GRANT SAVIERS, Director since 1997 Mr. Saviers, age 58, has been retired since August 1998. He served as Chairman of the Board of Adaptec, Inc., a provider of high-performance input/output products , from August 1997 to August 1998, President and Chief Executive Officer of Adaptec from July 1995 to August 1998, and President and Chief Operating Officer of Adaptec from August 1992 to July 1995. Prior to joining Adaptec, Mr. Saviers was employed with Digital Equipment Corporation, a computer manufacturer, for more than five years, last serving as Vice President of its Personal Computer and Peripherals Operation. Mr. Saviers also serves as a director of Chaparral Network Storage, Inc. JOHN L. DOYLE, Director since 1987 Mr. Doyle, age 71, has been self-employed as a technical consultant since January 1995. He was employed formerly by the Hewlett-Packard Company where he served as the Executive Vice President of Business Development from 1988 through 1991, Executive Vice President, Systems Technology Sector from 1986 to 1988, Executive Vice President, Information Systems and Networks from 1984 to 1986, and Vice President, Research and Development, from 1981 to 1984. Mr. Doyle was Co-Chief Executive Officer of Hexcel Corp., a provider of advanced structural materials, from July 1993 to December 1993. Mr. Doyle also serves as a director of DuPont Photomasks, Inc., Xilinx, Inc. and DURECT Corporation. RAY STATA, Chairman of the Board of Directors; Director since 1965 Mr. Stata, age 68, has served as our Chairman of the Board of Directors since 1973, as our Chief Executive Officer from 1973 to November 1996 and as our President from 1971 to November 1991. Mr. Stata also serves as a trustee of MIT, and as a director of Axiowave Networks, Inc. CHARLES O. HOLLIDAY, JR., Director since 1997 Mr. Holliday, age 54, has been Chairman of the Board and Chief Executive Officer of E.I. DuPont de Nemours & Co, Inc., or DuPont, a provider of science-based solutions, since January 1999, and has served as Chief Executive Officer of DuPont since February 1998. Mr. Holliday served as President of DuPont from December 1997 to December 1998, Chairman of DuPont, Asia Pacific from July 1995 to November 1997, and as President of DuPont, Asia Pacific from November 1990 to October 1995. He was Senior Vice President of DuPont from November 1992 to October 1995. From 1970 through November 1990, Mr. Holliday served in a number of positions with DuPont, including Executive Vice President of DuPont, Asia Pacific and global business manager of certain product lines. JOEL MOSES, Director since 1982 Mr. Moses, age 61, has been Institute Professor, Professor of Computer Science and Engineering Systems, at MIT since 1999. Mr. Moses was the Provost of MIT from June 1995 to August 1998, and Dean of the School of Engineering at MIT from January 1991 to June 1995. He was a Visiting Professor of Business Administration at Harvard University from September 1989 to June 1990. Mr. Moses was the Head of the Department of Electrical Engineering and Computer Science at MIT from 1981 to 1989. We have long believed that good corporate governance is important to ensure that Analog Devices is managed for the long-term benefit of its stockholders. During the past year, we have been reviewing our corporate governance policies and practices and comparing them to those suggested by various authorities in corporate governance and the practices of other public companies. We have also been reviewing the provisions of the Sarbanes-Oxley Act of 2002, the new and proposed rules of the Securities and Exchange Commission and the proposed new listing standards of the New York Stock Exchange. Based on our review, we have taken steps to implement voluntarily many of the proposed new rules and listing standards. In particular, we have: • adopted Corporate Governance Guidelines, • reconstituted our Nominating Committee as the Nominating and Corporate Governance Committee and adopted a new charter for this committee, • adopted new charters for our Audit Committee and Compensation Committee, • nominated for election two new directors, each of whom qualifies as an “independent” director under our Corporate Governance Guidelines and one of whom also qualifies as an “audit committee financial expert” under the new rules of the Securities and Exchange Commission, and • amended our Code of Business Conduct and Ethics, which applies to all officers, directors and employees. You can access our current committee charters, Corporate Governance Guidelines and Code of Business Conduct and Ethics in the “Corporate Governance” section of www.analog.com or by writing to: The Board of Directors has responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The Board’s primary responsibility is to oversee the management of the company and, in so doing, serve the best interests of the company and its stockholders. The Board selects, evaluates and provides for the succession of executive officers and, subject to stockholder election, directors. It reviews and approves corporate objectives and strategies, and evaluates significant policies and proposed major commitments of corporate resources. It participates in decisions that have a potential major economic impact on Analog Devices. Management keeps the directors informed of company activity through regular written reports and presentations at Board and committee meetings. The Board of Directors met six times in fiscal 2002 (including two teleconference meetings). During fiscal 2002, each of our directors that served as a director during fiscal year 2002 attended 75% or more of the total number of meetings of the Board of Directors and the committees of which such director was a member. The Board has standing Audit, Compensation and Nominating and Corporate Governance Committees. Each committee has a charter that has been approved by the Board. Each committee must review the appropriateness of its charter at least annually. Messrs. Stata and Fishman are the only directors who are also employees of Analog Devices. They do not participate in any meeting at which their compensation is evaluated. All members of all committees are non-employee directors, except Mr. Stata, who was a member of our former Nominating Committee from June 1996 to December 2002. The current members of our Audit Committee are Messrs. Doyle, Moses and Thurow. Mr. Moses has informed us that he will resign from our Board of Directors effective as of March 11, 2003. We expect that Mr. Sicchitano will join the Audit Committee as of March 11, 2003, and that Mr. Sicchitano will qualify as an “audit committee financial expert” under the new rules of the Securities and Exchange Commission. Each of Messrs. Doyle, Moses, Sicchitano and Thurow is an “independent director” under the rules of the New York Stock Exchange governing the qualifications of the members of audit committees. The Audit Committee met eight times during fiscal 2002 (including five teleconference meetings). The responsibilities of our Audit Committee and its activities during fiscal 2002 are described in the Report of the Audit Committee contained in this proxy statement. The current members of the Compensation Committee are Messrs. Holliday and Saviers. Mr. Holliday has informed us that he will resign from our Board of Directors effective as of March 11, 2003. We expect that Mr. Champy will join the Compensation Committee as of March 11, 2003. Our Compensation Committee held four meetings during the fiscal year ended November 2, 2002. In addition, the Compensation Committee evaluates and sets the compensation of our Chief Executive Officer. The Compensation Committee makes recommendations to our Board of Directors regarding the salaries and bonuses of our executive officers. The Compensation Committee also grants stock options and other stock incentives (within guidelines established by our Board of Directors) to our officers and employees. The responsibilities of our Compensation Committee and its activities during fiscal 2002 are described in the Report of the Compensation Committee contained in this proxy statement. Effective December 2002, our Board of Directors voted to reconstitute the Nominating Committee as the Nominating and Corporate Governance Committee. The sole member of the Nominating and Corporate Governance Committee is Mr. Doyle. We expect that Mr. Champy will join the Nominating and Corporate Governance Committee as of March 11, 2003. The purpose of the Nominating and Corporate Governance Committee is to identify individuals qualified to become Board members, recommend to the Board the persons to be nominated by the Board for election as directors at the annual meeting of stockholders, develop and recommend to the Board a set of corporate governance principles and oversee the evaluation of the Board and management. The Nominating and Corporate Governance Committee will consider for nomination to the Board of Directors candidates suggested by the stockholders, provided that such recommendations are delivered to us, with an appropriate biographical summary, no later than the deadline for submission of stockholder proposals. See “Information About the Annual Meeting and Voting — How and when may I submit a stockholder proposal for the 2004 annual meeting?” The members of the former Nominating Committee during the fiscal year ended November 2, 2002 were Messrs. Doyle and Stata. Our former Nominating Committee held several informal meetings during the fiscal year ended November 2, 2002, and held formal meetings in December 2002 and January 2003 to discuss nominees for election as directors at the annual meeting. The Audit Committee of the Board of Directors is responsible for providing independent, objective oversight of Analog’s accounting functions and internal controls. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal control. The Audit Committee oversees our financial reporting process on behalf of our Board of Directors, reviews our financial disclosures, and meets privately, outside the presence of our management, with our independent auditors to discuss our internal accounting control policies and procedures. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements in the Annual Report on Form 10-K with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. The Audit Committee reports on these meetings to our Board of Directors. The Audit Committee also considers and recommends the selection of our independent auditors, reviews the performance of the independent auditors in the annual audit and in assignments unrelated to the audit, and reviews the independent auditors’ fees. The Audit Committee operates under a written charter adopted by our Board of Directors that is attached as Appendix A to this proxy statement. The Audit Committee is composed of three non-employee directors, each of whom is an “independent director” under the rules of the New York Stock Exchange governing the qualifications of the members of audit committees. Mr. Moses, currently a member of the Audit Committee, has informed us that he intends to resign from our Board of Directors effective March 11, 2003. We expect that Mr. Sicchitano will join the Audit Committee as of March 11, 2003, and that Mr. Sicchitano will qualify as an “audit committee financial expert” under the new rules of the Securities and Exchange Commission. The Audit Committee held eight meetings (including five teleconference meetings) during the fiscal year ended November 2, 2002. The meetings were designed to facilitate and encourage communication between members of the Audit Committee and management as well as private communication between the members of the Audit Committee, our internal auditors, and our independent public auditors, Ernst & Young LLP. The Audit Committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of the audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of our accounting principles and such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards. In addition, the Audit Committee has discussed with the independent auditors the auditors’ independence from Analog Devices and its management, including the matters in the written disclosures we received from the auditors as required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and considered the compatibility of non-audit services with the auditors’ independence. Based on its review and discussions, the Audit Committee recommended to our Board of Directors (and the Board of Directors has approved) that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended November 2, 2002. The Audit Committee and Board of Directors also have recommended, subject to ratification by the stockholders, the selection of Ernst & Young LLP as our independent auditors for fiscal 2003. Audit Committee, John L. Doyle, Chairman Joel Moses Ernst & Young LLP billed us an aggregate of $1,265,000 in fees for professional services rendered in connection with the audit of our financial statements for the most recent fiscal year and the reviews of the financial statements included in each of our Quarterly Reports on Form 10-Q during the fiscal year ended November 2, 2002. Ernst & Young LLP did not bill us for any professional services rendered to us and our affiliates for the fiscal year ended November 2, 2002 in connection with financial information systems design or implementation, the operation of our information system or the management of our local area network. Ernst & Young LLP billed us an aggregate of $777,000 in fees for other services rendered to us and our affiliates for the fiscal year ended November 2, 2002. These services consisted of $378,000 of audit-related services and $399,000 related to tax compliance and advisory services. Audit-related services consisted of international statutory audits, services in connection with registration statements and various other audit-related accounting consultation services. We pay each non-employee director a quarterly fee of $5,000 ($4,250 for the first three quarters of fiscal 2002 due to our salary reduction initiative), plus $2,500 for attendance at each meeting of our Board of Directors, and $1,000 for attendance at each committee meeting. We also reimburse our directors for travel and other related expenses. Each director can elect to defer receipt of his fees under the Deferred Compensation Plan. See “Information About Executive Compensation — Deferred Compensation Plan.” Under our 1998 stock option plan, each non-employee director is granted annually a non-statutory stock option to purchase 20,000 shares of our common stock at an exercise price per share equal to the fair market value per share on the date of grant. Occasionally, as in fiscal year 2002, two option grants can fall within one fiscal year, as the period in which we grant options spans the end of one fiscal year and the beginning of the next fiscal year. The options are exercisable, subject to continued service on our Board of Directors, in three equal annual installments on each of the first, second and third anniversaries of the grant date. On January 22, 2002, we granted to each non-employee director options for the purchase of 20,000 shares of our common stock at an exercise price per share equal to the fair market value per share on that date, or $41.05 per share. On September 24, 2002, we granted to each non-employee director options for the purchase of 20,000 shares of our common stock at an exercise price per share equal to the fair market value per share on that date, or $19.89 per share. During fiscal 2002, we loaned funds from time to time on a short-term basis to our President and Chief Executive Officer, Jerald G. Fishman, to facilitate the exercise of options to purchase shares of our common stock. These loans carried interest at a market rate of interest equivalent to the applicable federal short-term rate plus two percent, which ranged from 4.48% to 4.73% per annum during the period of these loans, were secured by Mr. Fishman’s personal assets and were due upon our demand for payment. The largest aggregate amount outstanding under these loans at any time during the fiscal year ended November 2, 2002 was $865,048, amounts of which were outstanding for between 3 and 25 days. Mr. Fishman has paid all amounts due under these loans. The following table contains certain information required under applicable rules of the SEC about the compensation for each of the last three fiscal years of our chief executive officer and our four other most highly compensated executive officers who were serving as executive officers on November 2, 2002: Summary Compensation Table Annual Compensation(1) Other Restricted Securities Annual Stock Underlying All Other Name and Fiscal Salary Bonus Compensation Awards Options Compensation Principal Position Year ($)(2) ($)(2) ($)(3) ($)(4) (5) ($)(6) 2002 850,374 — 3,814,670 — 1,030,000 59,526 President and Chief 2001 860,146 317,630 2,197,638 — 613,964 146,392 2000 859,092 1,804,093 838,210 — 600,000 179,092 2002 392,988 — 425,826 — 160,000 27,509 Group Vice President, 2001 398,977 105,585 263,807 — 121,453 67,022 DSP Media and 2001 374,177 99,022 430,000 — 96,597 63,490 and Chief Financial 2002 330,733 — 208,711 — 80,000 23,151 Vice President, Research 2000 348,920 418,704 165,855 — 80,000 49,606 2002 286,766 — 164,651 — 7,500 20,074 Vice President and 2001 291,136 61,687 88,305 — 94,709 47,447 2000 277,130 112,825 25,809 — 110,000 19,399 Micromachined Products (1) In accordance with SEC rules, other compensation in the form of perquisites and other personal benefits has been omitted in those instances where such perquisites and other personal benefits comprised less than the lesser of $50,000 or 10% of the total of annual salary and bonus for the named executive officer for such year. (2) Reflects compensation earned by the named executive officers in the fiscal years presented, including amounts deferred at the election of these officers pursuant to our Deferred Compensation Plan. See “— Deferred Compensation Plan.” (3) These amounts relate to interest earned under investment options on deferred compensation balances with rates that exceed 120% of the applicable federal long-term rate, or AFR. See “— Deferred Compensation Plan.” (4) As of November 2, 2002, the number and value of the aggregate restricted stock holdings were as follows: 50,000 shares ($1,384,500) held by Mr. McAloon; 50,000 shares ($1,384,500) held by Mr. McDonough; 60,000 shares ($1,661,400) held by Mr. Fuller; and 50,000 shares ($1,384,500) held by Mr. Weigold. All restricted stock grants were issued prior to the fiscal year ended October 28, 2000. (5) Each option has an exercise price equal to the fair market value of our common stock on the date of grant and generally becomes exercisable, subject to the optionee’s continued employment with us, in three equal installments, on each of the third, fourth and fifth anniversaries of the date of grant or in four equal installments, on each of the second, third, fourth and fifth anniversaries of the date of the grant. (6) Reflects amounts contributed or accrued by us in each fiscal year for the named executive officers under our retirement arrangements, including the amount we credit the account of each participant in our deferred compensation plan equal to 7% of the greater of (1) the amount deferred during the calendar year or (2) the excess of the participant’s compensation for the calendar year under The Investment Partnership of Analog Devices. See “— Deferred Compensation Plan.” Options are generally granted once per year between September and January as part of our annual performance appraisal process. Occasionally, as in fiscal year 2002, two sets of option grants can fall within one fiscal year, as the process spans the end of one fiscal year and the beginning of the next fiscal year. The following contains information required under applicable SEC rules regarding stock options granted during fiscal year 2002 to our named executive officers: Option Grants in Last Fiscal Year Total Potential Realizable Value at Options Assumed Annual Rates of Number of Granted to Stock Price Appreciation Underlying Employees Exercise for Options Term(6) Options in Fiscal Price per Expiration Name Granted Year(4) Share($)(5) Date 5%($) 10%($) 530,000 (1) 1.88% 41.05 1/22/12 13,682,546 34,674,258 500,000 (2) 1.78% 19.89 9/24/12 6,254,357 15,849,769 80,000 (1) 0.28% 41.05 1/22/12 2,065,290 5,233,850 40,000 (2) 0.14% 19.89 9/24/12 500,349 1,267,982 7,500 (3) 0.03% 19.89 9/24/12 93,815 237,747 (1) Represents options granted on January 22, 2002. Each option has an exercise price per share equal to the fair market value per share of our common stock on the date of grant and becomes exercisable, subject to the optionee’s continued employment with us, in three equal installments, on each of the third, fourth and fifth anniversaries of the date of grant. (2) Represents options granted on September 24, 2002. Each option has an exercise price per share equal to the fair market value per share of our common stock on the date of grant and becomes exercisable, subject to the optionee’s continued employment with us, in four equal installments, on each of the second, third, fourth and fifth anniversaries of the date of the grant. (3) Represents an option granted on September 24, 2002. This option has an exercise price per share equal to the fair market value per share of our common stock on the date of grant and becomes exercisable, subject to the optionee’s continued employment with us, on the first anniversary of the date of the grant. (4) Calculated based on an aggregate of 28,127,317 options granted under our 1998 stock option plan and 2001 broad-based stock option plan to employees during fiscal 2002. (5) The exercise price per share is equal to the fair market value per share of our common stock on the date of grant. (6) Potential realizable value is based on an assumption that the market price of our common stock will appreciate at the stated rates (5% and 10%), compounded annually, from the date of grant until the end of the 10-year term. These values are calculated based on rules promulgated by the SEC and do not reflect our estimate or projection of future stock prices. Actual gains, if any, on stock option exercises will depend on the future performance of the price of our common stock and the timing of exercises. The following table contains information required under applicable SEC rules concerning the exercise of stock options during the fiscal year ended November 2, 2002 by each of our named executive officers and the number and value of unexercised options held by each of our named executive officers on November 2, 2002: Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Number of Securities Underlying Unexercised Value of Unexercised Options at Fiscal In-the-Money Options at Year-End Fiscal Year-End ($)(2) Shares Acquired Realized Exercisable/ Exercisable/ Name on Exercise(#) ($)(1) Unexercisable Unexercisable 160,000 5,894,725 544,982 / 3,576,982 11,125,970 / 31,272,100 10,000 398,950 189,362 / 452,895 3,951,076 / 1,955,231 28,333 1,071,013 94,025 / 428,239 1,866,144 / 1,955,231 7,333 292,550 83,381 / 259,384 1,516,910 / 1,270,061 64,667 1,344,862 2,354 / 256,521 0 / 915,410 (1) Value represents the difference between the closing price per share of our common stock on the date of exercise and the exercise price per share, multiplied by the number of shares acquired on exercise. (2) Value of unexercised in-the-money options represents the difference between the closing price per share of our common stock on November 1, 2002, the last trading day of fiscal 2002 ($27.69), and the exercise price per share of the stock option, multiplied by the number of shares subject to the stock option. Our stock option program is a broad-based, long-term employee retention program that is intended to attract, retain and motivate our employees, officers and directors and to align their interests with those of our stockholders. Options are generally granted once per year between September and January as part of our annual performance appraisal process. Occasionally, as in fiscal year 2002, two sets of option grants can fall within one fiscal year, as the process spans the end of one fiscal year and the beginning of the next fiscal year. Conversely, as in fiscal year 1999, there are fiscal years in which no annual merit options are granted. We have a goal to keep the dilution related to our option program to a long-term average of approximately 4% annually. The dilution percentage is calculated as the total number of shares of common stock underlying new option grants for the year, net of options forfeited by employees leaving the company, divided by total outstanding shares of our common stock. All stock option grants to executive officers and directors can be made only from stockholder-approved plans and are made after a review by, and with the approval of the Compensation Committee of our Board of Directors. All members of the Compensation Committee are independent directors, as that term is defined in the applicable rules for issuers traded on the New York Stock Exchange. In December 2002, our Board of Directors adopted an amendment to each of our 2001 Broad-Based Stock Option Plan and our 1998 Stock Option Plan to provide that the terms of outstanding options under these plans may not be amended to provide an option exercise price per share that is lower than the original option exercise price per share. Employee and Executive Option Grants As of the End of Fiscal Year Avg. 2002 2001 2000 1999 1998 Net grants during the period as a percentage of outstanding shares 4.4% 7.1% 4.3% 4.0% 0% 6.7% Grants to our named executive officers during the period as a percentage of total options granted Grants to our named executive officers during the period as a percentage of outstanding shares 0.32% 0.39% 0.27% 0.31% 0% 0.62% Cumulative options held by our named executive officers as a percentage of total options outstanding 9.6% 6.9% 7.9% 9.6% 13.1% 13.3% The following table provides information as of November 2, 2002 about the securities authorized for issuance under our equity compensation plans, consisting of our 2001 Broad-Based Stock Option Plan, our 1998 Stock Option Plan, our 1994 Director Option Plan, our Restated 1988 Stock Option Plan and our Employee Stock Purchase Plan. Equity Compensation Plan Information Remaining Available for Weighted-average Future Issuance Under Number of Securities to Exercise Price of Equity Compensation be Issued Upon Exercise Outstanding Plans (Excluding of Outstanding Options, Options, Warrants Securities Reflected in Plan Category Warrants and Rights(1) and Rights Column(a)) Equity compensation plans approved by stockholders 69,062,784 $ 25.64 13,128,861 (2) Equity compensation plans not approved by stockholders(3) 16,569,710 $ 24.76 33,430,290 (1) This table excludes an aggregate of 218,074 shares issuable upon exercise of outstanding options assumed by Analog in connection with various acquisition transactions. The weighted average exercise price of the excluded options is $5.22. (2) Includes 2,554,080 shares issuable under our Employee Stock Purchase Plan, of which up to 683,075 are issuable in connection with the current offering period that ends May 30, 2003. (3) Issued pursuant to our 2001 Broad-Based Stock Option Plan, which does not require the approval of and has not been approved by our stockholders. In December 2001, our Board of Directors adopted the 2001 Broad-Based Stock Option Plan pursuant to which non-statutory stock options for up to 50,000,000 shares of common stock may be granted to employees, consultants or advisors of Analog and its subsidiaries, other than executive officers and directors. The 2001 plan was filed most recently as an exhibit to our Annual Report on Form 10-K for the fiscal year ended November 2, 2002 (File No. 1-7819) as filed with the SEC on January 29, 2003. In December 2002, our Board of Directors adopted an amendment to the 2001 plan to provide that the terms of outstanding options under the 2001 plan may not be amended to provide an option exercise price per share which is lower than the original option exercise price per share. Our Board of Directors is authorized to administer the 2001 plan. Our Board of Directors is authorized to adopt, amend and repeal the administrative rules relating to the 2001 plan and to interpret the provisions of the 2001 plan. Our Board of Directors may amend, suspend or terminate the 2001 plan at any time. Our Board of Directors has delegated to the Compensation Committee authority to administer certain aspects of the 2001 plan. Our Board of Directors and our Compensation Committee have the authority to select the recipients of options under the 2001 plan and determine (i) the number of shares of common stock covered by such options, (ii) the dates upon which such options become exercisable (which is typically in annual installments of 33 1/3% on each of the third, fourth and fifth anniversaries of the date of the grant or in annual installments of 25% on each of the second, third, fourth and fifth anniversaries of the date of the grant), (iii) the exercise price of options (which may not be less than the fair market value of the common stock on the date of grant), and (iv) the duration of the options (which may not exceed 10 years). If any option granted under the 2001 plan expires or is terminated, surrendered, canceled or forfeited, the unused shares of common stock covered by such option will again be available for grant under the 2001 plan. No option may be granted under the 2001 plan after December 5, 2011, but options previously granted may extend beyond that date. Our Board of Directors is required to make appropriate adjustments in connection with the 2001 plan to reflect any stock split, stock dividend, recapitalization, liquidation, spin-off or other similar event. The 2001 plan also contains provisions addressing the consequences of any Reorganization Event or Change in Control (as such terms are defined in the 2001 plan). If a Reorganization Event occurs, the 2001 plan requires our Board of Directors to provide that all the outstanding options are assumed, or equivalent options substituted, by the acquiring or succeeding entity, and if not, all then unexercised options, would become exercisable in full and would terminate immediately prior to the consummation of the Reorganization Event. If such options are assumed or replaced with substituted options, they would continue to vest in accordance with their original vesting schedules. If the Reorganization Event also constitutes a Change in Control, one-half of the shares of common stock subject to then outstanding unvested options would become immediately exercisable and the remaining one-half of the unvested options would continue to vest in accordance with the original vesting schedules of such options, provided that any remaining unvested options held by an optionee would vest and become exercisable in full if, on or prior to the first anniversary of the Change in Control, such optionee’s employment is terminated without Cause or for Good Reason (as such terms are defined in the 2001 plan). We have employee retention agreements with each of our 11 current executive officers and with 39 additional key managers providing for severance benefits in the event of termination within 24 months following a change in control (as defined in each retention agreement) that was approved by our Board of Directors. The retention agreements also provide for severance benefits if (1) we terminate the employee (other than termination for “cause”), or (2) the employee terminates his or her employment for “good reason” (as defined in his or her retention agreement) within 24 months after a change in control (as defined in each retention agreement) that was approved by our Board of Directors. The retention agreements also provide for severance benefits if an employee is terminated (other than for “cause”) within 12 months after a change in control that was not approved by our Board of Directors. The retention agreements do not provide for severance benefits in the event of an employee’s death or disability. Each retention agreement provides that, in the event of a potential change in control (as defined in each retention agreement), the employee shall not voluntarily resign as an employee, subject to certain conditions, for at least six months after the occurrence of the potential change in control. The retention agreements are automatically renewed each year unless we give the employee three months’ notice that his or her agreement will not be extended. The retention agreements provide for the following severance benefits: (1) a lump-sum payment equal to 200% (299% in the case of 9 of the 50 employees who are parties to the agreements, including Messrs. Fishman, McAloon, McDonough, Fuller and Weigold) of the sum of the employee’s annual base salary plus the total cash bonuses paid or awarded to him or her in the four fiscal quarters preceding his or her termination; and (2) the continuation of life, disability, dental, accident and group health insurance benefits for a period of 24 months. In addition, if payments to the employee under his or her retention agreement (together with any other payments or benefits, including the accelerated vesting of stock options or restricted stock awards that the employee receives in connection with a change in control) would result in the triggering of the provisions of Sections 280G and 4999 of the Internal Revenue Code of 1986, the retention agreements provide for the payment of an additional amount so that the employee receives, net of excise taxes, the amount he or she would have been entitled to receive in the absence of the excise tax provided in Section 4999 of the Internal Revenue Code. On June 21, 2000, our Board of Directors authorized and approved an amendment to all of the outstanding unvested stock options granted to our President and Chief Executive Officer, Jerald G. Fishman. The amendment also applies to any future stock options we may grant Mr. Fishman and provides for the accelerated vesting of all of Mr. Fishman’s unvested stock options if (1) we terminate Mr. Fishman’s employment with us without “cause,” or (2) Mr. Fishman terminates his employment with us for “good reason,” as each of those terms is defined in a letter agreement between us and Mr. Fishman dated June 21, 2000. For other employees and senior management who are not parties to retention agreements, we have change in control policies in place that provide for lump-sum severance payments, based on length of service with us, in the event of the termination of his or her employment under certain circumstances within 18 months after a change in control (as defined in these policies). Severance payments range from a minimum of 2 weeks of annual base salary (for hourly employees with less than 5 years of service) to a maximum of 104 weeks of base salary. In addition to this payment, senior management employees with at least 21 years of service receive an amount equal to the total cash bonuses paid or awarded to the employee in the four fiscal quarters preceding termination. In addition to the agreements and policies described above, certain of our stock option and restricted stock awards provide for immediate vesting of some or all outstanding awards upon any change in control (as defined in the plans) of Analog Devices. Our executive officers and directors, along with a group of management and engineering employees, are eligible to participate in the Analog Devices Deferred Compensation Plan, or Deferral Plan. The Deferral Plan was established to provide participants with the opportunity to defer the receipt of all or any portion of their compensation, including gains on stock options and restricted stock granted before July 23, 1997. Under the Deferral Plan, we credit each participant’s account with the amount that would have been earned had the deferred amounts been invested in one or more of the 18 different fixed income or equity investment options (as selected by the participant) that are available under the Deferral Plan. Due to the decline in interest rates over the past year, the Moody’s +3 fixed-rate investment option was eliminated effective January 1, 2003. In addition, for each calendar year, we credit the account of each participant an amount equal to 7% of the greater of (1) the amount deferred during that calendar year or (2) the excess of the participant’s compensation for that calendar year over the compensation limit that applies for that calendar year under The Investment Partnership of Analog Devices. The compensation limit that applies under The Investment Partnership for calendar year 2003 is $200,000. The 7% contribution is designed to approximate the additional contribution that would have been made under The Investment Partnership for the participant if certain limitations under the Internal Revenue Code did not exist. Participants who terminate their employment with us due to retirement, disability or death will be paid in a lump sum or in installments over ten or fewer years. Participants who terminate their employment with us for any other reason will receive their payments in the form of a lump sum. Our executive compensation program is designed to attract, retain and reward the executives responsible for leading us toward the achievement of our business objectives. The Compensation Committee makes decisions each year regarding executive compensation, including annual base salaries, bonus awards and option grants. All compensation for executive officers is reviewed by the full Board of Directors. This report is submitted by the Compensation Committee and addresses the compensation policies for fiscal 2002 as they affected each of our executive officers. Our executive compensation philosophy is based on the belief that competitive compensation is essential to attract, motivate and retain highly qualified and industrious employees. Our policy is to provide total compensation that is competitive for comparable work and comparable corporate performance. The compensation program includes both motivational and retention-related compensation components. Bonuses are included to encourage effective performance relative to our current plans and objectives. Stock options are included to promote longer-term focus, to help retain key contributors and to more closely align their interests with those of our stockholders. Our compensation policy seeks to relate compensation with our financial performance and business objectives. We reward individual performance and also tie a significant portion of total executive compensation to the annual and long-term performance of Analog Devices. While compensation survey data are useful guides for comparative purposes, we believe that a successful compensation program also requires the application of judgment and subjective determinations of individual performance. To that extent, the Compensation Committee applies its judgment in reconciling the program’s objectives with the realities of retaining valued employees. Annual compensation for our executives consists of three principal elements: base salary; cash bonus; and equity ownership in the form of stock options. • Cash Compensation Annual cash compensation consists of two elements: base salary and bonus. In setting the annual cash compensation for our executives, the Compensation Committee reviews compensation for comparable positions in a group of approximately 20 companies selected by the Compensation Committee for comparison purposes. Most of these companies are engaged in the manufacture and sale of semiconductor devices, instruments and computer software. We also regularly compare our pay practices with other leading companies through reviews of survey data and information gleaned from the public disclosure filings of publicly-traded companies. Increases in annual base salary are based on an evaluation of the performance of the operation or activity for which an executive has responsibility, the impact of that operation or activity on our overall performance, the skills and experience required for the job, and a comparison of these elements with similar elements for other executives both within and outside Analog Devices. Due to business conditions, we terminated our bonus plan effective November 4, 2001 and therefore, did not pay any bonus during fiscal 2002. However, a cash bonus is normally tied directly to the attainment of financial performance targets approved by our Board of Directors. The ratio of bonus to base salary varies significantly across the levels in our organization to reflect the ability of the individual to impact our overall performance and, generally, is higher for employees with higher base salaries. The cash bonus depends solely on our corporate performance. • Equity Ownership Total compensation at the executive level also includes long-term incentives afforded by stock options. The purpose of our stock ownership program is to reinforce the mutuality of long-term interests between our employees and stockholders, and assist in the attraction and retention of important key executives, managers and individual contributors, mostly engineers, who are essential to our success. The design of our stock programs includes longer vesting periods to optimize the retention value of these options and to orient our managers to longer-term success. Generally, stock options vest in three equal installments on the third, fourth and fifth anniversaries of the date of grant or in four equal installments, on each of the second, third, fourth and fifth anniversaries of the date of the grant. Generally, if employees leave Analog Devices before these vesting periods, they forfeit the unvested portions of these awards. While we believe that these longer vesting periods are in the best interest of our stockholders, they tend to increase the number of stock options outstanding compared to companies with shorter vesting schedules. The size of stock option awards is generally intended to reflect the significance of the executive’s current and anticipated contributions to our overall performance. The exercise price per share of the stock options we grant is equal to the fair market value of a share of our common stock on the date of grant. Before determining any stock option grants to our executives, the Compensation Committee reviews survey information of the stock option programs of competitors and other companies with comparable capitalization. The value realizable from exercisable stock options depends on the extent to which our performance is reflected in the price of our common stock at any particular point in time. However, the decision as to whether this value will be realized through the exercise of a stock option in any particular year is primarily determined by each individual within the limits of the vesting schedule of the stock option, not by the Compensation Committee. Mr. Fishman, in his capacity as our President and Chief Executive Officer, is also eligible to participate in the same executive compensation program available to our other senior executives. The Compensation Committee has set Mr. Fishman’s total annual compensation, including compensation derived from our bonus program and stock option program, at a level it believes to be competitive with other companies in the industry. During fiscal 2002, Mr. Fishman’s annual base salary was restored from $791,295 to $930,935 in connection with a general restoration in pay to our 2,500 most highly compensated employees. We did not pay a bonus to Mr. Fishman in fiscal 2002. Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction to public companies for certain compensation in excess of $1 million paid to the company’s Chief Executive Officer and the four other most highly compensated executive officers. Certain compensation, including qualified performance-based compensation, will not be subject to the deduction limit if certain requirements are met. The Compensation Committee reviews the potential effect of Section 162(m) periodically and generally seeks to structure the long-term incentive compensation granted to its executive officers, except awards under the bonus plan, in a manner that is intended to avoid disallowance of deductions under Section 162(m). Nevertheless, there can be no assurance that compensation attributable to awards granted under Analog Devices’s plans will be treated as qualified performance-based compensation under Section 162(m). In addition, the Compensation Committee reserves the right to use its judgment to authorize compensation payments that may be subject to the limit when the Compensation Committee believes such payments are appropriate and in the best interests of Analog Devices and our stockholders, after taking into consideration changing business conditions and the performance of its employees. Compensation Committee, Charles O. Holliday, Jr., Chairman Messrs. Holliday and Saviers, neither of whom has been an officer or employee of Analog Devices at any time, served on our Compensation Committee during fiscal 2002. Mr. Holliday has informed us that he will resign from our Board of Directors effective as of March 11, 2003. During fiscal 2002, none of our executive officers served as a member of the board of directors or compensation committee (or other committee serving an equivalent function) of any entity that had one or more executive officers serving as a member of our Board of Directors or Compensation Committee. The following graph compares cumulative total stockholder return on our common stock since October 31, 1997 with the cumulative total return for the Standard & Poor’s 500 Index and the Standard & Poor’s Technology Sector Index. This graph assumes the investment of $100 on October 31, 1997 in our common stock, the Standard & Poor’s 500 Index and the Standard & Poor’s Technology Sector Index and assumes all dividends are reinvested. Measurement points are the last trading day for each respective fiscal year. S&P TECHNOLOGY ANALOG DEVICES, INC. S&P 500 SECTOR 100.00 100.00 100.00 65.03 121.99 133.75 Our Board of Directors, on the recommendation of our Audit Committee, has selected the firm of Ernst & Young LLP, independent auditors, as our auditors for the fiscal year ending November 1, 2003. Although stockholder approval of our Board of Directors’ selection of Ernst & Young LLP is not required by law, our Board of Directors believes that it is advisable to give stockholders an opportunity to ratify this selection. If this proposal is not approved at the 2003 annual meeting, our Audit Committee and Board of Directors will reconsider its selection of Ernst & Young LLP. Representatives of Ernst & Young LLP are expected to be present at the 2003 annual meeting. They will have the opportunity to make a statement if they desire to do so and will also be available to respond to appropriate questions from stockholders. Our Board of Directors recommends that you vote FOR the ratification of the selection by our directors of Ernst & Young LLP as our independent auditors for the 2003 fiscal year. The United Brotherhood of Carpenters and Joiners of America, located at 101 Constitution Avenue, NW, Washington, D.C. 20001, is the beneficial owner of 1,600 shares of Analog Devices Common Stock, and submits the following resolution: RESOLVED, that the shareholders of Analog Devices, Inc. (“Company”) hereby request that the Company’s Board of Directors establish a policy of expensing in the Company’s annual income statement the costs of all future stock options issued by the Company. Current accounting rules give companies the choice of reporting stock option expenses annually in the company income statement or as a footnote in the annual report (See: Financial Accounting Standards Board Statement 123). Most companies, including ours, report the cost of stock options as a footnote in the annual report, rather than include the option costs in determining operating income. We believe that expensing stock options would more accurately reflect a company’s operational earnings. Stock options are an important component of our Company’s executive compensation program. Options have replaced salary and bonuses as the most significant element of executive pay packages at numerous companies. The lack of option expensing can promote excessive use of options in a company’s compensation plans, obscure and understate the cost of executive compensation and promote the pursuit of corporate strategies designed to promote short-term stock price rather than long-term corporate value. A recent report issued by Standard & Poor’s indicated that the expensing of stock option grant costs would have lowered operational earnings at companies by as much as 10%. “The failure to expense stock option grants has introduced a significant distortion in reported earnings,” stated Federal Reserve Board Chairman Alan Greenspan. “Reporting stock options as expenses is a sensible and positive step toward a clearer and more precise accounting of a company’s worth.” Globe and Mail, “Expensing Options Is a Bandwagon Worth Joining,” Aug. 16, 2002. Warren Buffet wrote in a New York Times Op-Ed piece on July 24, 2002: There is a crisis of confidence today about corporate earnings reports and the credibility of chief executives. And it’s justified. For many years, I’ve had little confidence in the earnings numbers reported by most corporations. I’m not talking about Enron and WorldCom — examples of outright crookedness. Rather, I am referring to the legal, but improper, accounting methods used by chief executives to inflate reported earnings... Options are a huge cost for many corporations and a huge benefit to executives. No wonder, then, that they have fought ferociously to avoid making a charge against their earnings. Without blushing, almost all C.E.O.’s have told their shareholders that options are cost-free . . . When a company gives something of value to its employees in return for their services, it is clearly a compensation expense. And if expenses don’t belong in the earnings statement, where in the world do they belong? Many companies have responded to investors’ concerns about their failure to expense stock options. In recent months, more than 100 companies, including such prominent ones as Coca Cola, Washington Post, and General Electric, have decided to expense stock options in order to provide their shareholders more accurate financial statements. Our Company has yet to act. We urge your support. The Board of Directors has carefully considered the changes suggested in the proposal submitted by The United Brotherhood of Carpenters and Joiners of America and does not believe that it is in the best interests of our shareholders to record stock option expense in ADI’s income statement at this time. There is considerable ongoing debate regarding accounting for stock options. This debate may well be resolved by the accounting standard setters in the relatively near future. We believe that it would be premature for ADI to change its accounting until this issue is resolved. We believe that ADI would be placed at a significant competitive disadvantage if it were to begin recognizing stock option expense in its income statement at a time when most, if not all, of ADI’s primary competitors do not recognize expense for stock options in their income statements. A decision by ADI to expense stock options at this time would disadvantage ADI shareholders by making it more difficult for investors to compare ADI’s performance to that of its competitors. If the current debate results in new accounting rules that require the expensing of stock options ADI will, of course, comply. ADI currently accounts for its stock-based compensation costs in accordance with Generally Accepted Accounting Principles, or GAAP. ADI already reflects the impact of stock options in its calculation of diluted earnings per share. Over the past five years, this has resulted in dilution of EPS that, on average, was approximately 5.6%. During this same period, stock option grants, net of forfeitures, averaged 4.4% of outstanding shares, while actual dilution resulting from option exercises has averaged just 1.4% of outstanding shares. The dilutive impact of stock options is accurately reflected in the increased shares used to calculate diluted earnings per share and we believe it is inappropriate to record compensation expense in addition to the increase in the share count. Also, we believe that there are serious shortcomings in the methodologies that corporations can use to value employee stock options. One of the most widely used methods, the Black-Scholes model, was developed in 1973 to value short term, publicly traded options and warrants. It was never intended to be used to value employee stock options, which are not freely tradable and have unique attributes that are not contemplated by the Black-Scholes model. Included among these attributes are longer terms (generally 10 years), vesting and forfeiture provisions, and non-transferability. In addition, many optionees can become subject to company imposed trading “black-out” periods during which they cannot sell the underlying stock acquired in an option exercise. The valuation determined through use of the Black-Scholes model is also highly dependent upon subjective estimates such as stock price volatility and expected term of the option. ADI already provides comprehensive disclosure regarding its stock option activity. In its Form 10-K, ADI historically has disclosed the pro forma effect on its income statement of recognizing the “fair value” of options as determined through the use of the Black-Scholes option-pricing model. The application of the Black-Scholes model would result in an option expense of $227 million in fiscal 2002. However, approximately 87%, or $198 million, of this expense relates to options that were “underwater” at year end (i.e. the option price is higher than the stock price). In addition, beginning with this year’s Form 10-K, ADI has voluntarily adopted guidelines for expanded employee stock option disclosure, as suggested by the American Electronics Association (AEA). With more than 3,000 member companies, the AEA is the nation’s largest high-tech trade association. We believe these disclosures, which are being included in the “Management Discussion and Analysis” sections of ADI’s 10-K and 10-Q filings, provide our shareholders with comprehensive information about stock options and their dilutive impact in a more timely and consistent manner. They also consolidate the information into one location, as opposed to the current practice that discloses annual information partly in the 10-K and partly in the proxy statement. In summary, ADI currently is reflecting the impact of stock options in an appropriate manner and in accordance with GAAP in its financial statements and footnote disclosures. We believe it is premature for ADI to change its stock option accounting until this issue is resolved by the accounting standard setters. We believe that adopting a methodology that is out-of-step with ADI’s competitors would make it difficult for investors to compare ADI’s financial performance with that of its competitors and would not be in the best interests of ADI shareholders. We believe that ADI’s stock option disclosures, including the voluntary disclosures that ADI has adopted in this year’s Form 10-K, provide investors the information necessary to make sound judgments as to the impact of stock options on ADI’s financial results. If GAAP is modified, ADI will make any necessary changes in its accounting practices. Our Board of Directors believes approval of the Proposal is not in the best interests of ADI and its stockholders and recommends a vote AGAINST its approval. Our Board of Directors does not know of any other matters that may come before the 2003 annual meeting. However, if any other matters are properly presented to the 2003 annual meeting, it is the intention of the persons named in the accompanying proxy card or in the instructions for authorizing the voting of your shares over the Internet or by telephone to vote, or otherwise act, in accordance with their judgment on such matters. If you own your shares of common stock of record, you may authorize the voting of your shares over the Internet at www.eproxyvote.com/adi or telephonically by calling 1-877-PRX-VOTE (1-877-779-8683) and by following the instructions on the enclosed proxy card. Authorizations submitted over the Internet or by telephone must be received by 11:59 P.M. on March 10, 2003. Use of these Internet or telephonic voting procedures constitutes your authorization of EquiServe Trust Company, N.A. to deliver a proxy card on your behalf to vote at the annual meeting in accordance with your Internet or telephonically communicated instructions. On January 24, 2003, our Board of Directors amended Analog Devices’ By-Laws to confirm that the delivery of a vote by proxy on behalf of a stockholder consistent with telephonic or electronically transmitted instructions obtained pursuant to certain procedures that we establish constitutes execution and delivery of a vote by proxy by or on behalf of that stockholder. If the shares you own are held in “street name” by a bank or brokerage firm, your bank or brokerage firm will provide a vote instruction form to you with this proxy statement, which you may use to direct how your shares will be voted. Many banks and brokerage firms also offer the option of voting over the Internet or by telephone, instructions for which would be provided by your bank or brokerage firm on your vote instruction form. Management hopes that stockholders will attend the meeting. Whether or not you plan to attend, you are urged to complete, date, sign and return the enclosed proxy card in the accompanying postage-prepaid envelope. A prompt response will greatly facilitate arrangements for the meeting and your cooperation will be appreciated. Stockholders who attend the meeting may vote their stock personally even though they have sent in their proxies. A. Purpose The purpose of the Audit Committee is to assist the Board of Directors’ oversight of: • the integrity of the Company’s financial statements; • the Company’s compliance with legal and regulatory requirements; • the independent auditor’s qualifications and independence; and • the performance of the Company’s internal audit function and independent auditors; and to prepare the report that SEC rules require be included in the Company’s annual proxy statement. B. Structure and Membership 1. Number. The Audit Committee shall consist of at least three members of the Board of Directors. 2. Independence. Except as otherwise permitted by the applicable rules of the New York Stock Exchange (“NYSE”) and Section 301 of the Sarbanes-Oxley Act of 2002 (and the applicable rules thereunder), each member of the Audit Committee shall be “independent” as defined by such rules and Act. 3. Financial Literacy. Each member of the Audit Committee shall be financially literate, as such qualification is interpreted by the Company’s Board of Directors in its business judgment, or must become financially literate within a reasonable period of time after his or her appointment to the Audit Committee. At least one member of the Audit Committee must have accounting or related financial management expertise, as the Board of Directors interprets such qualification in its business judgment. Unless otherwise determined by the Board of Directors (in which case disclosure of such determination shall be made in the Company’s SEC periodic reports), at least one member of the Audit Committee shall be an “audit committee financial expert” (as defined by applicable SEC rules). 4. Chair. Unless the Board of Directors elects a Chair of the Audit Committee, the Audit Committee shall elect a Chair by majority vote. 5. Compensation. The compensation of Audit Committee members shall be as determined by the Board of Directors. No member of the Audit Committee may receive any compensation from the Company other than director’s fees. 6. Selection and Removal. Members of the Audit Committee shall be appointed by the Board of Directors, upon the recommendation of the Nominating and Corporate Governance Committee. Unless otherwise determined by the Board (in which case disclosure of such determination shall be made in the Company’s annual proxy statement), no member of the Audit Committee may serve on the audit committee of more than two other public companies. The Board of Directors may remove members of the Audit Committee from such committee, with or without cause. C. Authority and Responsibilities The Audit Committee shall discharge its responsibilities, and shall assess the information provided by the Company’s management and the independent auditor, in accordance with its business judgment. Management is responsible for the preparation, presentation, and integrity of the Company’s financial statements and for the appropriateness of the accounting principles and reporting policies that are used by the Company. The independent auditors are responsible for auditing the Company’s financial statements and for reviewing the Company’s unaudited interim financial statements. The authority and responsibilities set forth in this Charter do not reflect or create any duty or obligation of the Audit Committee to plan or conduct any audit, to determine or certify that the Company’s financial statements are complete, accurate, fairly presented, or in accordance with generally accepted accounting principles or applicable law, or to guarantee the independent auditor’s report. Oversight of Independent Auditors 1. Selection. The Audit Committee shall be directly responsible for appointing, evaluating and, when necessary, terminating the independent auditor. The Audit Committee may, in its discretion, seek stockholder ratification of the independent auditor it appoints. 2. Independence. At least annually, the Audit Committee shall assess the independent auditor’s independence. In connection with this assessment, the Audit Committee shall obtain and review a report by the independent auditor describing all relationships between the independent auditor and the Company, including the disclosures required by Independence Standards Board Standard No. 1. The Audit Committee shall engage in an active dialogue with the independent auditor concerning any disclosed relationships or services that might impact the objectivity and independence of the auditor. 3. Quality-Control Report. At least annually, the Audit Committee shall obtain and review a report by the independent auditor describing: • the firm’s internal quality control procedures; • any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues. 4. Compensation. The Audit Committee shall be directly responsible for setting the compensation of the independent auditor. The Audit Committee is empowered, without further action by the Board of Directors, to cause the Company to pay the compensation of the independent auditor established by the Audit Committee. 5. Preapproval of Services. The Audit Committee shall preapprove all auditing services, which may entail providing comfort letters in connection with securities underwritings, and non-audit services (other than de minimus non-audit services as defined by the Sarbanes-Oxley Act) to be provided to the Company by the independent auditor. The Audit Committee shall cause the Company to disclose in its SEC periodic reports the approval by the Audit Committee of any non-audit services to be performed by the independent auditor. 6. Oversight. The independent auditor shall report directly to the Audit Committee and the Audit Committee shall be directly responsible for oversight of the work of the independent auditor, including resolution of disagreements between Company management and the independent auditor regarding financial reporting. In connection with its oversight role, the Audit Committee shall, from time to time as appropriate: • obtain and review the reports required to be made by the independent auditor pursuant to paragraph (k) of Section 10A of the Securities Exchange Act of 1934 regarding: • critical accounting policies and practices; • alternative treatments of financial information within generally accepted accounting principles that have been discussed with Company management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor; and • other material written communications between the independent auditor and Company management, such as any management letter or schedule of unadjusted differences. • review with the independent auditor: • audit problems or difficulties the independent auditor encountered in the course of the audit work and management’s response, including any restrictions on the scope of the independent auditor’s activities or on access to requested information and any significant disagreements with management; • major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; • analyses prepared by management and/or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements; and • the effect of regulatory and accounting initiatives, as well as off balance sheet structures, on the financial statements of the Company. Review of Audited Financial Statements 7. Discussion of Audited Financial Statements. The Audit Committee shall review and discuss with the Company’s management and independent auditor the Company’s audited financial statements, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the matters about which Statement on Auditing Standards No. 61 (Codification of Statements on Auditing Standards, AU §380) requires discussion. 8. Recommendation to Board Regarding Financial Statements. The Audit Committee shall consider whether it will recommend to the Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K. 9. Audit Committee Report. The Audit Committee shall prepare for inclusion where necessary in a proxy or information statement of the Company relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting), the report described in Item 306 of Regulation S-K. Review of Other Financial Disclosures 10. Independent Auditor Review of Interim Financial Statements. The Audit Committee shall direct the independent auditor to use its best efforts to perform all reviews of interim financial information prior to disclosure by the Company of such information and to discuss promptly with the Audit Committee and the Chief Financial Officer any matters identified in connection with the auditor’s review of interim financial information which are required to be discussed by Statement on Auditing Standards Nos. 61, 71 and 90. The Audit Committee shall direct management to advise the Audit Committee in the event that the Company proposes to disclose interim financial information prior to completion of the independent auditor’s review of interim financial information. 11. Earnings Release and Other Financial Information. The Audit Committee shall review and discuss generally the types of information to be disclosed in the Company’s earnings press releases (including any use of “pro forma” or “adjusted” non-GAAP, information), as well in financial information and earnings guidance provided to analysts, rating agencies and others. 12. Quarterly Financial Statements. The Audit Committee shall discuss with the Company’s management and independent auditor the Company’s quarterly financial statements, including the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 13. Oversight. The Audit Committee shall coordinate the Board of Director’s oversight of the Company’s internal accounting controls, the Company’s disclosure controls and procedures and the Company’s code of business conduct and ethics. The Audit Committee shall receive and review the reports of the CEO and CFO required by Section 302 of the Sarbanes-Oxley Act and Rule 13a-14 of the Exchange Act (i.e. the Certification of Disclosure in Annual and Quarterly Results). 14. Internal Audit Function. The Audit Committee shall coordinate the Board of Director’s oversight of the performance of the Company’s internal audit function. 15. Risk Management. The Audit Committee shall discuss the Company’s policies with respect to risk assessment and risk management, including guidelines and policies to govern the process by which the Company’s exposure to risk is handled. 16. Hiring Policies. The Audit Committee shall establish policies regarding the hiring of employees or former employees of the Company’s independent auditors. 17. Procedures for Complaints. The Audit Committee shall establish procedures for (i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters; and (ii) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters. 18. Additional Powers. The Audit Committee shall have such other duties as may be delegated from time to time by the Board of Directors. D. Procedures and Administration 1. Meetings. The Audit Committee shall meet as often as it deems necessary in order to perform its responsibilities. The Audit Committee shall periodically meet separately with: (i) the independent auditor; (ii) Company management and (iii) the Company’s internal auditors. The Audit Committee shall keep such records of its meetings as it shall deem appropriate. 2. Subcommittees. The Audit Committee may form and delegate authority to one or more subcommittees (including a subcommittee consisting of a single member), as it deems appropriate from time to time under the circumstances. Any decision of a subcommittee to preapprove audit or non-audit services shall be presented to the full Audit Committee at its next scheduled meeting. 3. Reports to Board. The Audit Committee shall report regularly to the Board of Directors. 4. Charter. At least annually, the Audit Committee shall review and reassess the adequacy of this Charter and recommend any proposed changes to the Board for approval. 5. Written Affirmation to NYSE. On an annual basis, no later than one month after the Annual Meeting of Stockholders, and after each change in the composition of the Audit Committee, the Audit Committee shall direct the Company to prepare and provide to the NYSE such written confirmations regarding the membership and operation of the Audit Committee as the NYSE rules require. 6. Independent Advisors. The Audit Committee shall have the authority to engage such independent legal, accounting and other advisors as it deems necessary or appropriate to carry out its responsibilities. Such independent advisors may be the regular advisors to the Company. The Audit Committee is empowered, without further action by the Board of Directors, to cause the Company to pay the compensation of such advisors as established by the Audit Committee. 7. Investigations. The Audit Committee shall have the authority to conduct or authorize investigations into any matters within the scope of its responsibilities as it shall deem appropriate, including the authority to request any officer, employee or advisor of the Company to meet with the Audit Committee or any advisors engaged by the Audit Committee. 8. Annual Self-Evaluation. At least annually, the Audit Committee shall evaluate its own performance. SKU# ANA-PS-03 DETACH HERE IF YOU ARE RETURNING YOUR PROXY CARD BY MAIL ANNUAL MEETING OF STOCKHOLDERS — MARCH 11, 2003 The undersigned, revoking all prior proxies, hereby appoints Ray Stata, Jerald G. Fishman and Mark G. Borden, and each of them, with full power of substitution, as proxies to represent and vote as designated hereon, all shares of common stock of Analog Devices, Inc. (the “Company”) which the undersigned would be entitled to vote if personally present at the Annual Meeting of Stockholders of the Company to be held at the Hilton at Dedham Place, 25 Allied Drive, Dedham, Massachusetts 02026, on Tuesday, March 11, 2003, at 10:00 a.m. (Local Time) and at any adjournments thereof. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING, OR ANY ADJOURNMENTS THEREOF. ATTENDANCE OF THE UNDERSIGNED AT THE ANNUAL MEETING OR ANY ADJOURNMENTS THEREOF WILL NOT BE DEEMED TO REVOKE THIS PROXY UNLESS THE UNDERSIGNED REVOKES THIS PROXY IN WRITING. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS UNLESS AUTHORIZING THE VOTING OF YOUR SHARES OVER THE INTERNET OR BY TELEPHONE, PLEASE FILL IN, DATE, SIGN AND MAIL THIS PROXY CARD PROMPTLY, USING THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. SEE REVERSE (Continued and to be signed on reverse side) SEE REVERSE NORWOOD, MA 02062-9106 Voter Control Number You may also authorize the voting of your shares over the Internet or by telephone. Your vote is important. Please vote immediately. Vote-by-Internet 1. Log on to the Internet and go to http://www.eproxyvote.com/adi. OR 2. Enter your Voter Control Number listed above and follow the easy steps outlined on the secured website. Vote-by-Telephone 1. Call toll-free 1-877-PRX-VOTE (1-877-779-8683) 2. Enter your Voter Control Number listed above and follow the easy recorded instructions. Your Internet or telephone instructions authorize the named proxies to vote your shares in the same manner as if you marked, signed and returned your proxy card. If you authorize the voting of your shares over the Internet or by telephone, please do not mail your proxy card. Please mark votes as in this example UNLESS OTHERWISE INSTRUCTED, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS. Your Board of Directors recommends that you vote FOR proposals 1 and 2 and AGAINST proposal 3. 1. Election of the following three (3) nominees as Class I Directors of the Company for a term of three years: The Board of Directors recommends a vote FOR all nominees. Nominees:(01) James A. Champy, (02) Kenton J. Sicchitano and (03) Lester C. Thurow NOMINEES WITHHELD FROM ALL (INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee’s name in the space provided above.) The Board of Directors recommends a vote FOR proposal 2. FOR AGAINST ABSTAIN 2. To ratify the selection by the Board of Directors of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending November 1, 2003. The Board of Directors recommends a vote AGAINST proposal 3. 3. Stockholder proposal to establish a policy of expensing future stock option grants. MARK HERE IF YOU PLAN TO ATTEND THE MEETING MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT Please sign exactly as your name appears hereon. If the stock is registered in the names of two or more persons, each should sign. Executors, administrators, trustees, guardians, attorneys and corporate officers should add their titles. Signature:__________________________ Date:_______ Signature:__________________________ Date: ______

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professional_accounting

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF FOR THE TRANSITION PERIOD FROM __________ TO __________ CONTINENTAL AIRLINES, INC. 1600 Smith Street, Dept. HQSEO (Registrant's telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer X Accelerated filer _____ Non-accelerated filer _____ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X As of April 14, 2006, 87,704,112 shares of Class B common stock of the registrant were outstanding. Financial Statements - Consolidated Balance Sheets - Liabilities and Stockholders' Equity (Deficit) Management's Discussion and Analysis of Financial Condition and Results of Operations Defaults Upon Senior Securities PART I - FINANCIAL INFORMATION Item 1. Financial Statements. (In millions, except per share data) Operating Revenue: Passenger (excluding fees and taxes of $315 and $270) Wages, salaries and related costs Aircraft fuel and related taxes Regional capacity purchase, net Aircraft rentals Landing fees and other rentals Distribution costs Maintenance, materials and repairs Passenger servicing Special charges (credits) Operating Income (Loss) Nonoperating Income (Expense): Interest capitalized Income from affiliates Gain on disposition of ExpressJet Holdings shares Loss before Income Taxes and Cumulative Effect of Change in Accounting Principle Loss before Cumulative Effect of Change in Accounting Principle Basic and Diluted Loss per Share: $ (0.46) Shares Used for Basic and Diluted Computation The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. (In millions, except for share data) Total cash, cash equivalents and short-term Accounts receivable, net Spare parts and supplies, net Note receivable from ExpressJet Holdings, Inc Prepayments and other Property and Equipment: Owned property and equipment: Flight equipment Less: Accumulated depreciation Purchase deposits for flight equipment Capital leases Less: Accumulated amortization Airport operating rights, net Intangible pension asset Investment in affiliates (continued on next page) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current maturities of long-term debt and Air traffic and frequent flyer liability Accrued payroll Accrued other liabilities Long-Term Debt and Capital Leases Accrued Pension Liability Stockholders' Equity (Deficit): Preferred Stock - $.01 par, 10,000,000 shares authorized; one share of Series B issued and outstanding, stated at par value Class B common stock - $.01 par, 200,000,000 shares authorized; 112,704,030, 111,690,943 and 92,181,499 issued Treasury stock - 25,489,413, 25,489,413 and 25,489,291 shares, at cost Total stockholders' equity (deficit) Total Liabilities and Stockholders' Equity (Deficit) Ended March 31, Net cash provided by operations Purchase deposits (paid) refunded in connection with future aircraft deliveries, net Sale of short-term investments, net Proceeds from dispositions of property and equipment Increase in restricted cash Net cash (used in) provided by investing activities Payments on long-term debt and capital lease obligations Net cash used in financing activities Cash and Cash Equivalents - Beginning of Period Cash and Cash Equivalents - End of Period Investing and Financing Activities Not Affecting Cash: Contribution of ExpressJet stock to pension plan In our opinion, the unaudited consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature. As discussed in Note 3 below, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share Based Payment" ("SFAS 123R"), effective January 1, 2006. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2005 (the "2005 Form 10-K"). Due to seasonal fluctuations common to the airline industry, our results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire year. As used in these Notes to Consolidated Financial Statements, the terms "Continental," "we," "us," "our" and similar terms refer to Continental Airlines, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries. NOTE 1 - LOSS PER SHARE The following table sets forth the components of basic and diluted loss per share (in millions): Numerator for basic loss per share - net loss $(66) $(186) Effect of dilutive securities issued by equity investee Numerator for diluted loss per share - net loss after effect of dilutive securities of equity investee Denominator for basic and diluted loss per share - weighted average shares Approximately 17.9 million potential common shares related to convertible debt securities were excluded from the computation of diluted earnings per share in each of the three months ended March 31, 2006 and 2005 because they were antidilutive. In addition, approximately 13.0 million and 6.2 million of weighted average options to purchase shares of our common stock were excluded from the computation of diluted earnings per share for the three months ended March 31, 2006 and 2005, respectively, because the effect of including the options would have been antidilutive or the options' exercise prices were greater than the average market price of the common shares. NOTE 2 - FLEET INFORMATION As shown in the following table, our operating aircraft fleet consisted of 360 mainline jets and 270 regional jets at March 31, 2006, excluding aircraft out of service. The regional jets are leased by ExpressJet Airlines, Inc. ("ExpressJet") from us and are operated by ExpressJet as Continental Express. Our purchase commitments (firm orders) for aircraft as of March 31, 2006 are also shown below. Mainline jets ERJ-145XR ERJ-145 Regional jets Includes three 787-8 firm order aircraft for which we have cancellation rights that expire on December 31, 2006. During the first quarter of 2006, we placed into service four used 757-300 aircraft and ExpressJet took delivery of four ERJ-145XR aircraft. Firm Order and Option Aircraft. As of March 31, 2006, we had firm commitments for 54 new aircraft from Boeing, with an estimated cost of $2.6 billion, and options to purchase 30 additional Boeing aircraft. We are scheduled to take delivery of six new 737-800 aircraft in 2006, with delivery of the remaining 48 new Boeing aircraft occurring from 2007 through 2011. We have backstop financing for the six 737-800 aircraft to be delivered in the remainder of 2006 and two 777-200ER aircraft to be delivered in 2007. By virtue of these agreements, we have financing available for all Boeing aircraft scheduled to be delivered through 2007. However, we do not have backstop financing or any other financing currently in place for the remainder of the aircraft. Further financing will be needed to satisfy our capital commitments for our firm aircraft and other related capital expenditures. We can provide no assurance that sufficient financing will be available for the aircraft on order or other related capital expenditures, or for our capital expenditures in general. As of March 31, 2006, ExpressJet had firm commitments for four regional jets currently on order from Embraer with an estimated cost of approximately $0.1 billion. ExpressJet currently anticipates taking delivery of these regional jets in the second quarter of 2006. ExpressJet does not have an obligation to take any of these firm Embraer aircraft that are not financed by a third party and leased to either ExpressJet or us. Under the capacity purchase agreement between us and ExpressJet, we have agreed to lease as lessee and sublease to ExpressJet the regional jets that are subject to ExpressJet's firm purchase commitments. In addition, under the capacity purchase agreement with ExpressJet, we generally are obligated to purchase all of the capacity provided by these new aircraft as they are delivered to ExpressJet. Substantially all of the aircraft and engines we own are subject to mortgages. A significant portion of our spare parts inventory is also encumbered. Out-of-Service Aircraft. In addition to our operating fleet, we had seven owned and three leased MD-80 aircraft permanently removed from service as of March 31, 2006. Additionally, we own six out-of-service Embraer 120 turboprop aircraft. The owned out-of-service aircraft are being carried at an aggregate fair market value of $15 million as of March 31, 2006, and the remaining rentals on the leased out-of-service aircraft have been accrued. We are currently exploring sublease or sale opportunities for the remaining out-of-service aircraft. However, we cannot predict when or if purchasers, lessees or sublessees can be found, and it is possible that our owned out-of-service aircraft could suffer additional impairment. NOTE 3 - STOCK PLANS AND AWARDS Adoption of SFAS 123R. We adopted SFAS 123R effective January 1, 2006. This pronouncement requires companies to measure the cost of employee services received in exchange for an award of equity instruments (typically stock options) based on the grant-date fair value of the award. The fair value is estimated using option-pricing models. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Prior to the adoption of SFAS 123R, this accounting treatment was optional with pro forma disclosures required. We adopted SFAS 123R using the modified prospective transition method, which is explained below. The adoption of SFAS 123R changes the accounting for our stock options and awards of restricted stock units ("RSUs") under our Long-Term Incentive and RSU Program, including RSUs with performance targets based on the achievement of specified stock price targets ("Stock Price Based RSU Awards"), as discussed below. Additionally, it changes the accounting for our employee stock purchase plan, which does not have a material impact on our statement of operations. Stock Options. SFAS 123R is effective for all stock options we grant beginning January 1, 2006. For those stock option awards granted prior to January 1, 2006, but for which the vesting period is not complete, we used the modified prospective transition method permitted by SFAS 123R. Under this method, we account for such awards on a prospective basis, with expense being recognized in our statement of operations beginning in the first quarter of 2006 using the grant-date fair values previously calculated for our pro forma disclosures. We will recognize the related compensation cost not previously recognized in the pro forma disclosures over the remaining vesting period. Our options typically vest in equal annual installments over a service period. Expense related to each portion of an option grant is recognized over the specific vesting period for those options. The fair value of options is determined at the grant date using a Black-Scholes option pricing model, which requires us to make several assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to do so in the future. The market price volatility of our common stock is based on the historical volatility of our common stock over a time period equal to the expected term of the option and ending on the grant date. The expected life of the options is based on our historical experience for various work groups. The table below summarizes stock option activity pursuant to our plans for the three months ended March 31, 2006 (share data in thousands): Weighted- Exercise Price Life (Years) Outstanding at beginning of period Exercised Outstanding at end of period Exercisable at end of period In connection with pay and benefit cost reductions, on February 1, 2006, we issued to our flight attendants, except Continental Micronesia, Inc. ("CMI") flight attendants, stock options for approximately 1.1 million shares of our common stock with an exercise price of $20.31 per share. The exercise price is the closing price of our common stock on the date of grant. The options vest in three equal installments on the first, second and third anniversaries of the date of grant, and have terms of six years. The weighted-average fair value of options granted during the first quarter of 2006 was determined to be $9.57, based on the following weighted-average assumptions: Risk-free interest rate Expected market price volatility of our common stock Expected life of options (years) The total intrinsic value of options exercised during the three months ended March 31, 2006 was $10 million. Cash received from option exercises during the three months ended March 31, 2006 totaled $16 million. The following tables summarize the range of exercise prices and the weighted average remaining contractual life of the options outstanding and the range of exercise prices for the options exercisable at March 31, 2006 (share data in thousands): Options Outstanding Range of Exercise Prices Average Remaining Contractual Life Options Exercisable Exercisable Stock Price Based RSU Awards. Stock Price Based RSU Awards made pursuant to our Long-Term Incentive and RSU Program can result in cash payments to our officers if there are specified increases in our stock price over multi-year performance periods. Prior to our adoption of SFAS 123R, we had recognized no liability or expense because the targets set forth in the program had not been met. However, SFAS 123R requires these awards to be measured at fair value at each reporting date with the related expense being recognized over the required service periods, regardless of whether the specified stock price targets have been met. The fair value is determined using a pricing model until the target stock price has been met, and is determined based on the current stock price thereafter. On January 1, 2006, we recognized a cumulative effect of change in accounting principle to record our liability related to the Stock Price Based RSU Awards at that date, reducing earnings $26 million ($0.30 per basic and diluted share). On February 1, 2006, in light of the sacrifices made by their co-workers in connection with pay and benefit cost reduction initiatives, our officers voluntarily surrendered their Stock Price Based RSU Awards for the performance period ending March 31, 2006, which had vested during the first quarter of 2006 and would have otherwise paid out $23 million at the end of March 2006. Of the $26 million total cumulative effect of change in accounting principle recorded on January 1, 2006, $14 million related to the surrendered awards. Accordingly, upon surrender, we reported the reversal of the $14 million as a special credit in our statement of operations during the first quarter of 2006. The remaining $12 million of the cumulative effect of change in accounting principle was related to Stock Price Based RSU Awards with a performance period ending December 31, 2007, which were not surrendered. During the first quarter of 2006, our stock price achieved the target price per share for 1.2 million Stock Price Based RSU Awards with a performance period ending December 31, 2007. Accordingly, we now measure these awards based on the current stock price (which was $26.90 per share at March 31, 2006) and will recognize the related expense ratably through December 31, 2007, after adjustment for changes in the market price of our common stock. Impact of Adoption of SFAS 123R. Excluding the cumulative effect of change in accounting principle and the special credit discussed above, stock based compensation expense recognized under SFAS 123R in the three months ended March 31, 2006 increased wages, salaries and benefits expense and our net loss by $17 million, or $0.19 per basic and diluted share. At March 31, 2006, $43 million of compensation cost related to unvested stock options and Stock Price Based RSU Awards attributable to future performance had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 1.3 years. The following table illustrates the pro forma effect on net loss and loss per share for the three months ended March 31, 2005 had we applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-based Compensation" (in millions except per share amounts): Net loss, as reported Deduct total stock-based employee compensation expense determined under SFAS 123, net of tax in 2005 Net loss, pro forma Basic loss per share: As reported $(2.79) Diluted loss per share: NOTE 4 - COMPREHENSIVE LOSS We include changes in minimum pension liabilities and changes in the fair value of derivative financial instruments which qualify for hedge accounting in other comprehensive loss. For the first quarter of 2006 and 2005, total comprehensive loss amounted to $31 million and $197 million, respectively. Total comprehensive loss in the first quarter of 2006 and 2005 includes adjustments to the minimum pension liability of $28 million and $19 million, respectively, resulting from the pension settlement charge in the first quarter of 2006 and the pension curtailment loss recorded in the first quarter of 2005 (both discussed in Note 5). The remaining difference between the net loss and total comprehensive loss for each period was attributable to changes in the fair value of derivative financial instruments. NOTE 5 - DEFINED BENEFIT PENSION PLANS Net periodic defined benefit pension expense for the three months ended March 31 included the following components (in millions): Expected return on plan assets Amortization of prior service cost Amortization of unrecognized net actuarial loss Net periodic defined benefit pension expense Settlement charge (included in special charges) Curtailment loss (included in special charges) Net defined benefit pension expense During the first quarter of 2006, we contributed $6 million to our defined benefit pension plans. On April 11, 2006, we contributed an additional $91 million to our defined benefit pension plans. Including these contributions, based on current assumptions and applicable law, we expect to contribute a total of $258 million to our defined benefit pension plans in 2006 to meet our minimum funding obligations. During the first quarter of 2005, we contributed 6.0 million shares of ExpressJet Holdings, Inc. ("Holdings") common stock valued at $65 million to our primary defined benefit pension plan. We recognized a gain of $51 million related to this contribution. In the first quarter of 2006, we recorded a $15 million non-cash settlement charge related to lump sum distributions from our defined benefit pension plans to pilots who retired. SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" ("SFAS 88"), requires the use of settlement accounting if, for a given year, the cost of all settlements exceeds, or is expected to exceed, the sum of the service cost and interest cost components of net periodic pension expense for the plan. Under settlement accounting, unrecognized plan gains or losses must be recognized immediately in proportion to the percentage reduction of the plan's projected benefit obligation. We anticipate that we will have additional non-cash settlement charges in the future in conjunction with lump-sum distributions to retiring pilots. In the first quarter of 2005, we recorded a $43 million non-cash curtailment charge in accordance with SFAS 88 in connection with freezing the portion of our defined benefit pension plan related to our pilots, using actuarial assumptions consistent with those we used at December 31, 2004. SFAS 88 requires curtailment accounting if an event eliminates, for a significant number of employees, the accrual of defined benefits for some or all of their future services. In the event of a curtailment, a loss must be recognized for the unrecognized prior service cost associated with years of service no longer expected to be rendered. NOTE 6 - SPECIAL CHARGES (CREDITS) During the first quarter of 2006, total operating expense was reduced by a net special credit of $6 million. We recorded a $15 million non-cash settlement charge related to lump sum distributions from our pilot defined benefit pension plans to pilots who retired, as discussed in Note 5. As discussed in Note 3, on February 1, 2006, our officers voluntarily surrendered their Stock Price Based RSU Awards with a performance period ending March 31, 2006, resulting in a $14 million special credit. The remaining balance of the net special credit recognized during the first quarter of 2006 is attributable to our permanently grounded MD-80 aircraft. We reduced our allowance for future lease payments and return conditions following negotiated settlements with aircraft lessors and adjusted the carrying amount of our remaining owned MD-80 aircraft to current fair value. In March 2005, we recorded a $43 million non-cash curtailment charge relating to the freezing of the portion of our defined benefit pension plan attributable to pilots, as discussed in Note 5. NOTE 7 - INVESTMENT IN EXPRESSJET HOLDINGS AND REGIONAL CAPACITY PURCHASE AGREEMENT Investment in Holdings. We account for our investment in Holdings using the equity method of accounting. At March 31, 2006, we held 4.7 million shares, or an 8.6% interest, of Holdings. These 4.7 million shares had a market value of $35 million at March 31, 2006. Subject to market conditions, we intend to sell or otherwise dispose of all of our shares of Holdings common stock in the future. In addition to the Holdings shares we own, our defined benefit pension plans owned 1.2 million shares of Holdings common stock at March 31, 2006, which represented a 2.2% interest in Holdings. The independent fiduciary for our defined benefit pension plans, which exercises sole and exclusive control over the voting and disposition of all securities owned by our defined benefit pension plans, sold 3.1 million shares to third parties during the three months ended March 31, 2006. Our ownership of Holdings common stock, together with the shares held by our defined benefit pension plans (which shares are subject to the exclusive control of the independent fiduciary), totaled 5.9 million shares, or 10.8% of Holdings' outstanding shares at March 31, 2006. Regional Capacity Purchase, Net. Payments made under our capacity purchase agreement are reported as regional capacity purchase, net in our consolidated statements of operations. Regional capacity purchase, net includes all of ExpressJet's fuel expense plus a margin on ExpressJet's fuel expense up to a cap provided in the capacity purchase agreement and a related fuel purchase agreement (which margin applies only to the first 71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft we lease to ExpressJet. Such regional capacity purchase, net payments totaled $415 million and $353 million in the three months ended March 31, 2006 and 2005, respectively. Capacity and Fleet Matters. The capacity purchase agreement covers all of ExpressJet's existing fleet, as well as the four Embraer regional jets currently on order. Under the agreement, we have the right to give no less than twelve months' notice to ExpressJet of our intent to reduce the number of its aircraft covered by the contract. In December 2005, we gave notice to ExpressJet that we will withdraw 69 of the 274 regional jet aircraft (including 2006 deliveries) from the capacity purchase agreement because the rates charged by ExpressJet for regional capacity are above the current market. We requested proposals from numerous regional jet operators and have selected Chautauqua Airlines, a subsidiary of Republic Airways Holdings Inc., to operate up to 69 of the regional jets that will be withdrawn from the capacity purchase agreement. Our agreement with Chautauqua calls for us to pay a fixed fee, which is subject to annual escalations, to Chautauqua for their operation of up to 69 aircraft. The term of our agreement with Chautauqua is ten years; however, we have the option to terminate the agreement at any time after January 1, 2012. Under our capacity purchase agreement with ExpressJet, ExpressJet has the option to decide, on or before September 28, 2006, to (1) fly any of the withdrawn aircraft for another airline (subject to its ability to obtain facilities, such as gates, ticket counters, hold rooms and other operations-related facilities, and subject to its arrangement with us that prohibits ExpressJet during the term of the agreement from flying under its or another carrier's code in or out of our hub airports), (2) fly any of the withdrawn aircraft under ExpressJet's own flight designator code, subject to its ability to obtain facilities and subject to ExpressJet's arrangement with us respecting our hubs, or (3) decline to fly any of the withdrawn aircraft, return the aircraft to us and cancel the related subleases with us. If ExpressJet elects to retain any of the aircraft, it must do so for the remaining term of the applicable underlying aircraft lease, and the implicit interest rate used to calculate the scheduled lease payments under the applicable aircraft sublease with ExpressJet will automatically increase by 200 basis points to compensate us for our continued participation in ExpressJet's lease financing arrangements. Should ExpressJet retain the withdrawn aircraft, other operators may supply any regional aircraft needed to support our network. The transition of service from ExpressJet to Chautauqua will begin in January of 2007 and be completed during the summer of 2007. So long as we are ExpressJet's largest customer, if ExpressJet enters into an agreement with another major airline (as defined in our capacity purchase agreement) to provide regional airline services on a capacity purchase or other similar economic basis for more than ten aircraft, we are entitled to the same or comparable economic terms and conditions on a most-favored-nations basis. The capacity purchase agreement currently expires on December 31, 2010, but allows us to terminate the agreement at any time upon 12 months' notice, or at any time without notice for cause (as defined in the agreement). We may also terminate the agreement at any time upon a material breach by ExpressJet that does not constitute cause and continues for 90 days after notice of such breach, or without notice or opportunity to cure if we determine that there is a material safety concern with ExpressJet's flight operations. We have the option to extend the term of the agreement with 24 months' notice for up to four additional five-year terms through December 31, 2030. NOTE 8 - SEGMENT REPORTING We have two reportable segments: mainline and regional. We evaluate segment performance based on several factors, of which the primary financial measure is operating income (loss). However, we do not manage our business or allocate resources based on segment operating profit or loss because (1) our flight schedules are designed to maximize revenue from passengers flying, (2) many operations of the two segments are substantially integrated (for example, airport operations, sales and marketing, scheduling and ticketing) and (3) management decisions are based on their anticipated impact on the overall network, not on one individual segment. Financial information for the three months ended March 31 by business segment is set forth below (in millions): Total Consolidated Operating Income (Loss): Net Loss: Net loss for the mainline segment for the three months ended March 31, 2006 includes the $26 million cumulative effect of change in accounting principle related to the adoption of SFAS 123R. The amounts presented above are presented on the basis of how our management reviews segment results. Under this basis, the regional segment's revenue includes a pro-rated share of our ticket revenue for segments flown by ExpressJet, and expenses include all activity related to the regional operations, regardless of whether such expenses were paid by us or ExpressJet. NOTE 9 - COMMITMENTS AND CONTINGENCIES Purchase Commitments. See Note 2 for a discussion of our aircraft purchase commitments. Financings and Guarantees. We are the guarantor of approximately $1.7 billion aggregate principal amount of tax-exempt special facilities revenue bonds and interest thereon, excluding the US Airways contingent liability described below. These bonds, issued by various airport municipalities, are payable solely from our rentals paid under long-term agreements with the respective governing bodies. The leasing arrangements associated with approximately $1.5 billion of these obligations are accounted for as operating leases, and the leasing arrangements associated with approximately $200 million of these obligations are accounted for as capital leases in our financial statements. We are contingently liable for US Airways' obligations under a lease agreement between US Airways and the Port Authority of New York and New Jersey related to the East End Terminal at LaGuardia airport. These obligations include the payment of ground rentals to the Port Authority and the payment of other rentals in respect of the full amounts owed on special facilities revenue bonds issued by the Port Authority having an outstanding par amount of $156 million at March 31, 2006 and a final scheduled maturity in 2015. If US Airways defaults on these obligations, we would be obligated to cure the default and we would have the right to occupy the terminal after US Airways' interest in the lease had been terminated. We also have letters of credit and performance bonds relating to various real estate and customs obligations at March 31, 2006 in the amount of $58 million with expiration dates through June 2008. General Guarantees and Indemnifications. We are the lessee under many real estate leases. It is common in such commercial lease transactions for us, as the lessee, to agree to indemnify the lessor and other related third parties for tort liabilities that arise out of or relate to our use or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, we typically indemnify such parties for any environmental liability that arises out of or relates to our use of the leased premises. In our aircraft financing agreements, we typically indemnify the financing parties, trustees acting on their behalf and other related parties against liabilities that arise from the manufacture, design, ownership, financing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the negligence of these indemnified parties, except for their gross negligence or willful misconduct. We expect that we would be covered by insurance (subject to deductibles) for most tort liabilities and related indemnities described above with respect to real estate we lease and aircraft we operate. In our financing transactions that include loans, we typically agree to reimburse lenders for any reduced returns with respect to loans due to any change in capital requirements and, in the case of loans in which the interest rate is based on LIBOR, for certain other increased costs that the lenders incur in carrying these loans as a result of any change in law, subject in most cases to certain mitigation obligations of the lenders. At March 31, 2006, we had $1.0 billion of floating rate debt and $331 million of fixed rate debt, with remaining terms of up to 10 years, that is subject to these increased cost provisions. In several financing transactions involving loans or leases from non-U.S. entities, with remaining terms of up to 10 years and an aggregate carrying value of $1.1 billion, we bear the risk of any change in tax laws that would subject loan or lease payments thereunder to non-U.S. entities to withholding taxes, subject to customary exclusions. In addition, in cross-border aircraft lease agreements for two 757 aircraft, we bear the risk of any change in U.S. tax laws that would subject lease payments made by us to a resident of Japan to withholding taxes, subject to customary exclusions. These capital leases for two 757 aircraft expire in 2008 and have a carrying value of $43 million at March 31, 2006. We cannot estimate the potential amount of future payments under the foregoing indemnities and agreements due to unknown variables related to potential government changes in capital adequacy requirements or tax laws. Financial Covenants. Our bank-issued credit card processing agreement contains financial covenants which require, among other things, that we maintain a minimum EBITDAR (generally, earnings before interest, taxes, depreciation, amortization, aircraft rentals and income from affiliates, adjusted for special items) to fixed charges (interest and aircraft rentals) ratio for the preceding 12 months of 0.9 to 1.0 through June 30, 2006 and 1.1 to 1.0 thereafter. The liquidity covenant requires us to maintain a minimum level of $1.0 billion of unrestricted cash and short-term investments and a minimum ratio of unrestricted cash and short-term investments to current liabilities at each month end of .27 to 1.0 through June 30, 2006 and .29 to 1.0 thereafter. The agreement also requires that we maintain a senior unsecured debt rating of at least Caa3 as rated by Moody's or CCC- as rated by Standard & Poor's. Although we are currently in compliance with all of the covenants, failure to maintain compliance would result in our being required to post up to an additional $415 million of cash collateral, which would adversely affect our liquidity. Depending on our unrestricted cash and short-term investments balance at the time, the posting of a significant amount of cash collateral could cause our unrestricted cash and short-term investments balance to fall below the $1.0 billion minimum balance requirement under our $350 million secured loan facility, resulting in a default under such facility. Employees. As of March 31, 2006, we had approximately 42,600 employees, or 40,210 full-time equivalent employees. On January 29, 2006, our flight attendants ratified their new contract containing pay and benefit reductions and work rule changes. In March 2006, the three unionized workgroups at CMI voted on tentative agreements containing benefit reductions and work rule changes. The tentative agreement with the CMI technicians was ratified and is being implemented, while the tentative agreements with the CMI agents and the CMI flight attendants were not ratified. We will continue to negotiate with the union representing the CMI agents and the CMI flight attendants to obtain annual pay and benefit reductions and work rule changes. Although there can be no assurance that our generally good labor relations and high labor productivity will continue, we have established as a significant component of our business strategy the preservation of good relations with our employees, approximately 43% of whom are represented by unions. Environmental Matters. We could be responsible for environmental remediation costs primarily related to jet fuel and solvent contamination surrounding our aircraft maintenance hangar in Los Angeles. In 2001, the California Regional Water Quality Control Board ("CRWQCB") mandated a field study of the site and it was completed in September 2001. In April 2005, under the threat of a CRWQCB enforcement action, we began environmental remediation of jet fuel contamination surrounding our aircraft maintenance hangar pursuant to a workplan submitted to (and approved by) the CRWQCB and our landlord, the Los Angeles World Airports. We have established a reserve for estimated costs of environmental remediation at Los Angeles and elsewhere in our system, based primarily on third party environmental studies and estimates as to the extent of the contamination and nature of the required remedial actions. We expect our total losses from all environmental matters to be $44 million, for which we were fully accrued at March 31, 2006. We have evaluated and recorded this accrual for environmental remediation costs separately from any related insurance recovery. We do not have any material receivables related to insurance recoveries at March 31, 2006. Based on currently available information, we believe that our reserves for potential environmental remediation costs are adequate, although reserves could be adjusted as further information develops or circumstances change. However, we do not expect these items to materially impact our results of operations, financial condition or liquidity. Legal Proceedings. During the period between 1997 and 2001, we reduced or capped the base commissions that we paid to travel agents, and in 2002 we eliminated such base commissions. These actions were similar to those also taken by other air carriers. We are now a defendant, along with several other air carriers, in two lawsuits brought by travel agencies that purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a/ Travel Specialists v. United Air Lines, et al. (U.S.D.C. Eastern District of North Carolina) filed on June 21, 2000, in which the defendant airlines prevailed on summary judgment that was upheld on appeal. These similar suits against Continental and other major carriers allege violations of antitrust laws in reducing and ultimately eliminating the base commission formerly paid to travel agents. The pending cases are Tam Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern District of California), filed on April 9, 2003 and Swope Travel Agency, et al. v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June 5, 2003. By order dated November 10, 2003, these actions were transferred and consolidated for pretrial purposes by the Judicial Panel on Multidistrict Litigation to the Northern District of Ohio. Discovery has commenced. In each of the foregoing cases, we believe the plaintiffs' claims are without merit and we are vigorously defending the lawsuits. Nevertheless, a final adverse court decision awarding substantial money damages could have a material impact on our results of operations, financial condition or liquidity. We and/or certain of our subsidiaries are defendants in various other lawsuits and proceedings arising in the normal course of business. Although the outcome of these lawsuits and proceedings cannot be predicted with certainty and could have a material adverse effect on our results of operations, financial condition or liquidity, it is our opinion, after consulting with outside counsel, that the ultimate disposition of such suits will not have a material adverse effect on our results of operations, financial condition or liquidity. I tem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion contains forward-looking statements that are not limited to historical facts, but reflect our current beliefs, expectations or intentions regarding future events. In connection therewith, please see the risk factors set forth in our 2005 Form 10-K, which identify important factors such as the consequences of our significant financial losses and high leverage, terrorist attacks, domestic and international economic conditions, the significant cost of aircraft fuel, labor costs, competition and industry conditions including the demand for air travel, the airline pricing environment and industry capacity decisions, regulatory matters and the seasonal nature of the airline business (the second and third quarters are generally stronger than the first and fourth quarters). We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report. General information about us can be found at http://www.continental.com/company/ investor. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission. We recorded a net loss of $66 million for the first quarter of 2006, as compared to a net loss of $186 million for the first quarter of 2005. Our net loss for the first quarter of 2006 includes a cumulative effect of change in accounting principle of $26 million related to our adoption of SFAS 123R, "Share Based Payment," effective January 1, 2006. See Note 3 in the Notes to Consolidated Financial Statements contained in Item 1 for a discussion of the impact of adopting this new standard. The smaller net loss in the first quarter of 2006 was the result of higher revenue and our cost-savings initiatives, primarily pay and benefit reductions and work rule changes. Although the current U.S. domestic network carrier environment is improving as several of our network competitors reduce domestic capacity and as carriers have increased fares in response to record high fuel prices, those high fuel prices continue to pressure all carriers. Further increases in jet fuel prices or disruptions in fuel supplies, whether as a result of natural disasters or otherwise, could have a material adverse effect on our results of operations, financial condition or liquidity. Among the many factors that threaten us are the continued rapid growth of low-cost carriers and resulting pressure on domestic fares, high fuel costs, excessive taxation and significant pension liabilities. In addition to competition from low-cost carriers, we may face stronger competition from carriers that have filed for bankruptcy protection, such as Delta Air Lines and Northwest Airlines (both of which filed for bankruptcy in September 2005), and from carriers recently emerged from bankruptcy, including US Airways (which emerged from bankruptcy in September 2005, for the second time since 2002) and United Airlines (which emerged from over three years of bankruptcy protection in February 2006). Carriers in bankruptcy are able to achieve substantial cost reductions through, among other things, reduction or discharge of debt, lease and pension obligations and wage and benefit reductions. We have suffered substantial losses since September 11, 2001, the magnitude of which is not sustainable if those losses continue to occur. Our ability to return to sustained profitability depends, among other factors, on implementing and maintaining a more competitive cost structure, retaining our revenue per available seat mile ("RASM") premium to the industry and responding effectively to the factors that threaten the airline industry as a whole. We have attempted to return to profitability by implementing the majority of $1.1 billion of annual cost-cutting and revenue-generating measures since 2002, and we have also achieved agreements or arrangements for nearly all of the $500 million reduction in annual pay and benefits costs on a run-rate basis that we targeted in late 2004. On January 29, 2006, our flight attendants ratified a new contract which, along with previously announced pay and benefit reductions for other work groups, concluded the negotiation process with our domestic employees. Although we incurred a loss for the first quarter of 2006, we believe that under current conditions, absent adverse factors outside of our control, such as additional terrorist attacks, hostilities involving the United States, or further significant increases in jet fuel prices, our existing liquidity and projected 2006 cash flows will be sufficient to fund current operations and other financial obligations through 2006. While we have significant financial obligations due in 2007, we also believe that under current conditions and absent adverse factors outside of our control, such as those described above, our projected 2007 cash flows from operations and access to capital markets will provide us with sufficient liquidity to fund our operations and meet our other obligations through the end of 2007. The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three months ended March 31, 2006 as compared to the corresponding period in 2005. We recorded a net loss of $66 million for the first quarter of 2006 as compared to a net loss of $186 million for the first quarter of 2005. We consider a key measure of our performance to be operating income (loss), which was income of $11 million for the first quarter of 2006, as compared to a loss of $173 million for the first quarter of 2005. Significant components of our consolidated operating results are as follows (in millions, except percentage changes): (Decrease) (6.0)% Nonoperating Income (Expense) Loss before Income Taxes and Cumulative Effect of Change in Accounting Principle (78.5)% Operating Revenue. Passenger revenue increased 18.4% due to increased capacity and traffic and several fare increases. Consolidated revenue passenger miles for the quarter increased 12.3% year-over-year on a capacity increase of 10.7%, which produced a consolidated load factor for the first quarter of 2006 of 77.9%, up 1.1 points over the same period in 2005. Consolidated yield increased 5.4% year-over-year. Consolidated RASM for the quarter increased 6.9% year-over-year due to higher yield and load factors. The improved RASM reflects recent fuel-driven fare increases and our actions taken to improve the mix of local versus flow traffic and reduce discounting. The table below shows passenger revenue for the quarter ended March 31, 2006 and period to period comparisons for passenger revenue, RASM and available seat miles (ASMs) by geographic region for our mainline and regional operations: Passenger Revenue Percentage Increase (Decrease) in First Quarter 2006 vs First Quarter 2005 ASMs Trans-Atlantic Total Mainline Total System Cargo revenue increased 8.1% primarily due to higher freight and mail volumes and increases in freight fuel surcharges. Other revenue increased due to higher revenue associated with sales of mileage credits in our OnePass frequent flyer program and passenger ticket change fees. Operating Expenses. Wages, salaries and related costs decreased 6.0% primarily due to pay and benefit reductions and work rule changes, partially offset by a slight increase in the average number of employees and $17 million additional expense in the first quarter of 2006 related to stock options and Stock Price Based RSU Awards following the adoption of SFAS 123R. Aircraft fuel and related taxes increased 40.6% due to a significant rise in fuel prices, combined with an increase in flight activity. The average jet fuel price per gallon including related taxes increased 31.1% to $1.90 in the first quarter of 2006 from $1.45 in the first quarter of 2005. The impact of jet fuel hedging activities was immaterial in the first quarter of 2006. We had no fuel hedges in place during 2005. Payments made under our capacity purchase agreement are reported in regional capacity purchase, net. Regional capacity purchase, net includes all of ExpressJet's fuel expense plus a margin on ExpressJet's fuel expense up to a cap provided in the capacity purchase agreement and a related fuel purchase agreement (which margin applies only to the first 71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft we lease to ExpressJet. The net expense was higher in the first quarter of 2006 than in the corresponding quarter of 2005 due to increased flight activity at ExpressJet, a larger fleet and increased fuel prices. Aircraft rentals increased due to new mainline and regional aircraft delivered in 2005. Landing fees and other rentals were higher primarily due to increased flight activity. Distribution costs increased primarily due to higher credit card fees and reservation costs related to the increase in revenue. Maintenance, materials and repairs increased primarily due to a higher contractual repair rates associated with a maturing fleet. Other operating expenses increased primarily due to a higher number of international flights which resulted in increased air navigation, ground handling, security and related expenses. During the first quarter of 2006, total operating expense was reduced by a net special credit of $6 million. We recorded a $15 million settlement charge related to lump sum distributions from our pilot defined benefit pension plans to pilots who retired. Additionally, on February 1, 2006, our officers voluntarily surrendered their Stock Price Based RSU Awards with a performance period ending March 31, 2006, resulting in a $14 million special credit. The remaining balance of the net special credit recognized during the first quarter of 2006 is attributable to our permanently grounded MD-80 aircraft. We reduced our allowance for future lease payments and return conditions following negotiated settlements with aircraft lessors and adjusted the carrying amount of our remaining owned MD-80 aircraft to current fair value. In March 2005, we recorded a $43 million non-cash curtailment charge relating to the freezing of the portion of our defined benefit pension plan attributable to pilots. Nonoperating Income (Expense). Nonoperating income (expense) includes net interest expense (interest expense less interest income and capitalized interest), income from affiliates, and gains from dispositions of investments. Total nonoperating income (expense) was a net expense in the first quarters of both 2006 and 2005. The net expense increased $38 million in the first quarter of 2006 compared to the first quarter of 2005 primarily due to gains of $51 million in 2005 related to the contribution of 6.0 million shares of Holdings common stock to our primary defined benefit pension plan. Net interest expense decreased $11 million in 2006 as a result of interest income on our higher cash balances. Income from affiliates, which includes income related to our tax sharing agreement with Holdings and our equity in the earnings of Copa Holdings, S.A. ("Copa") and Holdings, was $3 million lower in 2006 as compared to 2005 as a result of our reduced ownership interest in Copa and Holdings and less income from our tax sharing agreement with Holdings. Income Tax Benefit (Expense). Due to our continued losses, we concluded that we were required to provide a valuation allowance for deferred tax assets because we determined that it was more likely than not that such deferred tax assets would ultimately not be realized. As a result, our losses for the first quarters of 2006 and 2005 were not reduced by any tax benefit. Segment Results of Operations We have two reportable segments: mainline and regional. The mainline segment consists of flights using jets that have a capacity of greater than 100 seats while the regional segment consists of flights using jets with a capacity of 50 or fewer seats. The regional segment is operated by ExpressJet through a capacity purchase agreement. Under that agreement, we handle all of the scheduling and are responsible for setting prices and selling all of the seat inventory. In exchange for ExpressJet's operation of the flights, we pay ExpressJet for each scheduled block hour based on an agreed formula. Under the agreement, we recognize all passenger, cargo and other revenue associated with each flight, and are responsible for all revenue-related expenses, including commissions, reservations, catering and terminal rent at hub airports. We evaluate segment performance based on several factors, of which the primary financial measure is operating income (loss). However, we do not manage our business or allocate resources based on segment operating profit or loss because (1) our flight schedules are designed to maximize revenue from passengers flying, (2) many operations of the two segments are substantially integrated (for example, airport operations, sales and marketing, scheduling and ticketing), and (3) management decisions are based on their anticipated impact on the overall network, not on one individual segment. Mainline. Significant components of our mainline segment's operating results are as follows (in millions, except percentage changes): Operating Revenue The variances in specific line items for the mainline segment are due to the same factors discussed under consolidated results of operations. Regional. Significant components of our regional segment's operating results are as follows (in millions, except percentage changes): The reported results of our regional segment do not reflect the total contribution of the regional segment to our system-wide operations. The regional segment generates additional revenue for the mainline segment as it feeds traffic between smaller cities and our mainline hubs. The variances in specific line items for the regional segment are due to the growth in our regional operations and reflect generally the same factors discussed under consolidated results of operations. ASMs for our regional operations increased by 12.5% in the first quarter of 2006 as compared to the first quarter of 2005. Regional capacity purchase, net was higher due to increased flight activity at ExpressJet and higher fuel costs, partially offset by the higher number of regional jets leased by ExpressJet from us. The net amounts consist of the following (in millions, except percentage changes): Capacity purchase expenses Fuel and fuel taxes in excess of 71.2 cents per gallon cap Aircraft sublease income Statistical Information. Certain statistical information for our operations for the periods indicated is as follows: Increase/ Mainline Operations: Passengers (thousands) (1) Revenue passenger miles (millions) (2) Available seat miles (millions) (3) Cargo ton miles (millions) Passenger load factor (4) Passenger revenue per available seat mile (cents) Total revenue per available seat mile (cents) Average yield per revenue passenger mile (cents) (5) Average segment fare per revenue passenger Cost per available seat mile, including special charges (credits) (cents) (6) Average price per gallon of fuel, including fuel taxes (cents) Fuel gallons consumed (millions) Actual aircraft in fleet at end of period (7) Average length of aircraft flight (miles) Average daily utilization of each aircraft (hours) (8) Regional Operations: Average yield per revenue passenger mile (cents) Consolidated Operations (Mainline and Regional): Revenue passengers measured by each flight segment flown. The number of scheduled miles flown by revenue passengers. The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown. Revenue passenger miles divided by available seat miles. The average passenger revenue received for each revenue passenger mile flown. Includes special charges (credits) which represented (0.03) and 0.20 cents per available seat mile for the three months ended March 31, 2006 and 2005, respectively. Excludes aircraft that have been removed from service. The average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival). As of March 31, 2006, we had $2.3 billion in consolidated cash, cash equivalents and short-term investments, which is $59 million higher than at December 31, 2005. At March 31, 2006, we had $245 million of restricted cash, which is primarily collateral for estimated future workers' compensation claims, credit card processing contracts, letters of credit and performance bonds. Restricted cash at December 31, 2005 totaled $241 million. Operating Activities. Cash flows provided by operations for the three months ended March 31, 2006 were $387 million compared to $121 million in the same period in 2005. The increase in cash flows provided by operations in 2006 compared to 2005 is primarily the result of an improvement in operating income and advance ticket sales associated with increased flight activity. Cash receipts from advance ticket sales during the quarter were sufficiently strong to enable us to pre-pay $96 million of high interest rate debt and pre-fund $103 million of aircraft deposits. Both payments will result in lower interest costs to us. Investing Activities. Cash flows used in investing activities were $154 million for the three months ended March 31, 2006 compared to cash flows provided by investing activities of $72 million for the three months ended March 31, 2005. On March 30, 2006, we pre-funded $103 million of purchase deposits on Boeing aircraft. A significant component of cash provided by investing activities in the first quarter of 2005 was our conversion of certain short-term auction rate certificates into short-term cash equivalents. We have substantial commitments for capital expenditures, including for the acquisition of new aircraft. Net capital expenditures for the full year 2006 are expected to be $325 million, or $350 million after considering purchase deposits to be paid, net of purchase deposits to be refunded. Projected net capital expenditures for 2006 consist of $180 million of fleet expenditures, $100 million of non-fleet expenditures and $45 million for rotable parts and capitalized interest. Through March 31, 2006, our net capital expenditures totaled $68 million and net purchase deposits paid totaled $113 million. Financing Activities. Cash flows used in financing activities, primarily the payment of long-term debt and capital lease obligations, were $149 million for the three months ended March 31, 2006 compared to $107 million in the three months ended March 31, 2005. In March 2006, we elected to pre-pay $96 million of debt due in early 2007. This debt had an interest rate of LIBOR plus 4.53%. At March 31, 2006, we had approximately $5.4 billion (including current maturities) of long-term debt and capital lease obligations. We do not currently have any undrawn lines of credit or revolving credit facilities and substantially all of our otherwise readily financeable assets are encumbered. However, our remaining interests in Copa and Holdings are not pledged as collateral under any of our debt. We were in compliance with all debt covenants at March 31, 2006. At March 31, 2006, our senior unsecured debt ratings were Caa2 by Moody's and CCC+ by Standard & Poor's. Reductions in our credit ratings have increased the interest we pay on new issuances of debt and may increase the cost and reduce the availability of financing to us in the future. We do not have any debt obligations that would be accelerated as a result of a credit rating downgrade. However, we would have to post additional collateral of approximately $70 million under our bank-issued credit card processing agreement if our senior unsecured debt rating falls below Caa3 as rated by Moody's or CCC- as rated by Standard & Poor's. We would also be required to post additional collateral of up to $27 million under our worker's compensation program if our senior unsecured debt rating falls below Caa2 as rated by Moody's or CCC+ as rated by Standard & Poor's. Our bank-issued credit card processing agreement also contains financial covenants which require, among other things, that we maintain a minimum EBITDAR (generally, earnings before interest, taxes, depreciation, amortization, aircraft rentals and income from affiliates, adjusted for special items) to fixed charges (interest and aircraft rentals) ratio for the preceding 12 months of 0.9 to 1.0 through June 30, 2006 and 1.1 to 1.0 thereafter. The liquidity covenant requires us to maintain a minimum level of $1.0 billion of unrestricted cash and short-term investments and a minimum ratio of unrestricted cash and short-term investments to current liabilities at each month end of 0.27 to 1.0 through June 30, 2006 and .29 to 1.0 thereafter. Although we are currently in compliance with all of the covenants, failure to maintain compliance would result in our being required to post up to an additional $415 million of cash collateral, which would adversely affect our liquidity. Depending on our unrestricted cash and short-term investments balance at the time, the posting of a significant amount of cash collateral could cause our unrestricted cash and short-term investments balance to fall below the $1.0 billion minimum balance requirement under our $350 million secured loan facility, resulting in a default under such facility. On April 10, 2006, we filed an automatically effective universal shelf registration statement covering the sale from time to time of our securities in one or more public offerings. The securities offered might include debt securities, including pass-through certificates, shares of common stock, shares of preferred stock and securities exercisable for, or convertible into, shares of common stock, such as stock purchase contracts, warrants or subscription rights, among others. Proceeds from any sale of securities under this registration statement other than pass-through certificates would likely be used for general corporate purposes, including the repayment of debt, the funding of pension obligations and working capital requirements, whereas proceeds from the issuance of pass-through certificates would be used to finance or refinance aircraft and related equipment. We have utilized proceeds from the issuance of pass-through certificates to finance the acquisition of 251 leased and owned mainline jet aircraft. Typically, these pass-through certificates, as well as separate financings secured by aircraft spare parts and spare engines, contain liquidity facilities whereby a third party agrees to make payments sufficient to pay at least 18 months of interest on the applicable certificates if a payment default occurs. The liquidity providers for these certificates include the following: CALYON New York Branch, Landesbank Hessen-Thuringen Girozentrale, Morgan Stanley Capital Services, Westdeutsche Landesbank Girozentrale, AIG Matched Funding Corp., ABN AMRO Bank N.V., Credit Suisse First Boston, Caisse des Depots et Consignations, Bayerische Landesbank Girozentrale, ING Bank N.V. and De Nationale Investeringsbank N.V. We are also the issuer of pass-through certificates secured by 130 leased regional jet aircraft currently operated by ExpressJet. The liquidity providers for these certificates include the following: ABN AMRO Bank N.V., Chicago Branch, Citibank N.A., Citicorp North America, Inc., Landesbank Baden-Wurttemberg, RZB Finance LLC and WestLB AG, New York Branch. We currently utilize policy providers to provide credit support on three separate financings with an outstanding principal balance of $516 million at March 31, 2006. The policy providers have unconditionally guaranteed the payment of interest on the notes when due and the payment of principal on the notes no later than 24 months after the final scheduled payment date. Policy providers on these notes are MBIA Insurance Corporation (a subsidiary of MBIA, Inc.), Ambac Assurance Corporation (a subsidiary of Ambac Financial Group, Inc.) and Financial Guaranty Insurance Company (a subsidiary of FGIC). Financial information for FGIC is available over the internet at http://www.fgic.com and financial information for the parent companies of our other policy providers is available over the internet at the SEC's website at http://www.sec.gov or at the SEC's public reference room in Washington, D.C. A policy provider is also used as credit support for the financing of certain facilities at Bush Intercontinental, currently subject to a sublease by us to the City of Houston, with an outstanding balance of $57 million at March 31, 2006. Pension Plans. We have noncontributory defined benefit pension plans in which substantially all of our U.S. employees participate, other than Chelsea Food Services and CMI employees. Future benefit accruals for our pilots under the pilot-only defined benefit pension plan ceased as of May 31, 2005. Funding requirements for defined benefit pension plans are determined by government regulations. During the first quarter of 2006, we contributed $6 million to our defined benefit pension plans. On April 11, 2006, we contributed an additional $91 million to our defined benefit pension plans. Including these contributions, based on current assumptions and applicable law, we expect to contribute a total of $258 million to our defined benefit pension plans in 2006 to meet our minimum funding obligations. Item 3. Quantitative and Qualitative Disclosures about Market Risk. There have been no material changes in market risk from the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our 2005 Form 10-K except as follows: Foreign Currency. At March 31, 2006, we had forward contracts outstanding to hedge approximately 84% of our projected Canadian dollar-denominated cash inflows for the remainder of 2006. We estimate that at March 31, 2006, a uniform 10% strengthening in the value of the U.S. dollar relative to the Canadian dollar would have increased the fair value of the existing forward contracts by $6 million, which would be offset by a corresponding loss on the underlying 2006 exposure of $6 million. Aircraft Fuel. From time to time we enter into petroleum swap contracts, petroleum call option contracts and/or jet fuel purchase commitments to provide some short-term hedge protection (generally three to six months) against sudden and significant increases in jet fuel prices. As of March 31, 2006, we had hedged approximately 17% of our projected fuel requirements for the second quarter of 2006 using petroleum swap contracts with a weighted average swap price of $63.56 per barrel. We estimate that a 10% increase in the price per gallon of aircraft fuel at March 31, 2006 would increase the fair value of petroleum swap contracts existing at March 31, 2006 by $12 million. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures, which have been designed to permit us to effectively identify and timely disclose important information. They concluded that the controls and procedures were effective as of March 31, 2006 to provide reasonable assurance that the information required to be disclosed by the Company in reports it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. While our disclosure controls and procedures provide reasonable assurance that the appropriate information will be available on a timely basis, this assurance is subject to limitations inherent in any control system, no matter how well it may be designed or administered. Changes in Internal Controls. There was no change in our internal control over financial reporting during the quarter ended March 31, 2006, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings. During the period between 1997 and 2001, we reduced or capped the base commissions that we paid to travel agents, and in 2002 we eliminated such base commissions. These actions were similar to those also taken by other air carriers. We are now a defendant, along with several other air carriers, in two lawsuits brought by travel agencies that purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a/ Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern District of North Carolina), filed on June 21, 2000, in which the defendant airlines prevailed on summary judgment that was upheld on appeal. These similar suits against Continental and other major carriers allege violations of antitrust laws in reducing and ultimately eliminating the base commission formerly paid to travel agents. The pending cases are Tam Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern District of California), filed on April 9, 2003 and Swope Travel Agency, et al. v. Orbitz LLC et al. (U.S.D.C., Eastern District of Texas), filed on June 5, 2003. By order dated November 10, 2003, these actions were transferred and consolidated for pretrial purposes by the Judicial Panel on Multidistrict Litigation to the Northern District of Ohio. Discovery has commenced. In each of the foregoing cases, we believe the plaintiffs' claims are without merit and we are vigorously defending the lawsuits. Nevertheless, a final adverse court decision awarding substantial money damages could have a material adverse impact on our results of operations, financial condition or liquidity. Item 1A, "Risk Factors," of our 2005 Form 10-K includes a detailed discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our 2005 Form 10-K. The airline industry is highly competitive and susceptible to price discounting and fluctuations in passenger demand. The U.S. airline industry is increasingly characterized by substantial price competition, especially in domestic markets. Carriers use discount fares to stimulate traffic during periods of slack demand, to generate cash flow and to increase market share. Some of our competitors have substantially greater financial resources, including hedges against fuel price increases, or lower cost structures than we do, or both. In recent years, the domestic market share held by low cost carriers has increased significantly and is expected to continue to increase, which is dramatically changing the airline industry. The increased market presence of low cost carriers has increased competition and impacted the ability of the network carriers to maintain sufficient pricing structures in domestic markets, which negatively affects profitability. This has contributed to the dramatic losses for us and the airline industry generally. For example, a low-cost carrier began to directly compete with us on flights between Liberty International and destinations in Florida in 2005. We are responding vigorously to this challenge, but have experienced decreased yields on affected flights. We cannot predict whether or for how long these trends will continue. In addition to price competition, airlines also compete for market share by increasing the size of their route system and the number of markets they serve. Several of our domestic competitors have announced aggressive plans to expand into international markets, including some destinations that we currently serve. The increased competition in these international markets, particularly to the extent our competitors engage in price discounting, may have a material adverse effect on our results of operations, financial condition or liquidity. Airline profit levels are highly sensitive to changes in fuel costs, fare levels and passenger demand. Passenger demand is influenced by, among other things, the state of the global economy and domestic and international events such as terrorism, hostilities involving the United States or concerns about exposure to contagious diseases (such as SARS or avian flu). The September 11, 2001 terrorist attacks, the weak economy prior to 2004, turbulent international events (including the war in Iraq and the SARS outbreak), high fuel prices and extensive price discounting by carriers have resulted in dramatic losses for us and the airline industry generally. To the extent that future events of this nature negatively impact passenger travel behavior and/or fare levels, such events may have a material adverse effect on our results of operations, financial condition or liquidity. Delta, Northwest and several small competitors have filed for bankruptcy protection, and other carriers could file for bankruptcy or threaten to do so to reduce their costs. US Airways and, more recently, United, have emerged from bankruptcy. Carriers operating under bankruptcy protection may be in a position to operate in a manner adverse to us and could emerge from bankruptcy as more vigorous competitors with substantially lower costs than ours. Since its deregulation in 1978, the U.S. airline industry has undergone substantial consolidation and may experience additional consolidation in the future. We routinely monitor changes in the competitive landscape and engage in analysis and discussions regarding our strategic position, including alliances, asset acquisitions and business combination transactions. We have had, and expect to continue to have, discussions with third parties regarding strategic alternatives. The impact of any consolidation within the U.S. airline industry cannot be predicted at this time. A significant failure or disruption of the computer systems on which we rely could adversely affect our business, as could our failure to reach agreement with companies operating global distribution systems. We depend heavily on computer systems and technology to operate our business, such as flight operations systems, communications systems, airport systems and reservations systems (including continental.com and third party global distribution systems). These systems could suffer substantial or repeated disruptions due to events beyond our control, including natural disasters, power failures, terrorist attacks, equipment or software failures and computer viruses and hackers. Any such disruptions could materially impair our flight and airport operations and our ability to market our services, and could result in increased costs, lost revenue and the loss or compromise of important data. Although we have taken measures in an effort to reduce the adverse effects of certain potential failures or disruptions, if these steps are not adequate to prevent or remedy the risks, our business may be materially adversely affected. In addition, a significant portion of our revenue, including a significant portion of our higher yield traffic, is derived from bookings made through third party global distribution systems ("GDSs") used by many travel agents and travel purchasers. Over the past several years we have focused on reducing our distribution costs, including GDS fees. We recently entered into a new long-term content agreement with the operator of one of the four major GDSs, and our current agreements with the operators of the three other major GDSs are scheduled to expire during July and August 2006. We are currently in negotiations with the operators of the other three major GDSs, and we have not yet been able to reach content agreements with them on terms that are acceptable to us. If we are unable to reach agreement with one or more of the operators of the GDSs, it is possible that our flights would not be available for sale through the particular GDS with which we would have no content agreement. The lack of a content agreement would make our fares, seat availability, schedules and inventories unavailable for display through a particular GDS, which could damage our relationships with any travel agents or travel purchasers reliant on that GDS, and could also result in a decline in our sales, which decline could be sufficient to result in a material adverse effect on us. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Item 3. Defaults Upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits. 10.1* Continental Airlines, Inc. Long-Term Incentive and RSU Program (as amended and restated through March 29, 2006). 10.1(a)* Form of Award Notice pursuant to Continental Airlines, Inc. Long-Term Incentive and RSU Program (Profit Based RSU Awards). Supplemental Agreement No. 37, dated March 30, 2006, to Purchase Agreement No. 1951 between the Company and The Boeing Company ("Boeing"), dated July 23, 1996, relating to the purchase of Boeing 737 aircraft. (1) Supplemental Agreement No. 12, dated March 17, 2006, to Purchase Agreement No. 2061 between the Company and Boeing, dated October 10, 1997, relating to the purchase of Boeing 777 aircraft. (1) Rule 13a-14 (a)/15d-14 (a) Certification of Chief Executive Officer. Rule 13a-14 (a)/15d-14 (a) Certification of Chief Financial Officer. Section 1350 Certifications. *These exhibits relate to management contracts or compensatory plans or arrangements. Continental has applied to the Commission for confidential treatment of a portion of this exhibit. /s/ Jeffrey J. Misner Jeffrey J. Misner Executive Vice President and (On behalf of Registrant) /s/ Chris Kenny Chris Kenny Vice President and Controller (Principal Accounting Officer) As Adopted and Filed LONG TERM INCENTIVE AND RSU PROGRAM (As Amended and Restated Through March 29, 2006) I. PURPOSE OF PROGRAM This Continental Airlines, Inc. Long Term Incentive and RSU Program (the "Program") has been adopted by the Human Resources Committee of the Board of Directors of Continental Airlines, Inc., a Delaware corporation (the "Company"), to implement in part the Performance Award provisions of the Continental Airlines, Inc. Incentive Plan 2000 (as amended from time to time, the "Incentive Plan 2000") adopted by the Board of Directors of the Company, and is intended to provide a method for attracting, motivating, and retaining key employees to assist in the development and growth of the Company and its Subsidiaries. The Program and Awards hereunder shall be subject to the terms of the Incentive Plan 2000, including (a) with respect to Profit Based RSU Awards and Stock Price Based RSU Awards, the limitations on the maximum number of shares of stock that may be subject to awards granted under the Incentive Plan 2000 to any one individual during any calendar year, and (b) with respect to NLTIP Awards, the limitations on the maximum value of Awards contained in Section 5(a)(iii) of the Incentive Plan 2000. The Program as set forth herein constitutes an amendment and restatement of the Program as previously adopted and amended by the Company and as in effect on March 28, 2006 (the "Prior Program"), and shall supersede and replace in its entirety such previously adopted Prior Program. This amendment and restatement of the Prior Program into the Program was adopted by the Human Resources Committee of the Company's Board of Directors on March 29, 2006, and shall be effective as of such date; provided, however, that provisions of the Program required to have an earlier effective date pursuant to Section 409A of the Code shall be effective as of January 1, 2005. The terms and conditions of this amendment and restatement of the Program shall apply to all Awards granted under the Program, including, without limitation, Awards granted under the Prior Program. II. DEFINITIONS AND CONSTRUCTION 2.1 Definitions. Where the following words and phrases are used in the Program, they shall have the respective meanings set forth below, unless the context clearly indicates to the contrary: "Administrator" means (i) in the context of Awards made to, or the administration (or interpretation of any provision) of the Program as it relates to, any person who is subject to Section 16 of the Securities Exchange Act of 1934, as amended (including any successor section to the same or similar effect, "Section 16"), the Committee, or (ii) in the context of Awards made to, or the administration (or interpretation of any provision) of the Program as it relates to, any person who is not subject to Section 16, the Chief Executive Officer of the Company (or, if the Chief Executive Officer is not a director of the Company, the Committee), unless the Program specifies that the Committee shall take specific action (in which case such action may only be taken by the Committee) or the Committee (as to any Award described in this clause (ii) or the administration or interpretation of any specific provision of the Program) specifies that it shall serve as Administrator. "Annual Executive Bonus Program" means the Continental Airlines, Inc. Annual Executive Bonus Program, or any successor to such program. "Award" means, with respect to each Participant for a Performance Period, such Participant's opportunity to earn a Payment Amount for such Performance Period, upon the satisfaction of the terms and conditions of the Program. Awards shall relate to an NLTIP Performance Target ("NLTIP Awards"), a Stock Price Based RSU Performance Target ("Stock Price Based RSU Awards"), or a Profit Based RSU Performance Target ("Profit Based RSU Awards"). Awards hereunder constitute Performance Awards (as such term is defined in the Incentive Plan 2000) under the Incentive Plan 2000. "Award Notice" means a written notice issued by the Company to a Participant evidencing such Participant's receipt of an Award with respect to a Performance Period. "Base Amount" means the sum of (i) the annual base rate of pay paid or payable in cash by the Company and the Subsidiaries to or for the benefit of a Participant for services rendered or labor performed, plus (ii) an additional amount equal to (1) for all Participants other than those described in Section 2.1(dd)(vi), 2.1(dd)(vii) or 2.1(dd)(viii) below, 125% of the amount described in clause (i), and (2) for all Participants described in Section 2.1(dd)(vi), 2.1(dd)(vii) or 2.1(dd)(viii) below, 37.5% of the amount described in clause (i). Base Amount shall be determined without reduction for amounts a Participant could have received in cash in lieu of (A) elective deferrals under any deferred compensation plan of the Company or (B) elective contributions made on such Participant's behalf by the Company or a Subsidiary pursuant to a qualified cash or deferred arrangement (as defined in section 401(k) of the Code) or pursuant to a plan maintained under section 125 of the Code. "Basis Point" means one one-hundredth of one percent (0.01%). "Board" means the Board of Directors of the Company "Cash Hurdle" means, with respect to an NLTIP Performance Period or a Profit Based RSU Performance Period, the dollar amount specified by the Committee as the Cash Hurdle with respect to such Performance Period as provided in Section 3.1, and achievement of the Cash Hurdle means (i) in the case of an NLTIP Performance Period, that the Company's cash flow over such Performance Period is such that the Company's cash, cash equivalents and short term investments (excluding restricted cash, cash equivalents and short term investments) at the end of such Performance Period, as reflected on the regularly prepared and publicly available balance sheet of the Company and its consolidated subsidiaries prepared in accordance with GAAP, is equal to or greater than that dollar amount so specified by the Committee as the Cash Hurdle for such Performance Period, and (ii) in the case of a Profit Based RSU Performance Period, that the Company's cash flow over the period beginning on the first day of such Performance Period and ending on the last day of the Fiscal Year prior to the applicable Specified Payment Date (the "Cash Hurdle Measurement Period") is such that the Company's cash, cash equivalents and short term investments (excluding restricted cash, cash equivalents and short term investments) at the end of such Cash Hurdle Measurement Period, as reflected on the regularly prepared and publicly available balance sheet of the Company and its consolidated subsidiaries prepared in accordance with GAAP, is equal to or greater than that dollar amount so specified by the Committee as the Cash Hurdle for such Performance Period. "Change in Control" shall have the same meaning as is assigned to such term under the Incentive Plan 2000, as in effect on March 12, 2004, taking into account amendments effected on that date. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means a committee of the Board comprised solely of two or more outside directors (within the meaning of the term "outside directors" as used in section 162(m) of the Code). Such committee shall be the Human Resources Committee of the Board unless and until the Board designates another committee of the Board to serve as the Committee. "Company" means Continental Airlines, Inc., a Delaware corporation. "Company Stock" means the Class B common stock, par value $0.01 per share, of the Company. "Cumulative Profit Sharing Pool" means, with respect to the last day of a Fiscal Year in a Profit Based RSU Performance Period, the aggregate amount of the Profit Sharing Pools, if any, for such Fiscal Year and for all prior Fiscal Years in such Profit Based RSU Performance Period. "Cumulative Profit Sharing Pool Target" means, with respect to a Profit Based RSU Performance Period, the dollar amount specified by the Committee as the Cumulative Profit Sharing Pool Target with respect to such Performance Period as provided in Section 3.1. The Committee may set multiple levels for the Cumulative Profit Sharing Pool Target that may apply to a single Profit Based RSU Performance Period (and each such level is referred to herein as a "Cumulative Profit Sharing Pool Target Level"), and the Payout Structure relating to the Profit Based RSU Award for such Performance Period may specify different Profit Based RSU Payment Percentages depending on the Cumulative Profit Sharing Pool Target Level achieved. Achievement of a Cumulative Profit Sharing Pool Target means that, as of the last day of a Fiscal Year in the Profit Based RSU Performance Period, the Cumulative Profit Sharing Pool equals or exceeds a Cumulative Profit Sharing Pool Target Level that has not been so achieved as of the last day of any prior Fiscal Year in such Profit Based RSU Performance Period (and the Cumulative Profit Sharing Pool Target shall be deemed achieved for such Fiscal Year only with respect to the highest such Cumulative Profit Sharing Pool Target Level so achieved for such Fiscal Year). "Disability" or "Disabled" means, with respect to a Participant, that such Participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of such Participant's employer. "EBITDAR" means, with respect to the Company and each company in the Industry Group and each NLTIP Performance Period, the aggregate earnings of the Company or such company and its consolidated subsidiaries during the Performance Period, determined prior to the charges, costs, and expenses associated with interest, income taxes, depreciation, amortization, and aircraft rent. EBITDAR shall be determined based on the regularly prepared and publicly available statements of operations of the Company and each company in the Industry Group prepared in accordance with GAAP (and if necessary to determine certain items, based on Form 41 data filed by the Company or such company with the Department of Transportation); provided, however, that EBITDAR shall be adjusted to exclude (i) non-operating income or expense, (ii) write-offs of assets (including aircraft and associated parts), (iii) one-time gains or losses from the disposal of assets, and (iv) any other item of gain, loss, or expense determined to be extraordinary or unusual in nature or infrequent in occurrence, in each case under clauses (i), (ii), (iii) and (iv) as determined by the Committee in accordance with GAAP. If the fiscal year of a company in the Industry Group is not the calendar year, then such company's EBITDAR for an NLTIP Performance Period shall be determined based upon the fiscal quarters of such company that coincide with the fiscal quarters contained in such Performance Period. Further, if a company in the Industry Group provides publicly available statements of operations with respect to its airline business that are separate from the statements of operations provided with respect to its other businesses, then such company's EBITDAR shall be determined based solely upon the separately provided statements of operations pertaining to its airline business. "EBITDAR Margin" means, with respect to the Company and each company in the Industry Group and each NLTIP Performance Period, the cumulative EBITDAR for the Company or such company for such Performance Period divided by the Company's or such company's cumulative revenues (determined on a consolidated basis based on the regularly prepared and publicly available statements of operations of the Company or such company prepared in accordance with GAAP) over such Performance Period. If the fiscal year of a company in the Industry Group is not the calendar year, then such company's EBITDAR Margin for an NLTIP Performance Period shall be determined based upon the fiscal quarters of such company that coincide with the fiscal quarters contained in such Performance Period. Further, if a company in the Industry Group provides publicly available statements of operations with respect to its airline business that are separate from the statements of operations provided with respect to its other businesses, then such company's EBITDAR Margin shall be determined based solely upon the separately provided statements of operations pertaining to its airline business. "Eligible Employee" means any individual who is a staff vice president or more senior officer of the Company or a Subsidiary. "Entry EBITDAR Margin" means, with respect to each NLTIP Performance Period, the percentage determined by calculating the simple average of the EBITDAR Margins of the companies in the Industry Group with respect to such Performance Period. "Financial Performance Hurdle" means, with respect to a particular Fiscal Year, that the Company's net income for such Fiscal Year, as set forth on its regularly prepared and publicly available consolidated statements of operations prepared in accordance with GAAP, is greater than $0 (or, with respect to the first Fiscal Year under the Program, greater than $66 million). "Fiscal Year" means each 12-consecutive month period commencing on January 1; provided, however, that the first Fiscal Year under the Program shall be the nine-consecutive month period commencing on April 1, 2006. "GAAP" means United States generally accepted accounting principles, consistently applied. "Incentive Plan 2000" means the Continental Airlines, Inc. Incentive Plan 2000, as amended from time to time. "Industry Group" means, with respect to each NLTIP Performance Period, the companies determined in accordance with the provisions of Article V for such Performance Period. "Market Value per Share" means, as of any specified date, the simple average of the closing sales prices of Company Stock in the principal securities market in which the Company Stock is then traded over the 20 most recent consecutive Trading Days ending on the last Trading Day preceding the specified date, adjusted appropriately by the Committee for any stock splits, stock dividends, reverse stock splits, special dividends or other similar matters occurring during or with respect to any relevant measurement period. "NLTIP Performance Period" means: (i) as to the first NLTIP Performance Period under the Program, the period commencing on April 1, 2004 and ending on December 31, 2006, and (ii) each three-year period commencing on the first day of a calendar year that begins on or after January 1, 2005. Notwithstanding the foregoing, no new NLTIP Performance Period shall commence on or after the date upon which a Change in Control occurs, unless otherwise determined by the Committee. "Participant" means an Eligible Employee who has received an Award under the Program with respect to a Performance Period pursuant to Section 4.1. "Payment Amount" (A) with respect to Stock Price Based RSU Awards means, with respect to each Participant and each Stock Price Based RSU Performance Period with respect to which the Stock Price Based RSU Performance Target is satisfied, an amount equal to 100% of the RSU Value, determined as of the last day of the relevant Stock Price Based RSU Performance Period (or, in the event of a Change in Control, as of the date of the Change in Control, or in the event of death, Disability or Retirement of a Participant, as of the date of such death, Disability or Retirement), (B) with respect to NLTIP Awards means, with respect to each Participant and each NLTIP Performance Period for which the NLTIP Performance Target is satisfied, an amount equal to (i) such Participant's Base Amount in effect as of the earlier of (1) the last day of such NLTIP Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, multiplied by (ii) the Payout Percentage applicable to such Participant for such NLTIP Performance Period, and (C) with respect to each Profit Based RSU Award and related Profit Based RSU Performance Period, means each amount payable pursuant to Section 6.2(b), 6.3(b) and 6.4(b). Notwithstanding the foregoing, a Payment Amount may be pro-rated as provided in the Program. "Payout Percentage" means, with respect to each NLTIP Performance Period for which the NLTIP Performance Target is satisfied: (i) In the case of a Participant who is the Company's Chief Executive Officer as of the earlier of (1) the last day of such Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, 75% plus (A) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 25 divided by (y) the difference between the Target EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, up to and including the Target EBITDAR Margin with respect to such Performance Period, and (B) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 50 divided by (y) the difference between the Stretch EBITDAR Margin with respect to such Performance Period and the Target EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, up to and including the Stretch EBITDAR Margin with respect to such Performance Period; (ii) In the case of a Participant who is the Company's President as of the earlier of (1) the last day of such Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, 70% plus (A) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 20 divided by (y) the difference between the Target EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, up to and including the Target EBITDAR Margin with respect to such Performance Period, and (B) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 45 divided by (y) the difference between the Stretch EBITDAR Margin with respect to such Performance Period and the Target EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, up to and including the Stretch EBITDAR Margin with respect to such Performance Period; (iii) In the case of a Participant who is an Executive Vice President of the Company as of the earlier of (1) the last day of such Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, 50% plus (A) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 25 divided by (y) the difference between the Target EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, up to and including the Target EBITDAR Margin with respect to such Performance Period, and (B) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 25 divided by (y) the difference between the Stretch EBITDAR Margin with respect to such Performance Period and the Target EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, up to and including the Stretch EBITDAR Margin with respect to such Performance Period; (iv) In the case of a Participant who is a Senior Vice President of the Company (or the President of a Subsidiary) as of the earlier of (1) the last day of such Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, 30% plus (A) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 20 divided by (y) the difference between the Target EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, up to and including the Target EBITDAR Margin with respect to such Performance Period, and (B) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 20 divided by (y) the difference between the Stretch EBITDAR Margin with respect to such Performance Period and the Target EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, up to and including the Stretch EBITDAR Margin with respect to such Performance Period; (v) In the case of a Participant (other than a Participant described in any of clauses (i), (ii), (iii) or (iv) above) who is a participant in the Annual Executive Bonus Program as of the earlier of (1) the last day of such Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, 25% plus (A) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 15 divided by (y) the difference between the Target EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, up to and including the Target EBITDAR Margin with respect to such Performance Period, and (B) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 15 divided by (y) the difference between the Stretch EBITDAR Margin with respect to such Performance Period and the Target EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, up to and including the Stretch EBITDAR Margin with respect to such Performance Period; (vi) In the case of a Participant who is designated as a Category 1 officer by the Administrator and is not described in any of clauses (i), (ii), (iii), (iv) or (v) above as of the earlier of (1) the last day of such Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, 40% plus (A) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 15 divided by (y) the difference between the Target EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, up to and including the Target EBITDAR Margin with respect to such Performance Period, and (B) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 30 divided by (y) the difference between the Stretch EBITDAR Margin with respect to such Performance Period and the Target EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, up to and including the Stretch EBITDAR Margin with respect to such Performance Period; (vii) In the case of a Participant who is designated as a Category 2 officer by the Administrator and is not described in any of clauses (i), (ii), (iii), (iv), (v) or (vi) above as of the earlier of (1) the last day of such Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, 30% plus (A) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 10 divided by (y) the difference between the Target EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, up to and including the Target EBITDAR Margin with respect to such Performance Period, and (B) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 25 divided by (y) the difference between the Stretch EBITDAR Margin with respect to such Performance Period and the Target EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, up to and including the Stretch EBITDAR Margin with respect to such Performance Period; and (viii) In the case of a Participant who is designated as a Category 3 officer by the Administrator and is not described in any of clauses (i), (ii), (iii), (iv), (v), (vi) or (vii) above as of the earlier of (1) the last day of such Performance Period, (2) the date of such Participant's death, Disability or Retirement, or (3) the day immediately preceding the date upon which such Participant suffers a Qualifying Event in connection with, after, or in contemplation of a Change in Control, 15% plus (A) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 5 divided by (y) the difference between the Target EBITDAR Margin with respect to such Performance Period and the Entry EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Entry EBITDAR Margin with respect to such Performance Period, up to and including the Target EBITDAR Margin with respect to such Performance Period, and (B) if the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, an additional percentage equal to (x) 10 divided by (y) the difference between the Stretch EBITDAR Margin with respect to such Performance Period and the Target EBITDAR Margin with respect to such Performance Period (expressed in Basis Points), for each Basis Point that the Company's EBITDAR Margin with respect to such Performance Period exceeds the Target EBITDAR Margin with respect to such Performance Period, up to and including the Stretch EBITDAR Margin with respect to such Performance Period. "Payout Structure" means, with respect to each Profit Based RSU Performance Period, a Profit Based RSU Payment Percentage determined by the Committee to apply to each Cumulative Profit Sharing Pool Target Level relating to such Performance Period. The Payout Structure for each Profit Based RSU Performance Period shall be determined by the Committee as provided in Section 3.1. "Performance Period" means an NLTIP Performance Period, a Stock Price Based RSU Performance Period or a Profit Based RSU Performance Period, as applicable or as the context requires. "Performance Target" means (A) with respect to an NLTIP Performance Period, that (1) the Cash Hurdle with respect to such Performance Period has been achieved, and (2) the Company's EBITDAR Margin with respect to such Performance Period equals or exceeds the Entry EBITDAR Margin with respect to such Performance Period (clauses (A)(1) and (2) together, the "NLTIP Performance Target"), (B) with respect to a Stock Price Based RSU Performance Period, that the Market Value per Share at any date during the Performance Period has been equal to or greater than the Target Price with respect to such Performance Period (clause (B), the "Stock Price Based RSU Performance Target"), or (C) with respect to a Profit Based RSU Performance Period, that, as of the last day of a Fiscal Year in such Performance Period, (1) the Financial Performance Hurdle for such Fiscal Year has been achieved, and (2) the Cumulative Profit Sharing Pool Target for such Performance Period has been achieved (clauses (C)(1) and (2) together, the "Profit Based RSU Performance Target"). "Pre-tax Net Income" means, with respect to each Fiscal Year, the consolidated income before taxes but after minority interest (as computed using net income (loss) before taxes) of the Company for such Fiscal Year in accordance with GAAP, as shown on the Company's consolidated statements of operations for such Fiscal Year, but calculated (i) excluding any unusual or non-recurring items in accordance with GAAP and (ii) prior to any costs associated with executive incentive compensation (defined as incentive compensation for executives of the Company with performance targets determined by the Committee), in each case as determined by the Committee; provided, however, Pre-Tax Net Income with respect to the first Fiscal Year under the Program shall be calculated using the Company's consolidated statements of operations for the three quarters ended December 31, 2006 and adjusted by reducing Pre-Tax Net Income for the first Fiscal Year by $31 million. Notwithstanding the foregoing, in no event shall the Pre-tax Net Income for a Fiscal Year be less than $0 for purposes of the Program. "Profit Based RSU Payment Percentage" means, with respect to each Profit Based RSU Performance Period, the percentage of the RSUs subject to the related Profit Based RSU Award for which payments may be made under the Program upon achievement of a particular Cumulative Profit Sharing Pool Target Level relating to such Performance Period. The Profit Based RSU Payment Percentages for a Profit Based RSU Performance Period shall be determined by the Committee in connection with the Committee's determination of the Payout Structure for such Performance Period. "Profit Based RSU Performance Period" means: (i) as to the first Profit Based RSU Performance Period under the Program, the period commencing on April 1, 2006 and ending on December 31, 2009, and (ii) each other period specified by the Committee as provided in Section 3.1 that consists of one or more consecutive Fiscal Years that begin on or after January 1, 2007. "Profit Sharing Pool" means, with respect to each Fiscal Year, the sum of: (i) the dollar amount of Pre-tax Net Income, if any, earned with respect to such Fiscal Year up to and including $250 million multiplied by 30%; plus (ii) the dollar amount of Pre-tax Net Income, if any, earned with respect to such Fiscal Year in excess of $250 million and up to and including $500 million multiplied by 25%; plus (iii) the dollar amount of Pre-tax Net Income, if any, earned with respect to such Fiscal Year in excess of $500 million multiplied by 20%. "Program" means this Continental Airlines, Inc. Long Term Incentive and RSU Program, as amended from time to time. "Qualifying Event" means, with respect to a Participant, the termination of such Participant's employment with the Company under circumstances which would permit such Participant to receive a Termination Payment or Monthly Severance Amount (as such terms are defined in such Participant's employment agreement), or similar payment, pursuant to any contract of employment between such Participant and the Company or any Subsidiary. "Retirement," "Retires" or "Retired" means retirement of a Participant from employment with the Company pursuant to the provisions of the Continental Retirement Plan, as amended from time to time. "RSUs" means the method of denominating Profit Based RSU Awards and Stock Price Based RSU Awards, which shall be granted in whole numbers and which are denominated in Company Stock for purposes of Incentive Plan 2000. The number of RSUs subject to an outstanding Profit Based RSU Award or Stock Price Based RSU Award shall be subject to appropriate adjustment by the Committee for any stock splits, stock dividends, reverse stock splits, special dividends or other similar matters relating to Company Stock occurring after the date of grant of such Award and during or with respect to the applicable Performance Period. "RSU Value" of a Stock Price Based RSU Award, as of a specified date, means the dollar amount calculated by multiplying the number of RSUs subject to the Stock Price Based RSU Award as of the specified date times the Market Value per Share as of the specified date. "Specified Payment Date" means: (i) If a Profit Based RSU Performance Target is achieved for the first Profit Based RSU Performance Period as of the last day of the Fiscal Year that ends on December 31, 2006, then (A) with respect to a payment under Section 6.2(b)(i) for such Fiscal Year, the last day of the 15th month following the end of such Fiscal Year, (B) with respect to a payment under Section 6.2(b)(ii) for such Fiscal Year, the last day of the 27th month following the end of such Fiscal Year, and (C) with respect to a payment under Section 6.2(b)(iii) for such Fiscal Year, the last day of the 39th month following the end of such Fiscal Year; and (ii) If a Profit Based RSU Performance Target is achieved for any Profit Based RSU Performance Period as of the last day of a Fiscal Year that ends after December 31, 2006, then (A) with respect to a payment under Section 6.2(b)(i) for such Fiscal Year, the last day of the 3rd month following the end of such Fiscal Year, (B) with respect to a payment under Section 6.2(b)(ii) for such Fiscal Year, the last day of the 15th month following the end of such Fiscal Year, and (C) with respect to a payment under Section 6.2(b)(iii) for such Fiscal Year, the last day of the 27th month following the end of such Fiscal Year. With respect to each Fiscal Year during a Profit Based RSU Performance Period for which a Profit Based RSU Performance Target is achieved, the Specified Payment Date referred to in clause (i)(A) and (ii)(A) above, as applicable, is referred to herein as the "First Specified Payment Date," the Specified Payment Date referred to in clause (i)(B) and (ii)(B) above, as applicable, is referred to herein as the "Second Specified Payment Date," and the Specified Payment Date referred to in clause (i)(C) and (ii)(C) above, as applicable, is referred to herein as the "Third Specified Payment Date." Notwithstanding the foregoing, a Specified Payment Date may be deferred as provided in Section 6.2(b). "Stock Price Based RSU Performance Period" means (i) the period commencing on April 1, 2004 and ending March 31, 2006, and (ii) the period commencing on April 1, 2004 and ending on December 31, 2007. "Stretch EBITDAR Margin" means, with respect to an NLTIP Performance Period, the percentage determined by the Committee to be the Stretch EBITDAR Margin with respect to such Performance Period as provided in Section 3.1 hereof, which shall be expressed as the Target EBITDAR Margin plus that number of Basis Points determined by the Committee as provided in Section 3.1. "Subsidiary" for purposes of participation in the Program means any entity (other than the Company) with respect to which the Company, directly or indirectly through one or more other entities, owns equity interests possessing 50 percent or more of the total combined voting power of all equity interests of such entity (excluding voting power that arises only upon the occurrence of one or more specified events). "Target EBITDAR Margin" means, with respect to an NLTIP Performance Period, the percentage determined by the Committee to be the Target EBITDAR Margin with respect to such Performance Period as provided in Section 3.1 hereof, which shall be expressed as the Entry EBITDAR Margin plus that number of Basis Points determined by the Committee as provided in Section 3.1. "Target Price" with respect to a Stock Price Based RSU Performance Period means the dollar value per share of Company Stock specified by the Committee as the Target Price for such Stock Price Based RSU Performance Period as provided in Section 3.1, which Target Price shall be appropriately adjusted by the Committee for any stock splits, stock dividends, reverse splits, special dividends or other similar events occurring during or with respect to the Stock Price Based RSU Performance Period. "Trading Day" means a day during which trading in securities generally occurs in the principal securities market in which Company Stock is traded. 2.2 Number, Gender, Headings, and Periods of Time. Wherever appropriate herein, words used in the singular shall be considered to include the plural, and words used in the plural shall be considered to include the singular. The masculine gender, where appearing in the Program, shall be deemed to include the feminine gender. The headings of Articles, Sections, and Paragraphs herein are included solely for convenience. If there is any conflict between such headings and the text of the Program, the text shall control. All references to Articles, Sections, and Paragraphs are to the Program unless otherwise indicated. Any reference in the Program to a period or number of days, weeks, months, or years shall mean, respectively, calendar days, calendar weeks, calendar months, or calendar years unless expressly provided otherwise. III. ADMINISTRATION 3.1 Administration by the Administrator. The Program shall be administered by the Administrator, so that (i) Awards made to, and the administration (or interpretation of any provision) of the Program as it relates to, any person who is subject to Section 16, shall be made or effected by the Committee, and (ii) Awards made to, and the administration (or interpretation of any provision) of the Program as it relates to, any person who is not subject to Section 16, shall be made or effected by the Chief Executive Officer of the Company (or, if the Chief Executive Officer is not a director of the Company, the Committee), unless the Program specifies that the Committee shall take specific action (in which case such action may only be taken by the Committee) or the Committee (as to any Award described in this clause (ii) or the administration or interpretation of any specific provision of the Program) specifies that it shall serve as Administrator. The action of a majority of the members of the Committee will be the act of the Committee. The Committee may from time to time in its discretion establish in writing for purposes of the Program a Profit Based RSU Performance Period that consists of one or more consecutive Fiscal Years.. The Committee shall, promptly upon adoption of the Program in the case of all Performance Periods commencing on April 1, 2004, and within 90 days after the first day of each Performance Period commencing on or after January 1, 2005 (but in no event after the date required for a performance goal to be considered preestablished under Section 162(m) of the Code), establish in writing for purposes of the Program: (i) for NLTIP Awards, the applicable Target EBITDAR Margin and Stretch EBITDAR Margin (such that at all times the Stretch EBITDAR Margin shall be higher than the Target EBITDAR Margin, which in turn shall be higher than the Entry EBITDAR Margin) and the Cash Hurdle for each such Performance Period, (ii) for Stock Price Based RSU Awards, the applicable Target Price for each such Performance Period, and (iii) for Profit Based RSU Awards, the Cash Hurdle, the Cumulative Profit Sharing Pool Target Levels (including the Cumulative Profit Sharing Pool Target Level that shall apply for purposes of Section 6.4(b)) and the related Payout Structure for such Performance Period. 3.2 Powers of the Administrator. The Administrator shall supervise the administration and enforcement of the Program according to the terms and provisions hereof and shall have the sole discretionary authority and all of the powers necessary to accomplish these purposes. The Administrator (which shall be limited solely to the Committee with respect to clauses (e), (f), (g), (h), (i) and (j) below and as described in clause (c) below) shall have all of the powers specified for it under the Program, including, without limitation, the power, right, or authority: (a) to designate an Eligible Employee as a Participant with respect to a Performance Period at any time prior to the last day of such period, (b) from time to time to establish rules and procedures for the administration of the Program, which are not inconsistent with the provisions of the Program or the Incentive Plan 2000, and any such rules and procedures shall be effective as if included in the Program, (c) to construe in its discretion all terms, provisions, conditions and limitations of the Program and any Award, and to determine the number of RSUs subject to a Profit Based RSU Award or a Stock Price Based RSU Award to a Participant (which determination with respect to any person who is subject to Section 16 shall be made only by the Committee), (d) to correct any defect or to supply any omission or to reconcile any inconsistency that may appear in the Program in such manner and to such extent as the Administrator shall deem appropriate, (e) to determine the Target Price, the Target EBITDAR Margin, the Stretch EBITDAR Margin, and the Cumulative Profit Sharing Pool Target Levels with respect to each relevant Performance Period, (f) to determine the Cash Hurdle for each relevant Performance Period, (g) to determine the Payout Structure for each Profit Based RSU Award, (h) to make determinations as to whether the Performance Targets for the various Performance Periods were satisfied, (i) to make determinations as to whether the Cash Hurdles for the various Profit Based RSU Performance Periods were satisfied, (j) to certify in writing, prior to the payment of any amount under the Program with respect to a Performance Period, whether the Performance Targets relating to such Performance Period and any other material terms of the Program have in fact been satisfied, and (k) to make all other determinations necessary or advisable for the administration of the Program. The Administrator may correct any defect or supply any omission or reconcile any inconsistency in the Program or in any Award or Award Notice in the manner and to the extent it shall deem expedient to carry it into effect. 3.3 Administrator Decisions Conclusive; Standard of Care. The Administrator shall, in its sole discretion exercised in good faith (which, for purposes of this Section 3.3, shall mean the application of reasonable business judgment), make all decisions and determinations and take all actions necessary in connection with the administration of the Program. All such decisions, determinations, and actions by the Administrator shall be final, binding, and conclusive upon all persons. However, in the event of any conflict in any such determination as between the Committee and the Chief Executive Officer of the Company, each acting in its or his capacity as Administrator of the Plan, the determination of the Committee shall be conclusive. The Administrator shall not be liable for any action or determination taken or made in good faith or upon reliance in good faith on the records of the Company or information presented to the Administrator by the Company's officers, employees, or other persons (including the Company's outside auditors) as to matters the Administrator reasonably believes are within such other person's professional or expert competence. If a Participant disagrees with any decision, determination, or action made or taken by the Administrator, then the dispute will be limited to whether the Administrator has satisfied its duty to make such decision or determination or take such action in good faith. No liability whatsoever shall attach to or be incurred by any past, present or future stockholders, officers or directors, as such, of the Company or any of its Subsidiaries, under or by reason of the Program or the administration thereof, and each Participant, in consideration of receiving benefits and participating hereunder, expressly waives and releases any and all claims relating to any such liability. IV. PARTICIPATION AND AWARD NOTICES 4.1 Participation. Each individual who is an Eligible Employee on the first day of a Performance Period shall automatically be a Participant and receive an Award with respect to such Performance Period, unless otherwise determined by the Administrator prior to the first day of the relevant Performance Period. NLTIP Awards shall be made with respect to NLTIP Performance Periods, Profit Based RSU Awards shall be made with respect to Profit Based RSU Performance Periods, and Stock Price Based RSU Awards shall be made with respect to Stock Price Based RSU Performance Periods. Each individual who becomes an Eligible Employee after the first day of a Performance Period shall become a Participant and receive an Award with respect to such Performance Period only if such individual is selected prior to the last day of such Performance Period by the Administrator in its sole discretion for participation in the Program with respect to such Performance Period. Payment Amounts with respect to a Stock Price Based RSU Award or an NLTIP Award for an individual who becomes a Participant with respect to such Award after the first day of the related Performance Period shall be pro-rated based on a fraction, the numerator of which is (except as otherwise provided in Section 6.3 or Section 6.4) the number of days during the period beginning on the date of such Participant's commencement of participation in the Program for such Performance Period and ending on the last day of such Performance Period, and the denominator of which is the total number of days in such Performance Period. In addition, Payment Amounts under Section 6.2(b) with respect to an individual who becomes a Participant with respect to a Profit Based RSU Performance Period after the first day of such Performance Period shall be pro-rated based on a fraction, the numerator of which is (except as otherwise provided in Section 6.3) the number of days during the period beginning on the date of such Participant's commencement of participation in the Program for such Performance Period and ending on the date of the applicable payment under Section 6.2(b), and the denominator of which is the number of days in the period beginning on the first day of the relevant Profit Based RSU Performance Period and ending on the date of the applicable payment under Section 6.2(b). 4.2 Award Notices. The Company shall provide an Award Notice to each Eligible Employee who becomes a Participant with respect to a Performance Period within 90 days after such Eligible Employee becomes such a Participant; provided, however, that Award Notices for the Performance Periods that begin on April 1, 2004 shall be provided on or before May 15, 2004. With respect to Profit Based RSU Awards and Stock Price Based RSU Awards to a Participant, the Administrator shall determine in each case the number of RSUs subject to the Award as of the date of grant of the Award. Each Award Notice with respect to a Profit Based RSU Award shall specify (a) the Performance Period to which the Award relates, (b) the applicable Cumulative Profit Sharing Pool Target Levels and Cash Hurdle, (c) the number of RSUs subject to the Award as of the date of grant of the Award, and (d) the Payout Structure applicable to the Award. Each Award Notice with respect to a Stock Price Based RSU Award shall specify (i) the Performance Period to which the Award relates, (ii) the applicable Target Price, and (iii) the number of RSUs subject to the Award as of the date of grant of the Award. Each Award Notice with respect to an NLTIP Award shall specify (A) the Performance Period to which the Award relates, (B) the applicable Cash Hurdle, Target EBITDAR Margin and Stretch EBITDAR Margin, and (C) the applicable Payout Percentages set forth in Section 2.1(dd) hereof with respect to the Participant applicable upon the date of grant of the Award. V. INDUSTRY GROUP 5.1 Initial Designation. The Industry Group shall consist of Alaska Air Group, Inc., AMR Corporation, Delta Air Lines, Inc., Northwest Airlines Corporation, Southwest Airlines Co., UAL Corporation, and US Airways Group, Inc.; provided, however, that (a) within 90 days after the first day of each NLTIP Performance Period that begins on or after January 1, 2005, the Committee may in its discretion add any United States certificated scheduled mainline air carrier to, or remove any such company from, the Industry Group for such Performance Period and (b) the Industry Group for each NLTIP Performance Period shall be subject to adjustment as provided in Section 5.2. 5.2 Adjustments to the Industry Group During an NLTIP Performance Period. Except as provided in clause (a) of the proviso to Section 5.1, no company shall be added to, or removed from, the Industry Group for an NLTIP Performance Period during such period; provided, however, that a company shall be removed from the Industry Group for an NLTIP Performance Period if (a) during such period, (i) such company ceases to maintain publicly available statements of operations prepared in accordance with GAAP, (ii) such company is not the surviving entity in any merger, consolidation, or other non-bankruptcy reorganization (or survives only as a subsidiary of an entity other than a previously wholly owned subsidiary of such company), (iii) such company sells, leases, or exchanges all or substantially all of its assets to any other person or entity (other than a previously wholly owned subsidiary of such company), or (iv) such company is dissolved and liquidated, or (b) more than 20% of such company's revenues (determined on a consolidated basis based on the regularly prepared and publicly available statements of operations of such company prepared in accordance with GAAP) for any fiscal year of such company that ends during such Performance Period are attributable to the operation of businesses other than such company's airline business and such company does not provide publicly available statements of operations with respect to its airline business that are separate from the statements of operations provided with respect to its other businesses. VI. AWARD PAYMENTS 6.1 Determinations and Certification by the Committee. As soon as administratively feasible after the end of each NLTIP Performance Period and Stock Price Based RSU Performance Period, and as soon as administratively feasible after the end of each Fiscal Year in a Profit Based RSU Performance Period, as the case may be, the Committee shall determine whether the applicable Performance Target for such Performance Period has been met (including, with respect to a Profit Based RSU Performance Period, the Cumulative Profit Sharing Pool Target Level, if any, that has been achieved) and whether any other material terms relating to the payment of the related Awards have been satisfied. As soon as administratively feasible on or before each Specified Payment Date under Section 6.2(b), the Committee shall determine whether the Cash Hurdle for any Cash Hurdle Measurement Period related to such date has been met. The Committee's determination as to whether the applicable Performance Target for a Performance Period, the Cash Hurdle for a Cash Hurdle Measurement Period and any other material terms relating to the payment of the related Awards have been satisfied shall be certified by the Committee in writing and delivered to the Secretary of the Company. For purposes of the preceding sentence, approved minutes of the Committee meeting in which the certification is made shall be treated as a written certification. Notwithstanding the foregoing, each written certification by the Committee under this Section 6.1 shall be made by a date which will permit the Company to comply with the time of payment requirements of Sections 6.2 and 6.3 (after giving effect to the provisions of Section 6.7). 6.2 Eligibility for Payment of Awards. Subject to the delayed payment restrictions of Section 6.6, payments with respect to Awards shall be made as follows: (a) NLTIP Awards and Stock Price Based RSU Awards. Upon the Committee's written certification in accordance with Section 6.1 that the applicable NLTIP Performance Target for an NLTIP Performance Period or the applicable Stock Price Based RSU Performance Target for a Stock Price Based RSU Performance Period and any other material terms relating to the payment of the related Awards have been satisfied, each Participant who has received an Award with respect to the relevant Performance Period for which the related Performance Target and other material terms have been satisfied, who has remained continuously employed by the Company from the date he or she received such Award until the last day of such Performance Period and who has not surrendered such Award to the Company shall be entitled to the Payment Amount applicable to such Participant's Award for such Performance Period. Except as provided in Section 6.3(a) and Section 6.4(a), if a Participant's employment with the Company terminates for any reason whatsoever prior to the last day of an NLTIP Performance Period or Stock Price Based RSU Performance Period, then such Participant shall not be entitled to receive any payment under the Program with respect to his or her Award for such Performance Period, unless otherwise determined by the Administrator or otherwise provided in the Participant's employment agreement with the Company. Payment of the amount to which a Participant becomes entitled pursuant to this Section 6.2(a) shall be made by the Company on or before (i) in the case of an NLTIP Award, the 15th day of the third calendar month following the end of the applicable Performance Period, and (ii) in the case of a Stock Price Based RSU Award, the last day of the first calendar month following the end of the applicable Performance Period. (b) Profit Based RSU Awards. If the Committee certifies in writing in accordance with Section 6.1 that a Profit Based RSU Performance Target has been achieved as of the last day of a Fiscal Year in a Profit Based RSU Performance Period, then each Participant who has received an Award with respect to such Performance Period for which the related Performance Target and other material terms (including the relevant Cash Hurdle for the Cash Hurdle Measurement Period) have been satisfied shall receive the following payments with respect to the achievement of such Performance Target as of the last day of such Fiscal Year, provided that such Participant remains continuously employed by the Company from the date he or she received such Award until the date of payment specified below: (i) on the First Specified Payment Date for such Fiscal Year, a payment in an amount equal to (A) one third of the number of RSUs subject to such Award as of such Specified Payment Date multiplied by (B) the Profit Based RSU Payment Percentage applicable to the Cumulative Profit Sharing Pool Target Level achieved at the end of such Fiscal Year multiplied by (C) the Market Value per Share as of such First Specified Payment Date; (ii) on the Second Specified Payment Date for such Fiscal Year, a payment in an amount equal to (A) one third of the number of RSUs subject to such Award as of such Specified Payment Date multiplied by (B) the Profit Based RSU Payment Percentage applicable to the Cumulative Profit Sharing Pool Target Level achieved at the end of such Fiscal Year multiplied by (C) the Market Value per Share as of such Second Specified Payment Date; and (iii) on the Third Specified Payment Date for such Fiscal Year, a payment in an amount equal to (A) one third of the number of RSUs subject to such Award as of such Specified Payment Date multiplied by (B) the Profit Based RSU Payment Percentage applicable to the Cumulative Profit Sharing Pool Target Level achieved at the end of such Fiscal Year multiplied by (C) the Market Value per Share as of such Third Specified Payment Date. Notwithstanding the foregoing, if the Cash Hurdle for the relevant Profit Based RSU Performance Period has not been achieved as of an applicable Specified Payment Date set forth above and been certified by the Committee in writing in accordance with Section 6.1, then such Specified Payment Date shall be deferred and shall be deemed to occur on the next annual anniversary date of the original Specified Payment Date for which the Committee certifies in writing in accordance with Section 6.1 that such Cash Hurdle was achieved; provided, however, that if such Cash Hurdle is not so achieved on or before the last day of the 87th month following the end of the Fiscal Year to which such Specified Payment Date relates (or if such Cash Hurdle is not so achieved on or before the last day of the 99th month following the end of the Fiscal Year if such Specified Payment Date relates to the Fiscal Year ending on December 31, 2006), then no payment shall be made under this Section 6.2(b) for such Specified Payment Date with respect to the related Profit Based RSU Award. Except as provided in Section 6.3(b) and Section 6.4(b), if a Participant's employment with the Company terminates for any reason whatsoever prior to a payment date specified in this Section 6.2(b), then such Participant shall not be entitled to receive any payment with respect to his or her Profit Based RSU Award for such payment date or for any subsequent payment date, unless otherwise determined by the Administrator or otherwise provided in the Participant's employment agreement with the Company. 6.3 Death, Disability or Retirement. (a) NLTIP Awards and Stock Price Based RSU Awards. Except as provided in Section 6.4(a) and except as specifically provided in a Participant's employment agreement or retirement agreement with the Company, if during an NLTIP Performance Period or a Stock Price Based RSU Performance Period with respect to which a Participant has received an Award, such Participant dies or becomes Disabled or Retires, then as to such Participant only (i) the Administrator, with respect to each Stock Price Based RSU Performance Period that began prior to the date of such Participant's death, Disability or Retirement and which has not ended as of such date, shall as promptly as practicable determine whether the Market Value per Share at any date during such Performance Period that is on or before the date of such death, Disability or Retirement has been equal to or greater than the Target Price with respect to such Performance Period (in which case the Stock Price Based RSU Performance Target shall be deemed to have been met, as to such Participant only), (ii) the Administrator, with respect to each NLTIP Performance Period that began prior to the date of such Participant's death, Disability or Retirement and which has not ended as of such date, shall as promptly as practicable determine (based on publicly available data with respect to each NLTIP Performance Period that began prior to the date of such Participant's death, Disability or Retirement and which has not ended as of such date) the Company's EBITDAR Margin and the Entry EBITDAR Margin through the most recent practicable date and the Company's cash flow through the most recent practicable date, and the Company's resulting cash, cash equivalents and short term investments, excluding restricted cash, cash equivalents and short term investments at the most recent practicable date, and shall determine, based on such data and publicly available data with respect to the companies contained in the Industry Group (and, if deemed appropriate by the Administrator, annualizing or otherwise making assumptions with respect to any relevant data), whether the Company has achieved the relevant NLTIP Performance Target through such most recent practicable date (and if so, the NLTIP Performance Target shall be deemed to have been met, as to such Participant only), and (iii) the provisions of Sections 6.1 and 6.2(a) shall cease to apply with respect to each such Performance Period. Except as provided in Section 6.4(a) and except as specifically provided in a Participant's employment agreement or retirement agreement with the Company, with respect to each such Stock Price Based RSU Performance Period that began prior to the date of such Participant's death, Disability or Retirement and which has not ended as of such date that the Market Value per Share has been equal to or greater than the Target Price with respect to such Performance Period as described in clause (i) of the preceding sentence, such Participant (or, in the case of death, such Participant's estate) shall (A) receive a payment from the Company, within five business days after the determination by the Administrator referred to in clause (i) of the foregoing sentence, equal to the relevant Payment Amount applicable to such Participant's Stock Price Based RSU Award for such Stock Price Based RSU Performance Period, and (B) not be entitled to any additional payment under the program with respect to such Stock Price Based RSU Performance Period, and with respect to each NLTIP Performance Period that began prior to the date of such Participant's death, Disability or Retirement and which has not ended as of such date with respect to which the NLTIP Performance Target has been satisfied in the manner described in clause (ii) of the preceding sentence, such Participant (or, in the case of death, such Participant's estate) shall (A) receive a payment from the Company, within five business days after the determination by the Administrator referred to in clause (ii) of the foregoing sentence, equal to the relevant Payment Amount applicable to such Participant's NLTIP Award for such NLTIP Performance Period multiplied by a fraction, the numerator of which is the number of days during the period beginning on the date of such Participant's commencement of participation in the Program for such NLTIP Performance Period and ending on the date such Participant died, became Disabled or Retired, and the denominator of which is the number of days in the entire NLTIP Performance Period, and (B) not be entitled to any additional payment under the Program with respect to such NLTIP Performance Period. (b) Profit Based RSU Awards. Except as provided in Section 6.4(b) and except as specifically provided in a Participant's employment agreement or retirement agreement with the Company, if during a Profit Based RSU Performance Period with respect to which a Participant has received an Award (or after such Performance Period has ended but prior to the date such Participant has received all payments to which such Participant may have otherwise been entitled to under Section 6.2(b) if such Participant had continued to be employed by the Company), such Participant dies or becomes Disabled or Retires, then, as to such Participant only, such Participant shall receive payments in the amounts and at the times specified in Section 6.2(b) determined as if such Participant had remained continuously employed by the Company until the applicable payment date, except that: (i) each such payment shall be multiplied by a fraction, the numerator of which is the number of days during the period beginning on the date of such Participant's commencement of participation in the Program for the relevant Profit Based RSU Performance Period and ending on the date such Participant died, became Disabled or Retired, and the denominator of which is the number of days in the period beginning on the first day of the relevant Profit Based RSU Performance Period and ending on the date of the applicable payment under Section 6.2(b); and (ii) no payments shall be made to or for the benefit of such Participant with respect to any Profit Based RSU Performance Target that is achieved with respect to a Fiscal Year that begins after the date of such Participant's death, Disability or Retirement. 6.4 Change in Control. (a) NLTIP Awards and Stock Price Based RSU Awards. Upon the occurrence of a Change in Control, with respect to each Participant who is employed by the Company on the day immediately preceding the date of such Change in Control (or whose employment is terminated in connection therewith or in contemplation thereof), (i) the NLTIP Performance Targets and the Stock Price Based RSU Performance Targets, including achievement of the Stretch EBITDAR Margin, for each relevant Performance Period that began prior to the date of such Change in Control and which has not ended as of such date shall be deemed to have been satisfied, and (ii) the provisions of Sections 6.1, 6.2(a) and 6.3(a) shall cease to apply with respect to each such Performance Period. If a Change in Control occurs and thereafter (or in connection therewith or in contemplation thereof) during a Stock Price Based RSU Performance Period described in the first paragraph of this Section 6.4(a) a Participant who has received a Stock Price Based RSU Award with respect to such Stock Price Based RSU Performance Period suffers a Qualifying Event or subsequent to the Change in Control dies, becomes Disabled, or Retires, then, with respect to each such Stock Price Based RSU Performance Period, such Participant (or, in the case of death, such Participant's estate) shall (i) within five business days after the occurrence of the Qualifying Event, death, Disability or Retirement, receive a payment from the Company equal to the Payment Amount applicable to such Participant's Stock Price Based RSU Award for such Stock Price Based RSU Performance Period, and (ii) not be entitled to any additional payment under the Program with respect to such Stock Price Based RSU Performance Period. If a Change in Control occurs and thereafter (or in connection therewith or in contemplation thereof) during an NLTIP Performance Period described in the first paragraph of this Section 6.4(a) a Participant who has received an NLTIP Award with respect to such NLTIP Performance Period suffers a Qualifying Event or subsequent to the Change in Control dies, becomes Disabled, or Retires, then, with respect to each such NLTIP Performance Period, such Participant (or, in the case of death, such Participant's estate) shall (i) within five business days after the occurrence of the Qualifying Event, death, Disability or Retirement, receive a payment from the Company equal to the Payment Amount applicable to such Participant's NLTIP Award for such NLTIP Performance Period multiplied by a fraction, the numerator of which is the number of days during the period beginning on the date of such Participant's commencement of participation in the Program for such NLTIP Performance Period and ending on the date such Participant died, became Disabled, Retired or suffered the Qualifying Event, and the denominator of which is the number of days in the entire NLTIP Performance Period, and (ii) not be entitled to any additional payment under the Program with respect to such NLTIP Performance Period. If a Change in Control occurs and a Participant who has received an Award with respect to an NLTIP Performance Period or a Stock Price Based RSU Performance Period described in the first paragraph of this Section 6.4(a) did not die, become Disabled, Retire or suffer a Qualifying Event during such Performance Period and such Participant remained continuously employed by the Company from the date he or she received such Award until the last day of such Performance Period, then, with respect to each such Performance Period, such Participant shall receive a payment from the Company within five business days after the last day of such Performance Period in an amount equal to the Payment Amount applicable to such Participant's Award for such Performance Period. (b) Profit Based RSU Awards. Upon the occurrence of a Change in Control, (i) the Cash Hurdle for each Profit Based RSU Performance Period that began prior to the date of such Change in Control and for which a potential for payment under Sections 6.2(b) or 6.3(b) exists as of the date of such Change in Control shall be deemed to have been satisfied, and (ii) the Profit Based RSU Performance Targets for each Profit Based RSU Performance Period that began prior to the date of such Change in Control and which has not ended as of such date shall be deemed to have been satisfied for the Fiscal Year in which the Change in Control occurs at the Cumulative Profit Sharing Pool Target Level specified by the Committee for purposes of this Section 6.4(b) at the time of grant of the related Award (provided that this clause (ii) shall not be applicable with respect to any such Profit Based RSU Performance Period if such Profit Based RSU Performance Target was satisfied in a Fiscal Year that ended prior to the Fiscal Year in which such Change in Control occurs at such Cumulative Profit Sharing Pool Target Level or a higher level). Notwithstanding any provision in the Program to the contrary, upon the occurrence of a Change in Control, no Profit Based RSU Performance Target may be achieved with respect to a Fiscal Year that begins after the date of such Change in Control, and no payments shall be made to or for the benefit of any Participant with respect to any Profit Based RSU Performance Target that would have otherwise been achieved for any such Fiscal Year. If a Change in Control occurs, then the provisions of Sections 6.2(b) and 6.3(b) shall continue to apply to the Profit Based RSU Performance Periods described in the preceding paragraph with the following modifications: (i) certification by the Committee under Section 6.1 of the achievement of the relevant Profit Based RSU Performance Target and Cash Hurdle shall not be required; (ii) the Payment Amount described in Section 6.2(b) as of each applicable Specified Payment Date that occurs after the date of such Change in Control shall be based on the Market Value per Share as of the date of such Change in Control (rather than the Market Value per Share as of such Specified Payment Date); and (iii) if after such Change in Control (or in connection therewith or in contemplation thereof) and prior to receiving all payments pursuant to Section 6.2(b) with respect to such Profit Based RSU Performance Periods a Participant who has received a Profit Based RSU Award with respect to such Profit Based RSU Performance Periods suffers a Qualifying Event or subsequent to the Change in Control dies, becomes Disabled, or Retires, then such Participant (or, in the case of death, such Participant's estate) shall (A) within five business days after the occurrence of the Qualifying Event, death, Disability or Retirement, receive a payment from the Company equal to the aggregate of such remaining Payment Amounts, and (B) not be entitled to any additional payment under the Program with respect to such Payment Amounts. 6.5 Form of Payment of Awards. All payments to be made under the Program to a Participant with respect to an Award shall be paid in a single lump sum payment in cash; provided, however, that, to the extent permitted and subject to any limitations under the Incentive Plan 2000 and applicable laws and securities exchange rules, the Committee may, in its sole discretion, direct that payment of Profit Based RSU Awards and/or Stock Price Based RSU Awards be made either (a) in shares of Company Stock, but if and only if at the time of payment the Company has an effective registration statement under the Securities Act of 1933, as amended, covering the issuance of Company Stock under the Program, or (b) in a combination of cash and/or shares of Company Stock. If the Committee elects to direct the Company to pay all or a portion of a payment due for Profit Based RSU Awards or Stock Price Based RSU Awards in shares of Company Stock, then the number of shares of Company Stock shall be determined by dividing the amount of such payment to be paid in shares of Company Stock by the Market Value per Share as of the date of the particular payment with respect to such Award (or, in the case of Stock Price Based RSU Awards, as of the date used to determine the Payment Amount with respect to such payment), and rounding such number down to the nearest whole share. 6.6 Delayed Payment Restriction. With respect to a Participant who is identified as a specified employee (within the meaning of Section 409A(a)(2)(B)(i) of the Code and applicable administrative guidance thereunder) and who is to receive a payment hereunder (which payment is not a "short-term deferral" for purposes of Section 409A of the Code) on account of such Participant's separation from service (within the meaning of Section 409A(a)(2)(A)(i) of the Code and applicable administrative guidance thereunder, but excluding a separation from service by reason of death or Disability), the payment to such Participant shall not be made prior to the earlier of (a) the date that is six months after the Participant's termination of employment or (b) the date of death of the Participant. In such event, any payment to which the Participant would have otherwise been entitled during the first six months following the Participant's termination of employment (or, if earlier, prior to the Participant's date of death) shall be accumulated and paid in the form of a single lump sum payment to the Participant on the date that is six months after the Participant's termination of employment or to the Participant's estate on the date of the Participant's death, as applicable. For purposes of identifying a specified employee, the Program's identification date is December 31. 6.7 Time of Payment Obligations. Any obligation hereunder to make a payment on a specified date shall be deemed to have been satisfied in the event that such payment is made within five business days after such specified date. VII. TERMINATION AND AMENDMENT OF PROGRAM 7.1 Termination and Amendment. Subject to the terms of this Section 7.1, the Committee may amend the Program at any time and from time to time, and the Committee may at any time terminate the Program (in its entirety or as it applies to one or more specified Subsidiaries) with respect to Performance Periods that have not commenced as of the date of such Committee action; provided, however, that, (a) except as provided in the following sentence, the Program may not be amended in a manner that would impair the rights of any Participant with respect to any outstanding Award without the consent of such Participant, and (b) to the extent required by Section 409A of the Code, the Program may not be amended or terminated in a manner that would give rise to an impermissible acceleration of the time or form of a payment of a benefit under the Program pursuant to Section 409A(a)(3) of the Code and any regulations or guidance issued thereunder. Notwithstanding anything in the Program or an Award Notice to the contrary, if the Committee determines that the provisions of Section 409A of the Code apply to the Program and that the terms of the Program and/or any Award Notice do not, in whole or in part, satisfy the requirements of such section, then the Committee, in its sole discretion, may unilaterally modify the Program and any such Award Notice with respect to Awards for Performance Periods beginning on or after January 1, 2005, in such manner as it deems appropriate to comply with such section and any regulations or guidance issued thereunder. No Participant's participation herein may be terminated in contemplation of or in connection with a Change in Control. The Program may not be amended or terminated in contemplation of or in connection with a Change in Control unless adequate and effective provision for the making of all payments otherwise payable pursuant to Section 6.4 of the Program (as in effect on the date of the adoption of this amendment and restatement of the Program by the Committee) with respect to such Change in Control shall be made in connection with any such amendment or termination. The Committee shall remain in existence after the termination of the Program for the period determined necessary by the Committee to facilitate the termination of the Program and the payment of any outstanding Awards hereunder, and all provisions of the Program that are necessary, in the opinion of the Committee, for equitable operation of the Program during such period shall remain in force. VIII. MISCELLANEOUS PROVISIONS 8.1 No Effect on Employment Relationship. Except as expressly provided otherwise herein, for all purposes of the Program, a Participant shall be considered to be in the employment of the Company as long as he or she has not incurred a separation from service with the Company and its affiliates within the meaning of Section 409A(a)(2)(A)(i) of the Code. Nothing in the adoption of the Program, the grant of Awards, or the payment of amounts under the Program shall confer on any person the right to continued employment by the Company or any Subsidiary or affect in any way the right of the Company (or a Subsidiary, if applicable) to terminate such employment at any time. Unless otherwise provided in a written employment agreement, the employment of each Participant shall be on an at-will basis, and the employment relationship may be terminated at any time by either the Participant or the Participant's employer for any reason whatsoever, with or without cause. Any question as to whether and when there has been a termination of a Participant's employment for purposes of the Program, and the reason for such termination, shall be determined solely by and in the discretion of the Administrator, and its determination shall be final, binding, and conclusive on all parties. 8.2 Prohibition Against Assignment or Encumbrance. No Award or other right, title, interest, or benefit hereunder shall ever be assignable or transferable, or liable for, or charged with any of the torts or obligations of a Participant or any person claiming under a Participant, or be subject to seizure by any creditor of a Participant or any person claiming under a Participant. No Participant or any person claiming under a Participant shall have the power to anticipate or dispose of any Award or other right, title, interest, or benefit hereunder in any manner until the same shall have actually been distributed free and clear of the terms of the Program. Payments with respect to an Award shall be payable only to the Participant (or (a) in the event of a Disability that renders such Participant incapable of conducting his or her own affairs, any payment due under the Program to such Participant shall be made to his or her duly appointed legal representative and (b) in the event of the death of a Participant, any payment due under the Program to such Participant shall be made to his or her estate). Notwithstanding the preceding provisions of this paragraph, the Administrator shall comply with the terms of any qualified domestic relations order (as defined in the Incentive Plan 2000) providing for the transfer or assignment of all or any portion of a Participant's interest under the Program. The provisions of the Program shall be binding on all successors and permitted assigns of a Participant, including without limitation the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant's creditors. 8.3 Unfunded, Unsecured Program. The Program shall constitute an unfunded, unsecured obligation of the Company to make payments of incentive compensation to certain individuals from its general assets in accordance with the Program. Each Award granted under the Program merely constitutes a mechanism for measuring such incentive compensation and does not constitute a property right or interest in the Company, any Subsidiary, or any of their assets. Neither the establishment of the Program, the granting of Awards, nor any other action taken in connection with the Program shall be deemed to create an escrow or trust fund of any kind. 8.4 No Rights of Participant. No Participant shall have any security or other interest in any assets of the Company or any Subsidiary or in Company Stock as a result of participation in the Program (except after payment thereof to the Participant). Participants and all persons claiming under Participants shall rely solely on the unsecured promise of the Company set forth herein, and nothing in the Program, an Award or an Award Notice shall be construed to give a Participant or anyone claiming under a Participant any right, title, interest, or claim in or to any specific asset, fund, entity, reserve, account, or property of any kind whatsoever owned by the Company or any Subsidiary or in which the Company or any Subsidiary may have an interest now or in the future; but each Participant shall have the right to enforce any claim hereunder in the same manner as a general creditor. Neither the establishment of the Program nor participation hereunder shall create any right in any Participant to make any decision, or provide input with respect to any decision, relating to the business of the Company or any Subsidiary. 8.5 Tax Withholding. The Company and the Subsidiaries shall deduct and withhold, or cause to be withheld, from a Participant's payment, including the delivery of Company Stock, made under the Program, or from any other payment to such Participant, an amount necessary to satisfy any and all tax withholding obligations arising under applicable local, state, federal, or foreign laws associated with such payment. The Company and the Subsidiaries may take any other action as may in their opinion be necessary to satisfy all obligations for the payment and withholding of such taxes. 8.6 No Effect on Other Compensation Arrangements. Nothing contained in the Program or any Participant's Award or Award Notice shall prevent the Company or any Subsidiary from adopting or continuing in effect other or additional compensation arrangements affecting any Participant. Nothing in the Program shall be construed to affect the provisions of any other compensation plan or program maintained by the Company or any Subsidiary. 8.7 Subsidiaries. The Company may require any Subsidiary employing a Participant to assume and guarantee the Company's obligations hereunder to such Participant, either at all times or solely in the event that such Subsidiary ceases to be a Subsidiary. 8.8 Governing Law. The Program shall be construed in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the undersigned officer of the Company acting pursuant to authority granted to him by the Committee has executed this instrument effective as of March 29, 2006. By: /s/ Jeffery A. Smisek Jeffery A. Smisek AWARD NOTICE Exhibit 10.1(a) to [Name] [Date] Pursuant to the Continental Airlines, Inc. Profit Based RSU Award This document constitutes your Award Notice with respect to a Profit Based RSU Award as a Participant under the Continental Airlines, Inc. Long Term Incentive and RSU Program (as amended from time to time, the "Program") adopted under the Continental Airlines, Inc. Incentive Plan 2000 (as amended from time to time, the "Incentive Plan 2000"). This Award Notice evidences your receipt of a Profit Based RSU Award under the Program, as follows: (a) Number of RSUs. As of the date hereof, the number of RSUs subject to this Profit Based RSU Award is ________________. (b) Performance Period. This Profit Based RSU Award is with respect to the Profit Based RSU Performance Period commencing on ___________ and ending on ___________. (c) Performance Target and Cash Hurdle. The Performance Target applicable to this Profit Based RSU Award is satisfied when (1) a Cumulative Profit Sharing Pool Target is achieved for a particular Fiscal Year and (2) the Financial Performance Hurdle is achieved for such Fiscal Year. The Cumulative Profit Sharing Pool Target Level(s) applicable to this Profit Based RSU Award are as follows: [Level One: $___________] The Cash Hurdle applicable to this Profit Based RSU Award is $_________________. The Cumulative Profit Sharing Pool Target Level that shall be deemed to have been achieved upon a Change in Control for purposes of Section 6.4(b) of the Program is _____________ for this Profit Based RSU Award. (d) Payout Structure. The Payout Structure applicable to this Profit Based RSU Award is as follows: Cumulative Profit Sharing Pool Target Level Achieved Profit Based RSU Payment Percentage [Level One] X% The Cumulative Profit Sharing Pool Target Level achieved, if any, is determined at the end of each Fiscal Year during the Profit Based RSU Performance Period. The Cumulative Profit Sharing Pool Target Level achieved determines the applicable Profit Based RSU Payment Percentage. If more than one Cumulative Profit Sharing Pool Target Level has been established for this Profit Based RSU Award, the Profit Based RSU Payment Percentage for achieving a target level will be reduced by the Profit Based RSU Payment Percentage applicable to the highest Cumulative Profit Sharing Pool Target Level, if any, achieved for any prior Fiscal Year in the Performance Period. [For example _____.] (e) Award Payments. Prior to any payment under the Program, the Human Resources Committee (the "Committee") must (with limited exceptions) certify in writing that the Performance Target for a Fiscal Year within the Performance Period has been achieved, and that the Cash Hurdle for the Cash Hurdle Measurement Period and any other material terms relating to payment have been satisfied. If the Committee determines that the Performance Target or Cash Hurdle for a Fiscal Year was not achieved, there will be no payment for such Fiscal Year with respect to this Award. Payments with respect to achieving a Performance Target will be made in three installments - __ months, __ months and __ months following the end of the Fiscal Year in which the Performance Target was achieved. The Payment Amount payable on such dates with respect to the achievement of a Performance Target will be equal to one third of the number of Profit Based RSUs subject to this Profit Based RSU Award multiplied by the applicable Profit Based RSU Payment Percentage (determined based on the Cumulative Profit Sharing Pool Target Level achieved) multiplied by the Market Value per Share on the payment date (the average closing sales price of a share of Company Stock over the 20-consecutive Trading Days immediately preceding such payment date or, in the event of a Change in Control, immediately preceding the date of the Change in Control). If the Company does not achieve the Cash Hurdle applicable to a payment date, the payment will be deferred to the next payment date (March 31 of the following year, subject to a limit on the number of years payments may be carried forward). If the Cash Hurdle is not satisfied for such subsequent payment date, there will be no payment with respect to this Award. If the Cash Hurdle is satisfied, the Payment Amount will be paid on such date based on the Market Value per Share at the time of payment. Receipt of a Payment Amount is also conditioned on your continuous employment with the Company from the date of this Profit Based RSU Award through the applicable payment date (with limited exceptions for certain terminations of employment, such as death, Disability, Retirement and a Qualifying Event suffered in connection with a Change in Control). A Payment Amount may be pro-rated as provided in the Program under certain circumstances. (f) General. Capitalized terms used in this Award Notice are defined in the Program, and your participation is subject to the terms of the Program and the Incentive Plan 2000. The Program and the Incentive Plan 2000 are hereby incorporated into this Award Notice by reference. The Company shall have the right to make deductions from Payment Amounts to satisfy withholding of any taxes required by law and may take any other action as may be necessary or appropriate to satisfy any such tax withholding obligations. If you have any questions, or wish to obtain a copy of the Program or the Incentive Plan 2000, please contact _____________________. By:_________________________ [Authorized Officer] Supplemental Agreement No Supplemental Agreement No. 37 Purchase Agreement No. 1951 Relating to Boeing Model 737 Aircraft THIS SUPPLEMENTAL AGREEMENT, entered into as of March 30, 2006, by and between THE BOEING COMPANY (Boeing) and Continental Airlines, Inc. (Buyer); WHEREAS, the parties hereto entered into Purchase Agreement No. 1951 dated July 23, 1996 (the Agreement), as amended and supplemented, relating to Boeing Model 737-500, 737-600, 737-700, 737-800, and 737-900 aircraft (the Aircraft); WHEREAS, Buyer wishes to exercise its [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] WHEREAS, Boeing and Buyer have agreed to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] WHEREAS, Boeing has established certain pricing terms offered to Buyer for the 737-900 extended range aircraft (the 737-900ER Aircraft). NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to amend the Agreement as follows: 1. Table of Contents, Articles, Tables and Exhibits: 1.1 Remove and replace, in its entirety, the "Table of Contents", with the Table of Contents attached hereto, to reflect the changes made by this Supplemental Agreement No. 37. 1.2 Add page T-2-3 of Table 1 entitled, "Aircraft Deliveries and Descriptions, Model 737-700 Aircraft", attached hereto, to reflect the [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. 2. Letter Agreements: 2.1 Remove and replace, in its entirety, Letter Agreement 6-1162-GOC-131R4, "Special Matters", with the revised Letter Agreement 6-1162-GOC-131R5 attached hereto. The Agreement will be deemed to be supplemented to the extent herein provided as of the date hereof and as so supplemented will continue in full force and effect. EXECUTED IN DUPLICATE as of the day and year first written above. THE BOEING COMPANY Continental Airlines, Inc. By:/s/Michael S. Anderson By: /s/ Gerald Laderman Its: Attorney-In-Fact Its: Senior Vice President - Finance and Treasurer Page SA Number Number 1. Subject Matter of Sale 1-1 SA 5 2. Delivery, Title and Risk of Loss 2-1 3. Price of Aircraft 3-1 SA 31 4. Taxes 4-1 5. Payment 5-1 6. Excusable Delay 6-1 7. Changes to the Detail Specification 7-1 SA 5 8. Federal Aviation Requirements and Certificates and Export License 8-1 SA 5 9. Representatives, Inspection, Flights and Test Data 9-1 10. Assignment, Resale or Lease 10-1 11. Termination for Certain Events 11-1 12. Product Assurance; Disclaimer and Release; Exclusion of Liabilities; Customer Support; Indemnification And Insurance 12-1 13. Buyer Furnished Equipment and Spare Parts 13-1 14. Contractual Notices and Requests 14-1 SA 17 15. Miscellaneous 15-1 1. Aircraft Deliveries and Descriptions - 737-500 T-1 SA 3 Aircraft Deliveries and Descriptions - 737-700 T-2 SA 37 A-1 Aircraft Configuration - Model 737-724 (Aircraft delivering through July 2004) SA 26 A-3 Aircraft Configuration - Model 737-624 SA 1 (Aircraft delivering in or after August 2004) SA 31 B Product Assurance Document SA 1 EXHIBITS (continued) C Customer Support Document - Code Two - Major Model Differences SA 1 C1 Customer Support Document - Code Three - Minor Model Differences SA 1 D Aircraft Price Adjustments - New Generation Aircraft (1995 Base Price - Aircraft delivering through July 2004) SA 1 D1 Airframe and Engine Price Adjustments - Current Generation Aircraft SA 1 D2 Aircraft Price Adjustments - New Generation Aircraft (1997 Base Price - Aircraft delivering through July 2004) SA 5 Generation Aircraft (July 2003 Base Price - Aircraft delivering in or after August 2004) SA 31 E Buyer Furnished Equipment Provisions Document SA 20 F Defined Terms Document SA 5 LETTER AGREEMENTS 1951-1 Not Used 1951-2R3 Seller Purchased Equipment SA 5 1951-3R21 Option Aircraft-Model 737-824 Aircraft SA 35 1951-4R1 Waiver of Aircraft Demonstration SA 1 1951-5R2 Promotional Support - New Generation Aircraft SA 5 1951-6 Configuration Matters 1951-7R1 Spares Initial Provisioning SA 1 1951-8R2 Escalation Sharing - New Generation 1951-11R1 Escalation Sharing-Current Generation 1951-12R7 Option Aircraft - Model 737-924 Aircraft SA 32 1951-13 Configuration Matters - Model 737-924 SA 5 1951-14 Installation of Cabin Systems Equipment SA 22 RESTRICTED LETTER AGREEMENTS 6-1162-MMF-295 Performance Guarantees - Model 737-724 Aircraft 6-1162-MMF-308R3 Disclosure of Confidential Information SA 5 6-1162-MMF-309R1 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA 1 CONFIDENTIAL TREATMENT] SA 22 6-1162-MMF-312R1 Special Purchase Agreement Provisions SA 1 6-1162-MMF-319 Special Provisions Relating to the Rescheduled Aircraft 6-1162-MMF-378R1 Performance Guarantees - Model 737-524 Aircraft SA 3 6-1162-GOC-015R1 [CONFIDENTIAL MATERIAL OMITTED AND FILED 6-1162-GOC-131R5 Special Matters SA 37 6-1162-DMH-365 Performance Guarantees - Model 6-1162-DMH-624 [CONFIDENTIAL MATERIAL OMITTED AND FILED 6-1162-DMH-680 Delivery Delay Resolution Program SA 9 6-1162-DMH-1020 [CONFIDENTIAL MATERIAL OMITTED AND FILED 6-1162-CHL-048 Rescheduled Aircraft Agreement SA 26 6-1162-CHL-195 Restructure Agreement for Model 737NG and 757-300 Aircraft SA 30 SUPPLEMENTAL AGREEMENTS DATED AS OF: Supplemental Agreement No. 1 October 10, 1996 Supplemental Agreement No. 2 March 5, 1997 Supplemental Agreement No. 3 July 17, 1997 Supplemental Agreement No. 5 May 21, 1998 Supplemental Agreement No. 7 November 12, 1998 Supplemental Agreement No. 8 December 7, 1998 Supplemental Agreement No. 9 February 18, 1999 Supplemental Agreement No. 10 March 19, 1999 Supplemental Agreement No. 11 May 14, 1999 Supplemental Agreement No. 12 July 2, 1999 Supplemental Agreement No. 13 October 13, 1999 Supplemental Agreement No. 14 December 13, 1999 Supplemental Agreement No. 15 January 13, 2000 Supplemental Agreement No. 17 May 16,2000 Supplemental Agreement No. 18 September 11, 2000 Supplemental Agreement No. 23 June 29, 2001 Supplemental Agreement No. 24 August 31, 2001 Supplemental Agreement No. 27 November 6, 2002 Supplemental Agreement No. 28 April 1, 2003 Supplemental Agreement No. 36 July 21, 2005 Table 1 to Purchase Agreement 1951 Aircraft Deliveries and Descriptions Model 737-700 Aircraft [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 6-1162-GOC-131R5 1600 Smith Street Subject: Letter Agreement No. 6-1162-GOC-131R5 to Purchase Agreement No. 1951 - Special This Letter Agreement amends Purchase Agreement No. 1951 dated as of July 23, 1996 (the Agreement) between The Boeing Company (Boeing) and Continental Airlines, Inc. (Buyer) relating to Model 737 aircraft (the Aircraft). This Letter Agreement supersedes and replaces in its entirely Letter Agreement 6-1162-GOC-131R4 dated June 22, 2005. All terms used herein and in the Agreement, and not defined herein, will have the same meaning as in the Agreement. 1. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 2. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Advance Payment Schedule. 2.1 Firm Aircraft. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 2.2 Option Aircraft. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 4. Option Aircraft. 7. Confidential Treatment. Boeing and Buyer understand that certain information contained in this Letter Agreement, including any attachments hereto, are considered by both parties to be confidential. Notwithstanding the provisions of Letter Agreement 6-1162-MMF-308R2, Boeing and Buyer agree that each party will treat this Letter Agreement and the information contained herein as confidential and will not, without the other party's prior written consent, disclose this Letter Agreement or any information contained herein to any other person or entity except as may be required by applicable law or governmental regulations. By /s/ Micheal S. Anderson Its Attorney-In-Fact ACCEPTED AND AGREED TO this By /s/ Gerald Laderman Its Senior Vice President - Finance and Treasurer March 17, 2006, by and between THE BOEING COMPANY (Boeing) and Continental Airlines, Inc. (Customer); WHEREAS, the parties hereto entered into Purchase Agreement No. 2061 dated October 10, 1997, (the Purchase Agreement) relating to Boeing Model 777-200ER Aircraft (the Aircraft); WHEREAS, Boeing and Customer have agreed to [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to amend the Purchase Agreement as follows: 1. Table of Contents: 1.1 Remove and replace, in its entirety, the "Table of Contents", with the "Table of Contents" attached hereto, to reflect the changes made by this Supplemental Agreement No. 12. 5.1 Remove and replace, in its entirety, Letter Agreement 2061-6 [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] with the revised Letter Agreement 2061-6R1 attached hereto. The Purchase Agreement will be deemed to be supplemented to the extent herein provided as of the date hereof and as so supplemented will continue in full force and effect. By: /s/ Michael S. Anderson By: /s/ Gerald Laderman__ ARTICLES Revised By: 1. Quantity, Model and Description SA No. 11 2. Delivery Schedule SA No. 11 3. Price SA No. 11 4. Payment SA No. 11 5. Miscellaneous SA No. 11 1. Aircraft Information Table 1 SA No. 5 3. Aircraft Information Table 3 SA No. 11 A. Aircraft Configuration B. Aircraft Delivery Requirements and Responsibilities SUPPLEMENTAL EXHIBITS AE1. Escalation Adjustment/Airframe and Optional Features SA No. 11 (applicable to Table 3 Aircraft) BFE1. BFE Variables CS1. Customer Support Variables EE1. Engine Escalation/Engine Warranty and Patent Indemnity EE2. Engine Escalation/Engine Warranty and Patent Indemnity SA No. 9 LETTER AGREEMENTS Revised By: 2061-1R8 Option Aircraft SA No. 11 2061-2 Demonstration Flights 2061-3 Installation of Cabin Systems Equipment 2061-4 Spares Initial Provisioning 2061-5 Flight Crew Training Spares [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] SA No. 12 CONFIDENTIAL LETTER AGREEMENTS Revised By: 6-1161-GOC-087 Aircraft Performance Guarantees 6-1162-GOC-088 Promotion Support 6-1162-GOC-089R2 Special Matters SA No. 11 6-1162-GOC-172 Additional Matters SA No. 1 6-1162-CHL-048 Rescheduled Aircraft Agreement SA No. 9 6-1162-CHL-195 Restructure Agreement for Model SA No. 10 737NG and 757-300 Aircraft Supplemental Agreement No. 1 December 18, 1997 Supplemental Agreement No. 3 September 25, 1998 Supplemental Agreement No. 4 February 3, 1999 Supplemental Agreement No. 5 March 26, 1999 Supplemental Agreement No. 8 June 29, 2001 2061-6R1 Subject: [CONFIDENTIAL MATERIAL OMITTED AND FILED CONFIDENTIAL TREATMENT] Reference: Purchase Agreement No. 2061 (the Purchase Agreement) between The Boeing Company (Boeing) and Continental Airlines, Inc. (Customer) relating to Model 777-200ER aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. This Letter Agreement supersedes and replaces in its entirety Letter Agreement 2061-6 dated October 10, 1997. 1. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT]. It will be the responsibility of Customer to obtain concurrence of the cognizant aviation authorities to use the AFM and its appendices. To confirm, the Program described herein is applicable only for the Aircraft of the Purchase Agreement. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 4. Sale or Lease of Aircraft by Customer. Customer agrees to provide Boeing written notification [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] days prior, or as soon as practical, to ceasing to operate an Aircraft (Disposed Aircraft), which will result [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] 7. Confidentiality. Boeing and Customer understand that certain information contained in this Letter Agreement, including any attachments hereto and the reports required hereunder, is considered by both parties to be confidential. Boeing and Customer agree that each party will treat this Letter Agreement and the information contained herein as confidential and will not, without the other party's prior written consent, disclose this Letter Agreement or any information contained herein to any other person or entity except as may be required by applicable law or governmental regulations. By /s/ Michael S. Anderson Its Senior Vice President_- Finance and Treasurer The following definitions apply: Example Calculation [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] Step 1. [CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT] EXHBIT 31.1 I, Lawrence W. Kellner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Continental Airlines, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Lawrence W. Kellner Lawrence W. Kellner Chairman of the Board and I, Jeffrey J. Misner, certify that: Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Continental Airlines, Inc., a Delaware corporation (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to Continental Airlines, Inc. and will be retained by Continental Airlines, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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professional_accounting

HomeRecent QuestionsQuestion #32154Acc17089988 HI6026 Audit, Assurance and Compliance TRIMESTER 2, 2017 INDIVIDUAL ASSIGNMENT 1 Assessment Value: 20% • This assignment is to be submitted in accordance with assessment policy stated in the Subject Outline and Student Handbook. • It is the responsibility of the student who is submitting the work, to ensure that the work is in fact her/his own work. Incorporating another’s work or ideas into one’s own work without appropriate acknowledgement is an academic offence. Students should submit all assignments for plagiarism checking on Blackboard before final submission in the subject. For further details, please refer to the Subject Outline and Student Handbook. • Answer all questions. • Maximum marks available: 20 marks. • Due date of submission: Week 6, Friday at 5.00 p.m. Case Study on Double Ink Printers Ltd (DIPL) You are a senior manager with Stewart and Kathy and you have been approached to undertake the audit of Double Ink Printers Ltd (DIPL). For the year ended 2015, taking over from the small audit firm of Jay and Associates. DIPL print books, magazines and advertising materials for the publishing, educational and advertising industries on a print-on-demand basis. Printing on demand means that publishers can print the exact quantities ordered by retail outlets, rather than estimating in advance how many books are required and often printing too few or too many. The average printing turnaround time for DIPL is two business days for small orders and five to ten business days for large orders. In addition, five years ago, DIPL further expanded its earnings base by having publisher’s titles available as searchable ‘ebooks’ that could be downloaded directly by readers from DIPL’s website. Purchase and Inventory DIPL purchases 50% of its inventory requirements of paper, ink and binding materials from Australian sources and 50% from Asian countries. When inventory received at DIPL’s warehouse (whether it is purchased from Australia or Asia), the accounts payable clerk, Bill Jimmy, records the arrival of the inventory and also its value and quantity in the accounts payable system. Inventory is paid for the relevant currency of the country from which it is purchased. Raw materials have been valued at average cost and an allowance for inventory obsolescence has existed in previous years to cover the estimated decline in value from the effects of storage hazards. Work in progress is immaterial due to the quick turn- around time of printing jobs. Any work in progress is assessed at the cost of raw materials and labour and proportion of manufacturing overheads based on normal capacity. At year end, the warehouse is closed from 28 to 30 June for stocktake, so sales must be invoiced in the system by close of business on 27 June. The stock must have been sent to the customer (that is, it must either be on track, ship or plane on its way to the customer, or it must already have arrived at the customer; it must no longer be in DIPL’s warehouse). ‘Print on Demand’ revenue and receivables Each time a publisher wants to add a book to DIPL’s ‘digital library’ (a server storing all of the publisher’s books in a digital format, ready to print), it emails the book to DIPL in PDF format. The digital library is backed up at the close of business every day, with the backup tapes kept off site. Once the book is stored in the digital library, the publishers can order copies to be printed as required. When the publishers confirm the order, the accounting system automatically retrieves details of the publisher’s credit record and stops any orders from publishers that have exceeded their credit terms and limits. A printout of the transactions history of the publishers is generated and must be signed by both Helena keng, the head of publishing, and Jane Roger, the head of accounts at DIPL, before the order can continue, after the transaction history has been signed and dated, accounts receivable staff file it. If there are no credit problems with the order, it is processed and printed by casual staff in the relevant warehouse, who then load the books onto pallets for shipping. When printing is finished, the sales clerk, Brown Pall, prepares an invoice and dispatch docket and forwards them to the accounts receivable department. The accounts receivable clerk Gay Chan, checks the prices and arithmetic accuracy of the invoices and signs the invoice as evidence of her check. Gay records the sales both the accounts receivables subsidiary ledger and the general ledger and books are shipped to the publisher’s nominated destination (or the publisher will arrange pick up at the warehouse if has its own distributors). The client accepts liability for the goods when they are received in accordance with the purchase order, and signs the dispatch docket as proof of delivery. ‘E-book’ Revenue The proceeds from each e-book sale are paid to the publisher’s net of a 5% commission. Proceeds are sent to publishers automatically upon download (the commission is withheld by DIPL). Revenue from the commission is recognised when is withheld from payment to the publishers. DIPL also charge publishers an annual “storage fee” payable 12 months in advance, for keeping the e-book on DIPL’s website. Publishers are invoiced on the date the first download of a title occurs. As new books are downloaded on an ongoing basis, the storage fee is invoiced at different times of the year. Revenue from storage fees has been recognised in the month the fees are invoiced, notwithstanding the fact that the fees are charged 12 months in advance. In September 2014, DIPL acquired Nuclear Publishing Ltd (NPL). The main rationale behind the lay in the value of the copyright NPL held over a large range of specialised medical textbooks. Although the potential print run for the textbook was not large, each textbook had a high profit margin and had been used in universities across the world for many years. DIPL acquired the business operation of NPL (not the shares), paying net assets (including the right to the copyright). However, in June 2015 an article was published in a medical journal about a new theory that could result in NPL’s medical textbooks becoming obsolete. If the new theory is valid, the textbooks are unlikely to be reprinted or used as textbooks at universities in the future, effectively making them unviable as e-books. Cash Receipts Some Payments from accounts receivables are received by cheque through the mail, and the cashier, Judy Bones, record these in an inwards remittance register when the mail is opened. She then banks the cheques and forwards the payment advices to Gay Chan for posting ton the accounts receivable ledger. Most payments, however, are received by electronic funds transfer (EFT). Each day, Judy downloaded the previous day’s receipts from online banking and provides a copy to Gary for posting. Judy then reconciles the total of the batch postings to accounts receivable to the amount banked for the day. The assistant accountant, Boby Roger, prepares a bank reconciliation at the end of each month. Since DIPL’s incorporation, depreciation on assets has been calculated using the straight-line method to allocate their cost over their estimated useful lives, as follows: • Printing presses up to 20 years • Other production equipment up to 15 years • Other equipment up to 10 years During 2015, DIPL has entered into a 7.5 million loan from BDO Finance Ltd (BDO Finance). The loan has debt covenant’s requiring DIPL to maintain a current ratio of at least 1.5 and a debt to equity ratio of less than 1. Failure to maintain these key financial ratios under the specified benchmarks would result in BDO Finance having the right to recall the loan. Appointment of New CEO and internal Audit William Jackson was appointed the new chief executive officer (CEO) of DIPL in January 2015. William has extensive experience in the printing business. The previous CEO, Rebecca Styles, who is now semi- retired, will remain on the board as a non-executive director. A component of William’s remuneration package is a performance bonus based DIPL achieving an annual growth of 10% in total revenue and 10% in net profit after tax. Based on William’s recommendation, the board also established a new internal audit department headed up by Cody Baines, an ex-audit manager with a Big Four audit firm and two other recently qualified chartered accountants. Cody reports directly to the board. New IT System During 2015, DIPL decided to invest in a new IT system that would fully computerised and integrate all the current accounting processes across the organisation, including integration into the general ledger system. Under extreme pressure from the board, the IT department at DIPL managed to get the new accounting system installed in June, although IT manager, Andy Rogers, complained several times about how the installation was handled. Andy claimed that excess pressure had been placed on staff to get the system installed and that there was simply not enough staff to do the proper reconciliation’s and testing before the new system went live prior to year-end. Andy preliminary testing showed that some transactions conducted around year-end were not being allocated to the correct period. The problem appeared to be the interface between the new accounting system and one of the existing software systems. A software ‘patch’ had to be written to fix the problem. Board year-end reporting discussions As a board meeting held in June 2015, issues relating to the forthcoming year end were discussed. William stated that he believed that the valuation of raw materials inventories at average cost was no longer appropriate as the current cost of paper was substantially above the average cost. Further, he argued that the allowance for obsolescence of inventory to cover the estimated decline in value from the effects of storage hazards was necessary, as such a loss was unlikely. William also stated that based on his experience in the printing industry he believed that DIPL’s printing presses had a potential maximum life of 30 years, although he noted that another leading entity in the printing industry adopted the policy of depreciating its printing presses over a 20-year period on a straight-line basis, similar to what DIPL had done in the past. After much discussion, the board resolved that the allowance for obsolescence of inventory be written back and that raw materials be valued based on a firstin, first-out (FIFO) basis. In addition, following a review of the e-book facilities by internal audit, Cody recommended that in a report to the board that DIPL change the method it used to account for its revenue from e-book publication to ensure compliance with the applicable accounting standard. The board agreed that the revenue from e-book would be recognised in accordance with the stage of completion of each transaction (i.e. percentage of completion method). Note 2013 2014 2015 (Unadjusted) Cash 647250 517788 347120 Accounts Receivables 1 2482500 4320000 5073309 Inventories 2 2256188 2671362 4180500 Total 5385938 7509150 9600929 Property, Plant and Equipment 3 7544062 8394750 15572062 Intangible Assets ------- ------- 975000 7544062 8394750 16547062 Total Assets 12930000 15903900 26147991 Accounts Payable 1950000 3035250 3525000 Deferred revenue ---- ---- 697500 Interest-bearing liabilities 937500 862500 787500 Provisions 810000 1125000 1267500 Accruals 82500 97500 120000 Interest-bearing liabilities ---- ---- 7500000 Total Liabilities 3780000 5120250 13897500 Net Assets 9150000 10783650 12250491 Shareholders Fund 2250000 2250000 2250000 Retained Profits 6900000 8533650 10000491 Total Equity 9150000 10783650 12250491 Revenue from Operations 34212000 37699500 43459500 Cost of Sales 28207500 31620000 36855000 Gross Profit 6004500 6079500 6604500 Allowance for inventory obsolescence written back ------- ------- 155588 Commission Income 108000 123000 130500 E-book storage fees 667500 1027500 1417500 Income from operating activities 6780000 7230000 8308088 Advertising 83725 115923 125778 Audit Fees 112500 127500 135000 Bad Debt 150000 195000 210000 Depreciation 249375 274312 472688 Discounts allowed 195000 285000 335500 Legal Fees 74000 111500 137000 Foreign Exchange loss 38500 49750 ---- Rates 98500 106000 113500 Repairs and maintenance 224000 276500 306500 Salaries 1965000 2190000 2445000 Telecommunication costs 134750 141478 159785 Total expenses 3325350 3872963 4440751 Net income before interest and tax 3454650 3357037 3867337 Interest expense 84379 83663 808038 Profit before tax 3370271 3273374 3059299 Income tax 1011081 982012 87116 Profit after tax 2359190 2291362 2972183 Notes to the Financial Report Account Receivable 2647500 453000 5313309 1 Allowance for doubtful debts -165000 -210000 -240000 2482500 243000 5073309 Inventory 2362500 2797238 4180500 2 Allowance for obsolescence -106312 -125876 ------ 2256188 2671362 4180500 3 Property, Plant & Equipment Land 2775000 3375000 3375000 Plant and Equipment 5250000 5775000 13425000 Accumulated Depreciation -480938 -755250 -1227938 Question 1: As an auditor, you are conducting your preliminary analytical procedures based on the background information for DIPL contained in the case. Apply analytical procedures to the financial report information of DIPL for the last three years. Explain how your results influence your planning decisions for the audit for the year ending 30 June 2015 (10 marks). Question 2: You are conducting your risk assessment of DIPL, as part of the planning for your audit for the year ended 30 June. Identify two inherent risk factors that arise from the nature of DIPL’s business operations. Explain why it is a risk and how it may affect the risk of material misstatement in the financial report (5 marks). Question 3: As part of your audit of DIPL for the year ended 30 June 2015, you are considering the risk that fraud may have occurred (a) Based on the background information for DIPL contained in the case, identify and explain two key fraud risk factors relating to misstatements arising from fraudulent financial reporting to which DIPL may be susceptible. (b) Explain how the risk factors identified in (a) above would affect the conduct of the (a) audit. (5 marks).

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professional_accounting

Volker Inc. issued $2,500,000 of convertible 10-year bonds on July 1, 2014. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.’s $100 par value common stock for each $1,000 of bonds. On August 1, 2015, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash. Instructions Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Round to the nearest dollar.) (a) August 1, 2015. (Assume the book value method is used.) (b) August 31, 2015. (c) December 31, 2015, including closing entries for end-of-year. Assume that Amazon.com has a stock-option plan for top management. Each stock option represents the right to purchase a share of Amazon $1 par value common stock in 1 Problems 933 4 4 934 Chapter 16 Dilutive Securities and Earnings per Share the future at a price equal to the fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning of 2014. The following data relate to the option grant. Exercise price for options $40 Market price at grant date (January 1, 2014) $40 Fair value of options at grant date (January 1, 2014) $6 Service period 5 years. (a) Prepare the journal entry(ies) for the first year of the stock-option plan. (b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2014. (c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for (a) and (b). (d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid recording compensation expense? (1) Substantially all employees may participate. (2) The discount from market is small (less than 5%). Melton Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2014, and May 31, 2015. The income from operations for each year was $1,800,000 and $2,500,000, respectively. In both years, the company incurred a 10% interest expense on $2,400,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss of $600,000 from a fire in its Scotsland facility in February 2015, which was determined to be an extraordinary loss. The company uses a 40% effective tax rate for income taxes. The capital structure of Melton Corporation on June 1, 2013, consisted of 1 million shares of common stock outstanding and 20,000 shares of $50 par value, 6%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants. On October 1, 2013, Melton sold an additional 500,000 shares of the common stock at $20 per share. Melton distributed a 20% stock dividend on the common shares outstanding on January 1, 2014. On December 1, 2014, Melton was able to sell an additional 800,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years. (a) Identify whether the capital structure at Melton Corporation is a simple or complex capital structure, and explain why. (b) Determine the weighted-average number of shares that Melton Corporation would use in calculating earnings per share for the fiscal year ended: (1) May 31, 2014. (2) May 31, 2015. (c) Prepare, in good form, a comparative income statement, beginning with income from operations, for Melton Corporation for the fiscal years ended May 31, 2014, and May 31, 2015. This statement will be included in Melton’s annual report and should display the appropriate earnings per share presentations. Agassi Corporation is preparing the comparative financial statements to be included in the annual report to stockholders. Agassi employs a fiscal year ending May 31. Income from operations before income taxes for Agassi was $1,400,000 and $660,000, respectively, for fiscal years ended May 31, 2015 and 2014. Agassi experienced an extraordinary loss of $400,000 because of an earthquake on March 3, 2015. A 40% combined income tax rate pertains to any and all of Agassi Corporation’s profits, gains, and losses. Agassi’s capital structure consists of preferred stock and common stock. The company has not issued any convertible securities or warrants and there are no outstanding stock options. Agassi issued 40,000 shares of $100 par value, 6% cumulative preferred stock in 2011. All of this stock is outstanding, and no preferred dividends are in arrears. There were 1,000,000 shares of $1 par common stock outstanding on June 1, 2013. On September 1, 2013, Agassi sold an additional 400,000 shares of the common stock at $17 per share. Agassi distributed a 20% stock dividend on the common shares outstanding on December 1, 2014. These were the only common stock transactions during the past 2 fiscal years. Instructions (a) Determine the weighted-average number of common shares that would be used in computing earnings per share on the current comparative income statement for: (1) The year ended May 31, 2014. (2) The year ended May 31, 2015. The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation. In 2014, Joan Devers, the controller of Rouse, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Kurt Adkins, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Devers is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation. (a) What, if any, is the ethical dilemma for Devers? (b) Should Devers’s knowledge of the compensation plan be a factor that influences her estimate? (c) How should Devers respond to Adkins’s request? Looking for Financial Accounting Amortization And Interest Of Bonds Homework Help , please submit your details here with product code mentioned above.

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professional_accounting

Team, Inc. Reports Second Quarter 2021 Results Quest Delivered 51.4% Year-over-Year Revenue Growth IHT Revenue Increased by 46% Year-over-Year Team, Inc. SUGAR LAND, Texas, Aug. 3, 2021 /PRNewswire/ -- Team, Inc. (NYSE: TISI), a global leading provider of integrated, digitally-enabled asset performance assurance and optimization solutions, today reported its financial results for the second quarter ended June 30, 2021. Second Quarter 2021 Results: Revenue of $238.9 million, up $49.6 million, or 26.2%, from Q2 2020 IHT and Quest segment revenue increased by 46.0% and 51.4%, respectively from Q2 2020 Gross margin was $62.8 million, up $5.4 million from Q2 2020 Quest adjusted EBITDA margin of 26.6%, surpassing the 2020 full year average of 24.1% "TEAM's second quarter results reflect a mix of activity recovery and challenging market dynamics," said Amerino Gatti, TEAM's Chairman and Chief Executive Officer. "Although we are not pleased with our overall results, revenue was at the upper end of our outlook. All three segments achieved revenue growth over Q2 2020 with Quest reporting the largest overall percent increase at 51%. Inspection & Heat Treating followed at approximately 46% and Mechanical Services at 4.7%. The year-over-year topline growth was driven by strong April activity levels from several large turnaround projects. May and June activity benefited from increased economic activity as COVID-related restrictions began to lift. While COVID continued to force project delays, especially internationally, activity levels throughout the quarter were mostly in line with expectations, highlighting improved economic growth across the various end markets in which we serve. "TEAM faced margin headwinds in the second quarter. We experienced inflation in several areas, such as raw materials, transportation, and labor as well as increased technician training, and lingering COVID-related pricing concessions. We remain focused on cost discipline and continue to look for ways to mitigate overall inflationary pressures. Pricing negotiations have started with our clients to reflect current market conditions. Given these proactive actions, combined with the transitory nature of the cost increases, we expect our gross margin to improve in the second half of the year. "We continued our long-standing culture of technology innovation. After several successful field tests, the Mechanical Services segment commercialized our new, patent pending SmartStopTM Isolation Technology. This new double block and bleed isolation system increases integrity and overall safety, further strengthening our competitive advantages in the hot tapping market. Additionally, we entered into an agreement to become the exclusive provider of Credosoft Integrity Management Software in North America. The software enhances TEAM's ability to monitor assets, ensure compliance and provide inspection and repair solutions. The Credosoft service offering provides TEAM a stable, subscription-based revenue profile and further positions the company to be a leading provider of integrated digitally-enabled asset performance optimization solutions. "As we enter the second half of 2021, we are cautiously optimistic about increased activity levels associated with an improving economy. While the recent emergence of COVID variants is concerning and could negatively impact our activity levels, the outlook for the fall turnaround season looks solid since operators are now in a better financial position to start previously postponed maintenance projects. Additionally, our international operations should benefit from progress of the vaccine rollout and the gradual removal of lockdown restrictions in key markets. Therefore, we expect sequential revenue growth to continue in the third quarter. "We are making advances towards further revenue diversification into new markets, such as renewable energy and expanding regulatory services that include emissions control. Our revenue diversification efforts as well as investments in technology and digital are poised to be future growth drivers. TEAM is well-positioned to benefit from a strong economic recovery by capitalizing on built-up demand and pursuing opportunities that utilize the depth and breadth of our portfolio. We have a clear strategic plan to become more capital efficient, capture profitable growth, and generate positive cash flow," concluded Mr. Gatti. Consolidated net loss in the second quarter of 2021 was $17.5 million ($0.57 loss per diluted share) compared to a loss of $13.5 million ($0.44 loss per diluted share) in the second quarter of 2020. Consolidated Adjusted EBITDA, a non-GAAP measure, was $9.1 million for the second quarter of 2021 compared to $12.7 million for the prior year quarter. Consolidated revenue for the second quarter of 2021 was $238.9 million compared to $189.3 million in the prior year quarter. Revenue increased due to higher activity levels from increased economic activity in the U.S. and select international markets as economies opened from COVID-related shutdowns. In the second quarter of 2021, consolidated gross margin was $62.8 million, or 26.3%, compared with 30.3% in the same quarter a year ago. Gross margin was negatively impacted by cost inflation pressure combined with lingering COVID-related price discounts and the reinstatement of temporary cost reductions that TEAM enacted in 2020. SG&A for the second quarter was $68.5 million, up $9.6 million, or a 16.3% increase from the second quarter of 2020. The company's adjusted measure of net income/loss, Consolidated Adjusted EBIT, a non-GAAP measure was a loss of $3.4 million in the second quarter compared to a loss of $0.2 million in the prior year comparable quarter. Second quarter 2021 reported results include certain net charges not indicative of TEAM's core operating activities, including: $0.7 million of professional costs related to the previously announced new strategic organizational structure ("Operating Group Reorganization"), $0.3 million of severance charges primarily associated with the Operating Group Reorganization, and $1.6 million for accrued legal matters and other legal fees. Net of tax, these items totaled $2.6 million or $0.08 per diluted share. Adjusted net loss, consolidated Adjusted EBIT, and Adjusted EBITDA are non-GAAP financial measures that exclude certain items that are not indicative of TEAM's core operating activities. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures is at the end of this release. Segment Results The following table illustrates the composition of the company's revenue and operating income (loss) by segment for the quarters ended June 30, 2021 and 2020 (in thousands): June 30, Increase (Decrease) Revenues by business segment: Quest Integrity Corporate and shared support services All three business segments delivered year-over-year revenue growth due to higher activity levels from increased economic activity in the U.S. and select international markets as economies opened up from COVID-related shutdowns. IHT results included a 46.0% year-over-year improvement in revenue primarily due to increased activity levels in the U.S. and Canada and 56.0% increase in operating income. MS delivered a 4.7% year-over-year improvement in revenue due to an increase in Turnaround projects and call-out work. However, MS's operating income declined due to inflationary cost pressures in raw materials and labor. Quest Integrity's results included a 51.4% year-over-year improvement in revenue and a $5.0 million increase in operating income. The increase in Quest Integrity is primarily the result of easing COVID-related global restrictions, additional subsea inspection work, and increased demand for Quest's proprietary services. Cash and Debt Consolidated cash and cash equivalents were $18.4 million at June 30, 2021. The company's net debt (total debt less cash and cash equivalents) was $338.1 million at June 30, 2021, compared to $287.9 million at Dec. 31, 2020. The non-GAAP measures in this earnings release are provided to enable investors, analysts, and management to evaluate TEAM's performance excluding the effects of certain items that management believes impact the comparability of operating results between reporting periods. These measures should be used in addition to, and not in lieu of, results prepared in conformity with generally accepted accounting principles (GAAP). A reconciliation of each of the non-GAAP financial measures to the most directly comparable historical GAAP financial measure is contained in the accompanying schedule for each of the fiscal periods indicated. Conference Call and Webcast Details Team, Inc. will host a conference call on Wednesday, August 4, 2021 at 10:00 a.m. Eastern Time (9:00 a.m. Central Time) to review its second quarter 2021 results. By Phone: Dial 1-877-407-5794 inside the U.S. or 1-201-389-0869 outside the U.S. at least 10 minutes before the call. A telephone replay will be available through August 11, 2021 by dialing 1-877-660-6853 inside the U.S. or 201-612-7415 outside the U.S. using the Conference ID 13720696#. By Webcast: The call will be broadcast over the web and can be accessed on TEAM's website, www.teaminc.com under "Investor Relations." Please log on at least 10 minutes in advance to register and download any necessary software. A replay will be available shortly after the call. About Team, Inc. Headquartered in Sugar Land, Texas, Team Inc. (NYSE: TISI) is a global leading provider of integrated, digitally-enabled asset performance assurance and optimization solutions. We deploy conventional to highly specialized inspection, condition assessment, maintenance and repair services that result in greater safety, reliability and operational efficiency for our client's most critical assets. Through locations in more than 20 countries, we unite the delivery of technological innovation with over a century of progressive, yet proven integrity and reliability management expertise to fuel a better tomorrow. For more information, please visit www.teaminc.com. Certain forward-looking information contained herein is being provided in accordance with the provisions of the Private Securities Litigation Reform Act of 1995. We have made reasonable efforts to ensure that the information, assumptions and beliefs upon which this forward-looking information is based are current, reasonable and complete. However, such forward-looking statements involve estimates, assumptions, judgments and uncertainties. There are known and unknown factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking information. Although it is not possible to identify all of these factors, they include, among others, the duration and magnitude of the COVID-19 pandemic, related economic effects and the resulting negative impact on demand for oil and gas and such known factors as are detailed in the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with the Securities and Exchange Commission, and in other reports filed by the Company with the Securities and Exchange Commission from time to time. Accordingly, there can be no assurance that the forward-looking information contained herein, including projected cost savings, will occur or that objectives will be achieved. We assume no obligation to publicly update or revise any forward-looking statements made today or any other forward-looking statements made by the Company, whether as a result of new information, future events or otherwise, except as may be required by law. TEAM, INC. AND SUBSIDIARIES SUMMARY OF CONSOLIDATED OPERATING RESULTS (unaudited, in thousands, except per share data) Six Months Ended Restructuring and other related charges, net Goodwill impairment charge Other expense, net Loss before income taxes Provision (benefit) for income taxes Loss per common share: Basic and diluted Weighted-average number of shares outstanding: SUMMARY CONSOLIDATED BALANCE SHEET INFORMATION Current portion of long-term debt and finance lease obligations Long-term debt and finance lease obligations, net of current maturities TEAM INC. AND SUBSIDIARIES SUMMARY CONSOLIDATED CASH FLOW INFORMATION (unaudited, in thousands) Allowance for credit losses Non-cash compensation cost Working capital changes Other items affecting operating cash flows Cash used for business acquisitions, net Proceeds from disposal of assets Other items affecting investing cash flow Net cash used in investing activities Net payments under Credit Facility revolver Net borrowings under ABL facility Payments under Credit Facility term loan Payments for debt issuance costs Taxes paid for net share settlement of share-based awards, net Other items affecting financing cash flows Net change in cash and cash equivalents SEGMENT INFORMATION Operating income (loss) ("EBIT") Segment Adjusted EBIT Segment Adjusted EBITDA Includes goodwill impairment charge of $191.8 million for the six months ended June 30, 2020. Excluding the goodwill impairment charge, operating income for IHT would be $4.4 million for the six months ended June 30, 2020. The Company uses supplemental non-GAAP financial measures which are derived from the consolidated financial information including adjusted net income (loss); adjusted net income (loss) per diluted share, earnings before interest and taxes ("EBIT"); adjusted EBIT (defined below); adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA") and free cash flow to supplement financial information presented on a GAAP basis. The Company defines adjusted net income (loss), adjusted net income (loss) per diluted share and adjusted EBIT to exclude the following items: costs associated with our OneTEAM program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill impairment charges, loss on debt extinguishment and certain other items that we believe are not indicative of core operating activities. Consolidated adjusted EBIT, as defined by us, excludes the costs excluded from adjusted net income (loss) as well as income tax expense (benefit), interest charges, foreign currency (gain) loss, and items of other (income) expense. Consolidated adjusted EBITDA further excludes from consolidated adjusted EBIT depreciation, amortization and non-cash share-based compensation costs. Segment adjusted EBIT is equal to segment operating income (loss) excluding costs associated with our OneTEAM program, costs associated with the Operating Group Reorganization, non-routine legal costs and settlements, restructuring charges, certain severance charges, goodwill impairment charges and certain other items as determined by management. Segment adjusted EBITDA further excludes from segment adjusted EBIT depreciation, amortization, and non-cash share-based compensation costs. Free cash flow is defined as net cash provided by (used in) operating activities minus capital expenditures. Net debt is defined as the sum of the current and long-term portions of debt, including finance lease obligations, less cash and cash equivalents. Management believes these non-GAAP financial measures are useful to both management and investors in their analysis of our financial position and results of operations. In particular, adjusted net income (loss), adjusted net income (loss) per diluted share, consolidated adjusted EBIT, and consolidated adjusted EBITDA are meaningful measures of performance which are commonly used by industry analysts, investors, lenders and rating agencies to analyze operating performance in our industry, perform analytical comparisons, benchmark performance between periods, and measure our performance against externally communicated targets. Our segment adjusted EBIT and segment adjusted EBITDA is also used as a basis for the Chief Operating Decision Maker to evaluate the performance of our reportable segments. Free cash flow is used by our management and investors to analyze our ability to service and repay debt and return value directly to stakeholders. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis. Further, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies who may calculate non-GAAP financial measures differently, limiting the usefulness of those measures for comparative purposes. The liquidity measure of free cash flow does not represent a precise calculation of residual cash flow available for discretionary expenditures. Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (unaudited, in thousands except per share data) Adjusted Net Income (Loss): Professional fees and other1 Legal costs2 Severance charges, net3 Tax impact of adjustments and other net tax items4 Adjusted net loss Adjusted net loss per common share: Consolidated Adjusted EBIT and Adjusted EBITDA: Foreign currency loss (gain)6 Pension expense (credit)5 Consolidated Adjusted EBIT Amount included in operating expenses Amount included in SG&A expenses Total depreciation and amortization Non-cash share-based compensation costs Consolidated Adjusted EBITDA Free Cash Flow: Cash provided by (used in) operating activities For the three and six months ended June 30, 2021, includes $0.7 million and $1.5 million, respectively, of costs associated with the Operating Group Reorganization (exclusive of restructuring costs). For the three and six months ended June 30, 2020, includes $0.2 million and $2.0 million, respectively, associated with the OneTEAM program (exclusive of restructuring costs). For the three and six months ended June 30, 2021, primarily relates to accrued legal matters and other legal fees. For the three months and six months ended June 30, 2020, primarily relates to costs associated with international legal matters. For the three months and six months ended June 30, 2021, $0.3 million and $2.2 million, respectively, associated with the Operating Group Reorganization. For the three and six months ended June 30, 2020, severance charges are associated with the OneTEAM program, including international operations. Represents the tax effect of the adjustments. Beginning in Q2 2021, we now use the statutory tax rate, net of valuation allowance by legal entity to determine the tax effect of the adjustments. Prior to Q2 2021, we used an assumed marginal tax rate of 21% except for the adjustment of the goodwill impairment charge in Q1 2020 for which the actual tax impact was used. We have restated the prior period tax impact to use the statutory tax rate by legal entity, net of valuation allowance. Represents pension expense (credit) for the U.K. pension plan based on the difference between the expected return on plan assets and the cost of the discounted pension liability. The pension plan has had no new participants added since the plan was frozen in 1994 and accruals for future benefits ceased in connection with a plan curtailment in 2013. Represents foreign currency gain/loss. For prior period, includes other nominal fees. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (Continued) Segment Adjusted EBIT and Adjusted EBITDA: Operating income (loss) Adjusted EBIT Primarily relates to severance charges incurred associated with the Operating Group Reorganization for the three and six months ended June 30, 2021. For the three and six months ended June 30, 2020, relates to severance charges associated with the OneTEAM program, including international restructuring under the OneTEAM program. For the three and six months ended June 30, 2021, primarily relates to accrued legal matters and other legal fees. For the three and six months ended June 30, 2020, primarily relates to costs associated with international legal matters. SOURCE Team, Inc. www.teaminc.com

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professional_accounting

Explorations of Specific Sarbanes Oxley Sections Home Essay Samples Explorations of Specific Sarbanes Oxley Sections Sarbanes Oxley Act (SOX Act 2002), also called the Public Company Accounting Reform and Investor Protection Act or Corporate and Auditing Accountability and Responsibility Act came to effect in July 2002 and applies to all public companies in U.S. The Act was intended “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws and for other purposes”. The SOX Act was drafted by Senator Paul Sarbanes and Representative Michael Oxley. The enactment was thought necessary as a result of several accounting scandals like Enron, Tyco International and WorldCom where investors lost their investments as a result of misrepresentations of the financial statements. The Act has eleven titles and has strict compliance requirements. The Act led to the creation of the Public Company Accounting Oversight Board (PCAOB) which is meant to oversee and regulating the audit firms in order to protect the investors by ensuring that the auditors provide fair and independent audit reports (PCAOB, 2010). The enforcement of the Act is the responsibility of the Securities Exchange Commission (SEC). The Act was intended to protect investors by making the financial reporting more reliable by demanding more disclosures and more transparency. SEC endorsed PCAOB’s Auditing Standard 5 An audit of Internal Control over Financial Reporting that is integrated with an Audit of Financial Statements but also provided its own guiding section 13 (a) or 15 (d) Commission Guidance Regarding Management’s Report on Internal Control over Financial Reporting Under Section of the Securities Exchange Act of 1934in June 2007 (Public Company Accounting Board, 2010). The Act achieves this by, strengthening the internal controls, introducing new levels of internal control, demanding full disclosure in the financial statements and more transparent corporate governance. The Act requires the Chief Executive Officers (CEOs) and Chief Finance Officers (CFOs0 to be more accountable for the financial statements by specifying more responsibilities in financial reporting and enhancement of strict internal controls. The annual financial reports should include an assessment of the internal controls of the organization. Non-compliance with the Act is varied for each section of the act but it will include penalties for the CEO and the CFO, being removed from the stock exchange listing, loss of Directors and Officer’s insurance or imprisonment. Section 404 of the SOX Act 2002 Section 404 of the SOX Act 2002 is listed under Title IV (Enhanced Financial Disclosures) of the Act and refers to Management Assessment of Internal Controls. The section requires that public companies should publish within their annual reports on the adequacy of the organization’s structures and procedures of the internal controls for financial reporting as well as assess their effectiveness. This assessment of the procedures and structures on financial reporting and the effectiveness of the Internal Controls should be affirmed and reported by a registered accounting firm (AICPA, 2010). This is meant to improve the transparency and reliability of financial reporting. The annual report should contain; a report on the management’s responsibility in instituting and maintaining strong internal controls; a report identifying a structure and framework the management has used in assessing the effectiveness of internal controls; a report on the management’s assessment of the internal controls; a disclosure report on any material weaknesses; a statement that the auditors have assessed and attested the management report, as well as the attestation report by the registered audit firm (U.S. Securities Exchange Commission, 2010). Section 404 also requires that companies should report on any major changes in internal controls that may have happened in the previous fiscal year. SEC defines internal controls for financial reporting as “A process designed by, or under the supervision of the principal executive and principal financial offices and effected by the board of directors and the management, to provide reasonable assurance regarding the reliability of financial reporting and financial statements for external purposes and according to the generally accepted accounting principles (GAAP)” (American Institute of CPAs, 2010). Internal control for financial reporting includes the policies and procedures that there is accurate maintenance of records pertaining to the transactions that relate to the organization’s assets, the management can give the assurance that financial transactions are recorded according to GAAP rules and that receipts and expenditures are properly authorized; and finally that there is a structure to ensure there is early detection and overall prevention of unauthorized material transactions. The internal audit department forms part of the internal controls and assure the management and the audit committee on the effectiveness of the internal control structure. The SOX Act applies to all sizes of companies. However, the small companies had a longer compliance period as they may not have the financial power to meet the requirements in short notice and were expected to start complying by April 2005 as compared to the other companies had to comply one year earlier. There were no exemptions of the internal controls reporting requirement but only extensions of the compliance dates for foreign firms. Foreign firms with a market capitalization of more than $700 million were to comply by July 2006 while those with a market capitalization of less than this were to comply by July 2007. Registered investment companies are exempted by the SOX Act from submitting the internal control report and so are the asset-backed issuers are exempted from filing the internal controls reports as generally their reporting on financial statements is different from the other types of businesses. The Effect of the Regulation The practicality of the SOX 404 has been criticized by businesses and the lawmakers. The increased regulation requirement is one of the reasons it has been criticized as this has resulted to additional costs for the companies, and the impact being more serious for the small companies as the costs are disproportionate as compared to the big firms. The critics have argued that the regulatory and compliance costs far outweigh the benefits. The costs are related to the maintenance of internal controls and the costs of paying the independent registered accounting firm that does the attesting. A survey conducted in 2007 by Financial Executives International reported that the average compliance cost for section 404 was $1.7 million (Florham, 2007). The same survey indicated that the audit fees for the same period had also increased by 1.8 percent as compared to the year 2006. These compliance costs include an increase in audit fees, directors and officer’s insurance, legal costs, directors’ compensation costs and reduced productivity as the staff were being trained on the compliance rules. These has led to proposals to make amendments and two Amendments were adopted by the Financial Services Committee; the first one requires GAO to perform a cost-benefit analysis on the compliance and regulatory costs on non-accelerated filers (companies with a market capitalization between $75 million and $250 million) and the second one would requires the exemption from section 404 by non-accelerated fillers the small companies to be exempted from and requires the Securities and Exchange Commission (SEC) to device affordable ways for compliance for non-accelerated. Assessing the effect of the SOX Act has not been easy as the timing of the implementations of the Act requirements coincided with other financial, economic and political changes (Iliev, 2010). However using a quasi-experiment that compared companies that had submitted their first management reports (MR) and those that did not, Iliev concluded that complying with section 404 of the Act resulted to more conservative reporting and increased audit fees of 98 percent for small firms. Iliev used the regression discontinuity analyses and compared the buy-and-hold returns of the MR filers and non-filers of the small firms, Iliev concluded that the returns were 17 percent lower for the filers than for the non-filers. A similar experiment was conducted for the foreign firms nearing the 2006 compliance deadline with a cutoff of $700 million. The results of this experiment concluded that the audit fees for those foreign firms that did not submit the audit report was 30 percent less than those that did and the discretionary accruals were less by 2.3 percent. These two experiments showed that the costs of SOX compliance are higher than the benefits. The expectation of improved financial reporting was to safeguard investments. As such SOX 404 implementation should ideally led to a positive change on the earnings per share (EPS). According to Iliev those companies that filed the management report had a higher percentage reduction of approximately 19 percent in the EPS as compared to those that did not file the MR. This means that the filers had lost their discretion in reporting. The foreign firms and small firms reacted positively with the extension of the compliance date and negatively to the fact that the Act was after all going to be implemented. The above reasons lead to the conclusion that the SOX 404 compliance resulted to increased costs, a decrease in discretionary earnings, and a decrease in stock earnings. Thus the costs outweigh the benefits. After recognizing these negative effects on compliance the PCAOB advised that auditors should shift from the detailed bottom-up assessment to top-down approach which is more risk based and which the board recognizes to be more effective. This approach starts at the financial statements level and concentrates more on the transactions which need more focus rather than digging deep on transactions which may not produce material defects. Impact on private companies The SOX requirements and enforcement applied on to private requirements. The only private companies that were affected were those that were planning to be enlisted in the stock exchange, those that were merging with public companies, those issuing public registered debt and those conducting business with the Government entities. However the SOX rules have been accepted by several companies as “best practices”. Thus private companies are faced with pressure to comply from auditors, quality independent directors who may want to join these private companies, and investors. The pressure to comply as regards to SOX 404 is on strong internal controls and retention of proper documentation. Voluntary compliance by private companies is considered a way of reducing risk and is viewed positively by insurance providers, banks and lenders Potential benefits The SOX has highly been criticized as being too expensive especially for the small firms. However the compliance has its advantages. The proponents of SOX 404 have argued that the requirement on improved internal controls will lead to improved and transparent financial reporting, that the improved internal controls benefit all the stakeholders (U.S. Securities Exchange Commission, 2010). The financial reports are more accurate and they reflect the true picture of the organization. This is an advantage to the investors as they can make their investment decisions from an informed point of view. Again transparency leads to lower cost of capital as lenders or potential investors have increased confidence in the reliability of the financial statements. The internal control requirement has helped in identifying the vulnerabilities that had been present in the Information Technology area in most companies (Rittenberg and Miller, 2009). Again the proponents have argued that the compliance costs were only overwhelming at the early stage of implementation and these costs are likely to reduce in future. These costs are expected to reduce as companies shift from human-based auditing to an increased use of IT in audit. Some of the more specific control improvements include; an all rounded control environment that involves the management, the board of governors and the audit committee; more intense antifraud activities; more accurate and correct transaction entries, quick correction of computer errors; segregation of duties and more serious reconciliations of accounts, and an improvement of the audit trail. On specific internal control categories a research by IIA Research Foundation indicated an improvement in the control environment category and on the anti-fraud processes (Rittenberg and Miller, 2009). Control environment assesses the operating style, the ethical values of the top management and the responsibility and effectiveness of the board of governors and the audit committee. The disclosure involves assessing if the amount in the financial statements is in existence, is complete, and if the rights and obligations of the represented figures are correct. An example of a company that complied with SOX act and was positive on its effect is General Electric. General Electric (GE) spent approximately $30 million on section 404 compliance and the CFO had this to say about it, “GE had good controls before this, but it [section 404) has added more rigor, it certainly gives CEO and me more confidence when we are signing off on the results” (Rittenberg and Miller, 2009). The management of Chevron has a statement on their website that indicate the management responsibility for the financial reports and stating that the financial statements have been audited by a registered audit firm, Pricewaterhouse Coopers LLP as per the requirements of PCAOB (Chevron 2007). Brady Corporation is an example of a company that is making use of IT in its attempt to reduce the compliance costs. Brady Corporation uses the software AssureNet GL that it uses to reconcile its general ledger reconciliations, a requirement of the internal controls. The company’s Financial Director, Todd Endres said, “Before we had AssureNet GL we had no visibility into how our 60 reporting units were performing. Now, I know reconciliations are completed… I’m notified if reconciliations are delinquent. When it comes to SOX 404 compliance, this solution is leading edge”. This shows that with proper technology what seems a daunting task will be reduced which will reduce the cost and release labor for other duties (Trintech 2010). The financial costs may outweigh the benefits. This is bound to change in the long run as companies and other stakeholders look for ways to reduce the costs and with improved efficiency. Auditors should make use of technology to make it easier and faster but with more efficiency to carry out the internal controls audit. The requirements have led to winning back investors confidence that had been eroded after the high profile accounting scandals. The managers should learn the lessons learnt and improve on the internal controls and the reporting through, involving the line managers in the internal control improvement, improved planning, making use of the internal audit, involvement of the management, reduction of external costs and management leadership (Rittenberg and Miller, 2009). This will in future result to benefits for the investors. On the other hand the Regulatory Agencies should devise ways to make the process more friendly and acceptable by providing more guidance, emphasizing more on a more risk-based approach in auditing and introducing special compliance requirements for small firms. With these recommendations section 404 of the SOX act will attain the goal for which it was intended, winning the investors confidence and at a cost that is favorable to all the stakeholders.

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professional_accounting

Stock Selection for the Enterprising Investor 387 TABLE 15-1 A Sample Portfolio of Low-Multiplier Industrial (The First Fifteen Issues in the Stock Guide at December 31, 1971, Meeting Six Requirements) Price Earned Book Price Dec. Per Share Value S & P Feb. 1970 Ranking 1972 Aberdeen Mfg. 101⁄4 $1.25 $9.33 B 133⁄4 Alba-Waldensian 63⁄8 .68 9.06 B+ 63⁄8 Albert’s Inc. 81⁄2 1.00 8.48 n.r.a 14 Allied Mills 241⁄2 2.68 24.38 B+ 181⁄4 Am. Maize Prod. 91⁄4 1.03 10.68 A 161⁄2 Am. Rubber & Plastics 133⁄4 1.58 15.06 B 15 Am. Smelt. & Ref. 271⁄2 3.69 25.30 B+ 231⁄4 Anaconda 211⁄2 4.19 54.28 B+ 19 Anderson Clayton 373⁄4 4.52 65.74 B+ 521⁄2 Archer-Daniels-Mid. 321⁄2 3.51 31.35 B+ 321⁄2 Bagdad Copper 22 18.54 n.r.a 32 D. H. Baldwin 28 2.69 28.60 B+ 50 Big Bear Stores 181⁄2 3.21 20.57 B+ 391⁄2 Binks Mfg. 151⁄4 2.71 14.41 B+ 211⁄2 Bluefield Supply 221⁄4 1.83 28.66 n.r.a 391⁄2 b a n.r. = not ranked. b Adjusted for stock split. Single Criteria for Choosing Common Stocks An inquiring reader might well ask whether the choice of a bet- ter than average portfolio could be made a simpler affair than we have just outlined. Could a single plausible criterion be used to good advantage—such as a low price/earnings ratio, or a high div- idend return, or a large asset value? The two methods of this sort that we have found to give quite consistently good results in the longer past have been (a) the purchase of low-multiplier stocks of important companies (such as the DJIA list), and (b) the choice of a diversified group of stocks selling under their net-current-asset value (or working-capital value). We have already pointed out that the low-multiplier criterion applied to the DJIA at the end of 1968 worked out badly when the results are measured to mid-1971. The record of common-stock purchases made at a price below their working-capital value has no such bad mark against it; the draw- back here has been the drying up of such opportunities during most of the past decade. What about other bases of choice? In writing this book we have made a series of “experiments,” each based on a single, fairly obvi- ous criterion. The data used would be readily found in the Stan- dard & Poor’s Stock Guide. In all cases a 30-stock portfolio was assumed to have been acquired at the 1968 closing prices and then revalued at June 30, 1971. The separate criteria applied were the following, as applied to otherwise random choices: (1) A low multi- plier of recent earnings (not confined to DJIA issues). (2) A high dividend return. (3) A very long dividend record. (4) A very large enterprise, as measured by number of outstanding shares. (5) A strong financial position. (6) A low price in dollars per share. (7) A low price in relation to the previous high price. (8) A high quality- ranking by Standard & Poor’s. It will be noted that the Stock Guide has at least one column relat- ing to each of the above criteria. This indicates the publisher’s belief that each is of importance in analyzing and choosing com- mon stocks. (As we pointed out above, we should like to see another figure added: the net-asset-value per share.) The most important fact that emerges from our various tests relates to the performance of stocks bought at random. We have tested this performance for three 30-stock portfolios, each made up of issues found on the first line of the December 31, 1968, Stock Guide and also found in the issue for August 31, 1971. Between these two dates the S & P composite was practically unchanged, and the DJIA lost about 5%. But our 90 randomly chosen issues declined an average of 22%, not counting 19 issues that were dropped from the Guide and probably showed larger losses. These comparative results undoubtedly reflect the tendency of smaller issues of inferior quality to be relatively overvalued in bull mar- kets, and not only to suffer more serious declines than the stronger issues in the ensuing price collapse, but also to delay their full recovery—in many cases indefinitely. The moral for the intelligent investor is, of course, to avoid second-quality issues in making up a portfolio, unless—for the enterprising investor—they are demon- strable bargains. Other results gleaned from our portfolio studies may be sum- marized as follows: Only three of the groups studied showed up better than the S & P composite (and hence better than the DJIA), viz: (1) Industri- als with the highest quality ranking (A+). These advanced 91⁄2% in the period against a decline of 2.4% for the S & P industrials, and 5.6% for the DJIA. (However, the ten public-utility issues rated A+ declined 18% against a decline of 14% for the 55-stock S & P public- utility index.) It is worth remarking that the S & P rankings showed up very well in this single test. In every case a portfolio based on a higher ranking did better than a lower-ranking portfolio. (2) Com- panies with more than 50 million shares outstanding showed no change on the whole, as against a small decline for the indexes. (3) Strangely enough, stocks selling at a high price per share (over 100) showed a slight (1%) composite advance. Among our various tests we made one based on book value, a figure not given in the Stock Guide. Here we found—contrary to our investment philosophy—that companies that combined major size with a large good-will component in their market price did very well as a whole in the 21⁄2-year holding period. (By “good-will com- ponent” we mean the part of the price that exceeds the book value.)* Our list of “good-will giants” was made up of 30 issues, each of which had a good-will component of over a billion dollars, representing more than half of its market price. The total market value of these good-will items at the end of 1968 was more than $120 billions! Despite these optimistic market valuations the group as a whole showed a price advance per share of 15% between December 1968 and August 1971, and acquitted itself best among the 20-odd lists studied. A fact like this must not be ignored in a work on investment * In Graham’s terms, a large amount of goodwill can result from two causes: a corporation can acquire other companies for substantially more than the value of their assets, or its own stock can trade for substantially more than its book value. policies. It is clear that, at the least, a considerable momentum is attached to those companies that combine the virtues of great size, an excellent past record of earnings, the public’s expectation of continued earnings growth in the future, and strong market action over many past years. Even if the price may appear excessive by our quantitative standards the underlying market momentum may well carry such issues along more or less indefinitely. (Naturally this assumption does not apply to every individual issue in the cat- egory. For example, the indisputable good-will leader, IBM, moved down from 315 to 304 in the 30-month period.) It is difficult to judge to what extent the superior market action shown is due to “true” or objective investment merits and to what extent to long- established popularity. No doubt both factors are important here. Clearly, both the long-term and the recent market action of the good-will giants would recommend them for a diversified portfo- lio of common stocks. Our own preference, however, remains for other types that show a combination of favorable investment fac- tors, including asset values of at least two-thirds the market price. The tests using other criteria indicate in general that random lists based on a single favorable factor did better than random lists chosen for the opposite factor—e.g., low-multiplier issues had a smaller decline in this period than high-multiplier issues, and long-term dividend payers lost less than those that were not pay- ing dividends at the end of 1968. To that extent the results support our recommendation that the issues selected meet a combination of quantitative or tangible criteria. Finally we should comment on the much poorer showing made by our lists as a whole as compared with the price record of the S & P composite. The latter is weighted by the size of each enter- prise, whereas our tests are based on taking one share of each com- pany. Evidently the larger emphasis given to giant enterprises by the S & P method made a significant difference in the results, and points up once again their greater price stability as compared with “run-of-the-mine” companies. Bargain Issues, or Net-Current-Asset Stocks In the tests discussed above we did not include the results of buy- ing 30 issues at a price less than their net-current-asset value. The rea- son was that only a handful, at most, of such issues would have been found in the Stock Guide at the end of 1968. But the picture changed in the 1970 decline, and at the low prices of that year a goodly number of common stocks could have been bought at below their working- capital value. It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone—after deduct- ing all prior claims, and counting as zero the fixed and other assets— the results should be quite satisfactory. They were so, in our experience, for more than 30 years—say, between 1923 and 1957— excluding a time of real trial in 1930–1932. Has this approach any relevance at the beginning of 1971? Our answer would be a qualified “yes.” A quick runover of the Stock Guide would have uncovered some 50 or more issues that appeared to be obtainable at or below net-current-asset value. As might be expected a good many of these had been doing badly in the diffi- cult year 1970. If we eliminated those which had reported net losses in the last 12-month period we would be still left with enough issues to make up a diversified list. We have included in Table 15-2 some data on five issues that sold at less than their working-capital value* at their low prices of TABLE 15-2 Stocks of Prominent Companies Selling at or Below Net-Current-Asset Value in 1970 Net-Current- Book Earned High Price 1970 Asset Value Value Per Share, Current Before Company Price Per Share Per Share 1970 Dividend 1970 Cone Mills 13 $18 $39.3 $1.51 $1.00 411⁄2 Jantzen Inc. 111⁄8 12 16.3 1.27 .60 37 National Presto 211⁄2 27 31.7 6.15 1.00 45 Parker Pen 91⁄2 16.6 1.62 .60 311⁄4 West Point 91⁄4 201⁄2 39.4 1.82 1.50 64 Pepperell 161⁄4 * Technically, the working-capital value of a stock is the current assets per share, minus the current liabilities per share, divided by the number of shares outstanding. Here, however, Graham means “net working-capital value,” or the per-share value of current assets minus total liabilities. 1970. These give some food for reflection on the nature of stock- price fluctuations. How does it come about that well-established companies, whose brands are household names all over the coun- try, could be valued at such low figures—at the same time when other concerns (with better earnings growth of course) were selling for billions of dollars in excess of what their balance sheets showed? To quote the “old days” once more, the idea of good will as an element of intangible value was usually associated with a “trade name.” Names such as Lady Pepperell in sheets, Jantzen in swim suits, and Parker in pens would be considered assets of great value indeed. But now, if the “market doesn’t like a company,” not only renowned trade names but land, buildings, machinery, and what you will, can all count for nothing in its scales. Pascal said that “the heart has its reasons that the reason doesn’t under- stand.”* For “heart” read “Wall Street.” There is another contrast that comes to mind. When the going is good and new issues are readily salable, stock offerings of no qual- ity at all make their appearance. They quickly find buyers; their prices are often bid up enthusiastically right after issuance to levels in relation to assets and earnings that would put IBM, Xerox, and Polaroid to shame. Wall Street takes this madness in its stride, with no overt efforts by anyone to call a halt before the inevitable col- lapse in prices. (The SEC can’t do much more than insist on disclo- sure of information, about which the speculative public couldn’t care less, or announce investigations and usually mild punitive actions of various sorts after the letter of the law has been clearly broken.) When many of these minuscule but grossly inflated enter- prises disappear from view, or nearly so, it is all taken philosophi- cally enough as “part of the game.” Everybody swears off such inexcusable extravagances—until next time. Thanks for the lecture, says the gentle reader. But what about your “bargain issues”? Can one really make money in them with- out taking a serious risk? Yes indeed, if you can find enough of them to make a diversified group, and if you don’t lose patience if * Le coeur a ses raisons que la raison ne connaît point. This poetic pas- sage is one of the concluding arguments in the great French theologian’s discussion of what has come to be known as “Pascal’s wager” (see com- mentary on Chapter 20). they fail to advance soon after you buy them. Sometimes the patience needed may appear quite considerable. In our previous edition we hazarded a single example (p. 188) which was current as we wrote. It was Burton-Dixie Corp., with stock selling at 20, against net-current-asset value of 30, and book value of about 50. A profit on that purchase would not have been immediate. But in August 1967 all the shareholders were offered 533⁄4 for their shares, probably at just about book value. A patient holder, who had bought the shares in March 1964 at 20 would have had a profit of 165% in 31⁄2 years—a noncompounded annual return of 47%. Most of the bargain issues in our experience have not taken that long to show good profits–nor have they shown so high a rate. For a some- what similar situation, current as we write, see our discussion of National Presto Industries above, p. 168. Special Situations or “Workouts” Let us touch briefly on this area, since it is theoretically includ- able in the program of operations of an enterprising investor. It was commented upon above. Here we shall supply some examples of the genre, and some further remarks on what it appears to offer an open-minded and alert investor. Three such situations, among others, were current early in 1971, and they may be summarized as follows: Situation 1. Acquisition of Kayser-Roth by Borden’s. In January 1971 Borden Inc. announced a plan to acquire control of Kayser- Roth (“diversified apparel”) by giving 11⁄3 shares of its own stock in exchange for one share of Kayser-Roth. On the following day, in active trading. Borden closed at 26 and Kayser-Roth at 28. If an “operator” had bought 300 shares of Kayser-Roth and sold 400 Bor- den at these prices and if the deal were later consummated on the announced terms, he would have had a profit of some 24% on the cost of his shares, less commissions and some other items. Assum- ing the deal had gone through in six months, his final profit might have been at about a 40% per annum rate. Situation 2. In November 1970 National Biscuit Co. offered to buy control of Aurora Plastics Co. at $11 in cash. The stock was sell- ing at about 81⁄2; it closed the month at 9 and continued to sell there at year-end. Here the gross profit indicated was originally about 25%, subject to the risks of nonconsummation and to the time element. Situation 3. Universal-Marion Co., which had ceased its business operations, asked its shareholders to ratify dissolution of the concern. The treasurer indicated that the common stock had a book value of about $281⁄2 per share, a substantial part of which was in liquid form. The stock closed 1970 at 211⁄2, indicating a possible gross profit here, if book value was realized in liquidation, of more than 30%. If operations of this kind, conducted on a diversified basis for spreading the risk, could be counted to yield annual profits of, say, 20% or better, they would undoubtedly be more than merely worthwhile. Since this is not a book on “special situations,” we are not going into the details of the business—for it really is a business. Let us point out two contradictory developments there in recent years. On the one hand the number of deals to choose from has increased enormously, as compared with, say, ten years ago. This is a consequence of what might be called a mania of corporations to diversify their activities through various types of acquisitions, etc. In 1970 the number of “merger announcements” aggregated some 5,000, down from over 6,000 in 1969. The total money values involved in these deals amounted to many, many billions. Perhaps only a small fraction of the 5,000 announcements could have pre- sented a clear-cut opportunity for purchase of shares by a special- situations man, but this fraction was still large enough to keep him busy studying, picking, and choosing. The other side of the picture is that an increasing proportion of the mergers announced failed to be consummated. In such cases, of course, the aimed-for profit is not realized, and is likely to be replaced by a more or less serious loss. Reasons for nonsuccess are numerous, including antitrust intervention, shareholder opposi- tion, change in “market conditions,” unfavorable indications from further study, inability to agree on details, and others. The trick here, of course, is to have the judgment, buttressed by experience, to pick the deals most likely to succeed and also those which are likely to occasion the smallest loss if they fail.* * As discussed in the commentary on Chapter 7, merger arbitrage is wholly inappropriate for most individual investors. Further Comment on the Examples Above Kayser-Roth. The directors of this company had already rejected (in January 1971) the Borden proposal when this chapter was written. If the operation had been “undone” immediately the overall loss, including commissions, would have been about 12% of the cost of the Kayser-Roth shares. Aurora Plastics. Because of the bad showing of this company in 1970 the takeover terms were renegotiated and the price reduced to 101⁄2. The shares were paid for at the end of May. The annual rate of return realized here was about 25%. Universal-Marion. This company promptly made an initial distribution in cash and stock worth about $7 per share, reducing the investment to say 141⁄2. However the market price fell as low as 13 subsequently, casting doubt on the ultimate outcome of the liq- uidation. Assuming that the three examples given are fairly representa- tive of “workout or arbitrage” opportunities as a whole in 1971, it is clear that they are not attractive if entered into upon a random basis. This has become more than ever a field for professionals, with the requisite experience and judgment. There is an interesting sidelight on our Kayser-Roth example. Late in 1971 the price fell below 20 while Borden was selling at 25, equivalent to 33 for Kayser-Roth under the terms of the exchange offer. It would appear that either the directors had made a great mistake in turning down that opportunity or the shares of Kayser- Roth were now badly undervalued in the market. Something for a security analyst to look into. COMMENTARY ON CHAPTER 15 It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the inde- pendence of solitude. PRACTICE, PRACTICE, PRACTICE Max Heine, founder of the Mutual Series Funds, liked to say that “there are many roads to Jerusalem.” What this masterly stock picker meant was that his own value-centered method of selecting stocks was not the only way to be a successful investor. In this chapter we’ll look at several techniques that some of today’s leading money man- agers use for picking stocks. First, though, it’s worth repeating that for most investors, selecting individual stocks is unnecessary—if not inadvisable. The fact that most professionals do a poor job of stock picking does not mean that most amateurs can do better. The vast majority of people who try to pick stocks learn that they are not as good at it as they thought; the lucki- est ones discover this early on, while the less fortunate take years to learn it. A small percentage of investors can excel at picking their own stocks. Everyone else would be better off getting help, ideally through an index fund. Graham advised investors to practice first, just as even the greatest athletes and musicians practice and rehearse before every actual per- formance. He suggested starting off by spending a year tracking and picking stocks (but not with real money).1 In Graham’s day, you would 1 Patricia Dreyfus, “Investment Analysis in Two Easy Lessons” (interview with Graham), Money, July, 1976, p. 36. Commentary on Chapter 15 397 have practiced using a ledger of hypothetical buys and sells on a legal pad; nowadays, you can use “portfolio trackers” at websites like www.morningstar.com, http://finance.yahoo.com, http://money.cnn. com/services/portfolio/ or www.marketocracy.com (at the last site, ignore the “market-beating” hype on its funds and other services). By test-driving your techniques before trying them with real money, you can make mistakes without incurring any actual losses, develop the discipline to avoid frequent trading, compare your approach against those of leading money managers, and learn what works for you. Best of all, tracking the outcome of all your stock picks will pre- vent you from forgetting that some of your hunches turn out to be stinkers. That will force you to learn from your winners and your losers. After a year, measure your results against how you would have done if you had put all your money in an S & P 500 index fund. If you didn’t enjoy the experiment or your picks were poor, no harm done—selecting individual stocks is not for you. Get yourself an index fund and stop wasting your time on stock picking. If you enjoyed the experiment and earned sufficiently good returns, gradually assemble a basket of stocks—but limit it to a maximum of 10% of your overall portfolio (keep the rest in an index fund). And remember, you can always stop if it no longer interests you or your returns turn bad. LOOKING UNDER THE RIGHT ROCKS So how should you go about looking for a potentially rewarding stock? You can use websites like http://finance.yahoo.com and www.morningstar.com to screen stocks with the statistical filters sug- gested in Chapter 14. Or you can take a more patient, craftsmanlike approach. Unlike most people, many of the best professional investors first get interested in a company when its share price goes down, not up. Christopher Browne of Tweedy Browne Global Value Fund, William Nygren of the Oakmark Fund, Robert Rodriguez of FPA Capi- tal Fund, and Robert Torray of the Torray Fund all suggest looking at the daily list of new 52-week lows in the Wall Street Journal or the similar table in the “Market Week” section of Barron’s. That will point you toward stocks and industries that are unfashionable or unloved and that thus offer the potential for high returns once perceptions Christopher Davis of the Davis Funds and William Miller of Legg 398 Commentary on Chapter 15 FROM EPS TO ROIC Net income or earnings per share (EPS) has been distorted in recent years by factors like stock-option grants and accounting gains and charges. To see how much a company is truly earning on the capital it deploys in its businesses, look beyond EPS to ROIC, or return on invested capital. Christopher Davis of the Davis Funds defines it with this formula: ROIC = Owner Earnings Ϭ Invested Capital, where Owner Earnings is equal to: plus depreciation plus amortization of goodwill minus Federal income tax (paid at the company’s average rate) minus cost of stock options minus “maintenance” (or essential) capital expenditures minus any income generated by unsustainable rates of return on pension funds (as of 2003, anything greater than 6.5%) and where Invested Capital is equal to: minus cash (as well as short-term investments and non-interest- bearing current liabilities) plus past accounting charges that reduced invested capital. ROIC has the virtue of showing, after all legitimate expenses, what the company earns from its operating businesses—and how efficiently it has used the shareholders’ money to generate that return. An ROIC of at least 10% is attractive; even 6% or 7% can be tempting if the company has good brand names, focused management, or is under a temporary cloud. Mason Value Trust like to see rising returns on invested capital, or ROIC—a way of measuring how efficiently a company generates what Warren Buffett has called “owner earnings.” 2 (See the sidebar on p. 398 for more detail.) By checking “comparables,” or the prices at which similar busi- nesses have been acquired over the years, managers like Oakmark’s Nygren and Longleaf Partners’ O. Mason Hawkins get a better handle on what a company’s parts are worth. For an individual investor, it’s painstaking and difficult work: Start by looking at the “Business Segments” footnote in the company’s annual report, which typically lists the industrial sector, revenues, and earnings of each sub- sidiary. (The “Management Discussion and Analysis” may also be helpful.) Then search a news database like Factiva, ProQuest, or LexisNexis for examples of other firms in the same industries that have recently been acquired. Using the EDGAR database at www.sec.gov to locate their past annual reports, you may be able to determine the ratio of purchase price to the earnings of those acquired companies. You can then apply that ratio to estimate how much a corporate acquirer might pay for a similar division of the company you are inves- tigating. By separately analyzing each of the company’s divisions this way, you may be able to see whether they are worth more than the current stock price. Longleaf’s Hawkins likes to find what he calls “60-cent dollars,” or companies whose stock is trading at 60% or less of the value at which he appraises the businesses. That helps provide the margin of safety that Graham insists on. Finally, most leading professional investors want to see that a com- pany is run by people who, in the words of Oakmark’s William Nygren, “think like owners, not just managers.” Two simple tests: Are the company’s financial statements easily understandable, or are they full of obfuscation? Are “nonrecurring” or “extraordinary” or “unusual” charges just that, or do they have a nasty habit of recurring? Longleaf’s Mason Hawkins looks for corporate managers who are 2 See the commentary on Chapter 11. “good partners”—meaning that they communicate candidly about problems, have clear plans for allocating current and future cash flow, and own sizable stakes in the company’s stock (preferably through cash purchases rather than through grants of options). But “if man- agements talk more about the stock price than about the business,” warns Robert Torray of the Torray Fund, “we’re not interested.” Christopher Davis of the Davis Funds favors firms that limit issuance of stock options to roughly 3% of shares outstanding. At Vanguard Primecap Fund, Howard Schow tracks “what the com- pany said one year and what happened the next. We want to see not only whether managements are honest with shareholders but also whether they’re honest with themselves.” (If a company boss insists that all is hunky-dory when business is sputtering, watch out!) Nowa- days, you can listen in on a company’s regularly scheduled conference calls even if you own only a few shares; to find out the schedule, call the investor relations department at corporate headquarters or visit the company’s website. Robert Rodriguez of FPA Capital Fund turns to the back page of the company’s annual report, where the heads of its operating divi- sions are listed. If there’s a lot of turnover in those names in the first one or two years of a new CEO’s regime, that’s probably a good sign; he’s cleaning out the dead wood. But if high turnover continues, the turnaround has probably devolved into turmoil. KE E PI NG YOU R EYE S ON TH E ROAD There are even more roads to Jerusalem than these. Some leading portfolio managers, like David Dreman of Dreman Value Management and Martin Whitman of the Third Avenue Funds, focus on companies selling at very low multiples of assets, earnings, or cash flow. Others, like Charles Royce of the Royce Funds and Joel Tillinghast of Fidelity Low-Priced Stock Fund, hunt for undervalued small companies. And, for an all-too-brief look at how today’s most revered investor, Warren Buffett, selects companies, see the sidebar on p. 401. One technique that can be helpful: See which leading professional money managers own the same stocks you do. If one or two names keep turning up, go to the websites of those fund companies and download their most recent reports. By seeing which other stocks these investors own, you can learn more about what qualities they WA R R E N ’ S WAY Graham’s greatest student, Warren Buffett, has become the world’s most successful investor by putting new twists on Graham’s ideas. Buffett and his partner, Charles Munger, have combined Graham’s “margin of safety” and detachment from the market with their own innovative emphasis on future growth. Here is an all-too-brief summary of Buffett’s approach: He looks for what he calls “franchise” companies with strong consumer brands, easily understandable businesses, robust financial health, and near-monopolies in their markets, like H & R Block, Gillette, and the Washington Post Co. Buffett likes to snap up a stock when a scandal, big loss, or other bad news passes over it like a storm cloud—as when he bought Coca-Cola soon after its disastrous rollout of “New Coke” and the market crash of 1987. He also wants to see managers who set and meet realistic goals; build their businesses from within rather than through acquisition; allocate capital wisely; and do not pay themselves hundred-million-dollar jackpots of stock options. Buffett insists on steady and sustainable growth in earnings, so the company will be worth more in the future than it is today. In his annual reports, archived at www.berkshirehathaway. com, Buffett has set out his thinking like an open book. Probably no other investor, Graham included, has publicly revealed more about his approach or written such compellingly readable essays. (One classic Buffett proverb: “When a management with a reputation for brilliance tackles a business with a reputa- tion for bad economics, it is the reputation of the business that remains intact.”) Every intelligent investor can—and should—learn by reading this master’s own words. have in common; by reading the managers’ commentary, you may get ideas on how to improve your own approach.3 No matter which techniques they use in picking stocks, successful investing professionals have two things in common: First, they are dis- ciplined and consistent, refusing to change their approach even when it is unfashionable. Second, they think a great deal about what they do and how to do it, but they pay very little attention to what the market is doing. 3 There are also many newsletters dedicated to analyzing professional port- folios, but most of them are a waste of time and money for even the most enterprising investor. A shining exception for people who can spare the cash is Outstanding Investor Digest (www.oid.com). Convertible Issues and Warrants Convertible bonds and preferred stocks have been taking on a predominant importance in recent years in the field of senior financing. As a parallel development, stock-option warrants— which are long-term rights to buy common shares at stipulated prices—have become more and more numerous. More than half the preferred issues now quoted in the Standard & Poor’s Stock Guide have conversion privileges, and this has been true also of a major part of the corporate bond financing in 1968–1970. There are at least 60 different series of stock-option warrants dealt in on the American Stock Exchange. In 1970, for the first time in its history, the New York Stock Exchange listed an issue of long-term war- rants, giving rights to buy 31,400,000 American Tel. & Tel. shares at $52 each. With “Mother Bell” now leading that procession, it is bound to be augmented by many new fabricators of warrants. (As we shall point out later, they are a fabrication in more than one sense.)* In the overall picture the convertible issues rank as much more important than the warrants, and we shall discuss them first. There are two main aspects to be considered from the standpoint of the investor. First, how do they rank as investment opportunities and risks? Second, how does their existence affect the value of the related common-stock issues? Convertible issues are claimed to be especially advantageous to both the investor and the issuing corporation. The investor receives the superior protection of a bond or preferred stock, plus the opportunity to participate in any substantial rise in the value of the * Graham detested warrants, as he makes clear on pp. 413–416. common stock. The issuer is able to raise capital at a moderate interest or preferred dividend cost, and if the expected prosperity materializes the issuer will get rid of the senior obligation by hav- ing it exchanged into common stock. Thus both sides to the bargain will fare unusually well. Obviously the foregoing paragraph must overstate the case somewhere, for you cannot by a mere ingenious device make a bar- gain much better for both sides. In exchange for the conversion privilege the investor usually gives up something important in quality or yield, or both.1 Conversely, if the company gets its money at lower cost because of the conversion feature, it is surren- dering in return part of the common shareholders’ claim to future enhancement. On this subject there are a number of tricky argu- ments to be advanced both pro and con. The safest conclusion that can be reached is that convertible issues are like any other form of security, in that their form itself guarantees neither attractiveness nor unattractiveness. That question will depend on all the facts surrounding the individual issue.* We do know, however, that the group of convertible issues floated during the latter part of a bull market are bound to yield unsatisfactory results as a whole. (It is at such optimistic periods, unfortunately, that most of the convertible financing has been done in the past.) The poor consequences must be inevitable, from the timing itself, since a wide decline in the stock market must invari- ably make the conversion privilege much less attractive—and often, also, call into question the underlying safety of the issue itself.† As a group illustration we shall retain the example used in * Graham is pointing out that, despite the promotional rhetoric that investors usually hear, convertible bonds do not automatically offer “the best of both worlds.” Higher yield and lower risk do not always go hand in hand. What Wall Street gives with one hand, it usually takes away with the other. An investment may offer the best of one world, or the worst of another; but the best of both worlds seldom becomes available in a single package. † According to Goldman Sachs and Ibbotson Associates, from 1998 through 2002, convertibles generated an average annual return of 4.8%. That was considerably better than the 0.6% annual loss on U.S. stocks, but substantially worse than the returns of medium-term corporate bonds (a Convertible Issues and Warrants 405 TABLE 16-1 Price Record of New Preferred-Stock Issues Offered in 1946 Convertible and “Straight” Participating Price Change from Issue Price Issues Issues to Low up to July 1947 (number of issues) No decline 7 0 Declined 0–10% 16 2 10–20% 3 22 40% or more About 9% About 30% Average decline our first edition of the relative price behavior of convertible and straight (nonconvertible) preferreds offered in 1946, the closing year of the bull market preceding the extraordinary one that began in 1949. A comparable presentation is difficult to make for the years 1967–1970, because there were virtually no new offerings of non- convertibles in those years. But it is easy to demonstrate that the average price decline of convertible preferred stocks from Decem- ber 1967 to December 1970 was greater than that for common stocks as a whole (which lost only 5%). Also the convertibles seem to have done quite a bit worse than the older straight preferred shares during the period December 1968 to December 1970, as is shown by the sample of 20 issues of each kind in Table 16-2. These 7.5% annual gain) and long-term corporate bonds (an 8.3% annual gain). In the mid-1990s, according to Merrill Lynch, roughly $15 billion in convert- ibles were issued annually; by 1999, issuance had more than doubled to $39 billion. In 2000, $58 billion in convertibles were issued, and in 2001, another $105 billion emerged. As Graham warns, convertible securities always come out of the woodwork near the end of a bull market—largely because even poor-quality companies then have stock returns high enough to make the conversion feature seem attractive. TABLE 16-2 Price Record of Preferred Stocks, Common Stocks, and Warrants, December 1970 versus December 1968 (Based on Random Samples of 20 Issues Each) Straight Preferred Stocks Convertible Listed Rated A Rated or Better Below A Preferred Common Listed Stocks Stocks Warrants Advances 20 1 2 1 Declines: 0 0–10% 33 3 4 1 10–20% 14 10 2 1 65% 20–40% 15 5 6 40% or more 0 0 9 7 Average declines 10% 17% 29% 33% (Standard & Poor’s composite index of 500 common stocks declined 11.3%.) comparisons would demonstrate that convertible securities as a whole have relatively poor quality as senior issues and also are tied to common stocks that do worse than the general market except during a speculative upsurge. These observations do not apply to all convertible issues, of course. In the 1968 and 1969 particularly, a fair number of strong companies used convertible issues to combat the inordinately high interest rates for even first-quality bonds. But it is noteworthy that in our 20-stock sample of convertible pre- ferreds only one showed an advance and 14 suffered bad declines.* * Recent structural changes in the convertible market have negated some of these criticisms. Convertible preferred stock, which made up roughly half the total convertible market in Graham’s day, now accounts for only an eighth of the market. Maturities are shorter, making convertible bonds less volatile, and many now carry “call protection,” or assurances against early redemption. And more than half of all convertibles are now investment grade, a significant improvement in credit quality from Graham’s time. Thus, in 2002, the Merrill Lynch All U.S. Convertible Index lost 8.6%—versus the 22.1% loss of the S & P 500-stock index and the 31.3% decline in the NASDAQ Composite stock index. The conclusion to be drawn from these figures is not that con- vertible issues are in themselves less desirable than nonconvertible or “straight” securities. Other things being equal, the opposite is true. But we clearly see that other things are not equal in practice and that the addition of the conversion privilege often—perhaps generally—betrays an absence of genuine investment quality for the issue. It is true, of course, that a convertible preferred is safer than the common stock of the same company—that is to say, it carries smaller risk of eventual loss of principal. Consequently those who buy new convertibles instead of the corresponding common stock are logical to that extent. But in most cases the common would not have been an intelligent purchase to begin with, at the ruling price, and the substitution of the convertible preferred did not improve the picture sufficiently. Furthermore, a good deal of the buying of convertibles was done by investors who had no special interest or confidence in the common stock—that is, they would never have thought of buying the common at the time—but who were tempted by what seemed an ideal combination of a prior claim plus a conversion privilege close to the current market. In a num- ber of instances this combination has worked out well, but the sta- tistics seem to show that it is more likely to prove a pitfall. In connection with the ownership of convertibles there is a spe- cial problem which most investors fail to realize. Even when a profit appears it brings a dilemma with it. Should the holder sell on a small rise; should he hold for a much bigger advance; if the issue is called—as often happens when the common has gone up consid- erably—should he sell out then or convert into and retain the com- mon stock?* Let us talk in concrete terms. You buy a 6% bond at 100, convert- ible into stock at 25—that is, at the rate of 40 shares for each $1,000 bond. The stock goes to 30, which makes the bond worth at least 120, and so it sells at 125. You either sell or hold. If you hold, hop- ing for a higher price, you are pretty much in the position of a com- * A bond is “called” when the issuing corporation forcibly pays it off ahead of the stated maturity date, or final due date for interest payments. For a brief summary of how convertible bonds work, see Note 1 in the commen- tary on this chapter (p. 418). mon shareholder, since if the stock goes down your bond will go down too. A conservative person is likely to say that beyond 125 his position has become too speculative, and therefore he sells and makes a gratifying 25% profit. So far, so good. But pursue the matter a bit. In many cases where the holder sells at 125 the common stock continues to advance, car- rying the convertible with it, and the investor experiences that peculiar pain that comes to the man who has sold out much too soon. The next time, he decides to hold for 150 or 200. The issue goes up to 140 and he does not sell. Then the market breaks and his bond slides down to 80. Again he has done the wrong thing. Aside from the mental anguish involved in making these bad guesses—and they seem to be almost inevitable—there is a real arithmetical drawback to operations in convertible issues. It may be assumed that a stern and uniform policy of selling at 25% or 30% profit will work out best as applied to many holdings. This would then mark the upper limit of profit and would be realized only on the issues that worked out well. But, if—as appears to be true—these issues often lack adequate underlying security and tend to be floated and purchased in the latter stages of a bull mar- ket, then a goodly proportion of them will fail to rise to 125 but will not fail to collapse when the market turns downward. Thus the spectacular opportunities in convertibles prove to be illusory in practice, and the overall experience is marked by fully as many substantial losses—at least of a temporary kind—as there are gains of similar magnitude. Because of the extraordinary length of the 1950–1968 bull market, convertible issues as a whole gave a good account of themselves for some 18 years. But this meant only that the great majority of common stocks enjoyed large advances, in which most convertible issues were able to share. The soundness of investment in convertible issues can only be tested by their performance in a declining stock market—and this has always proved disappointing as a whole.* In our first edition (1949) we gave an illustration of this special * In recent years, convertibles have tended to outperform the Standard & Poor’s 500-stock index during declining stock markets, but they have typi- cally underperformed other bonds—which weakens, but does not fully negate, the criticism Graham makes here. problem of “what to do” with a convertible when it goes up. We believe it still merits inclusion here. Like several of our references it is based on our own investment operations. We were members of a “select group,” mainly of investment funds, who participated in a private offering of convertible 41⁄2% debentures of Eversharp Co. at par, convertible into common stock at $40 per share. The stock advanced rapidly to 651⁄2, and then (after a three-for-two split) to the equivalent of 88. The latter price made the convertible debentures worth no less than 220. During this period the two issues were called at a small premium; hence they were practically all converted into common stock, which was retained by a number of the original investment-fund buyers of the debentures. The price promptly began a severe decline, and in March 1948 the stock sold as low as 73⁄8. This represented a value of only 27 for the debenture issues, or a loss of 75% of the original price instead of a profit of over 100%. The real point of this story is that some of the original purchasers converted their bonds into the stock and held the stock through its great decline. In so doing they ran counter to an old maxim of Wall Street, which runs: “Never convert a convertible bond.” Why this advice? Because once you convert you have lost your strategic com- bination of prior claimant to interest plus a chance for an attractive profit. You have probably turned from investor into speculator, and quite often at an unpropitious time (because the stock has already had a large advance). If “Never convert a convertible” is a good rule, how came it that these experienced fund managers exchanged their Eversharp bonds for stock, to their subsequent embarrassing loss? The answer, no doubt, is that they let themselves be carried away by enthusiasm for the company’s prospects as well as by the “favorable market action” of the shares. Wall Street has a few pru- dent principles; the trouble is that they are always forgotten when they are most needed.* Hence that other famous dictum of the old- timers: “Do as I say, not as I do.” Our general attitude toward new convertible issues is thus a mistrustful one. We mean here, as in other similar observations, * This sentence could serve as the epitaph for the bull market of the 1990s. Among the “few prudent principles” that investors forgot were such market clichés as “Trees don’t grow to the sky” and “Bulls make money, bears make money, but pigs get slaughtered.” that the investor should look more than twice before he buys them. After such hostile scrutiny he may find some exceptional offerings that are too good to refuse. The ideal combination, of course, is a strongly secured convertible, exchangeable for a common stock which itself is attractive, and at a price only slightly higher than the current market. Every now and then a new offering appears that meets these requirements. By the nature of the securities markets, however, you are more likely to find such an opportunity in some older issue which has developed into a favorable position rather than in a new flotation. (If a new issue is a really strong one, it is not likely to have a good conversion privilege.) The fine balance between what is given and what is withheld in a standard-type convertible issue is well illustrated by the exten- sive use of this type of security in the financing of American Tele- phone & Telegraph Company. Between 1913 and 1957 the company sold at least nine separate issues of convertible bonds, most of them through subscription rights to shareholders. The convertible bonds had the important advantage to the company of bringing in a much wider class of buyers than would have been available for a stock offering, since the bonds were popular with many financial institutions which possess huge resources but some of which were not permitted to buy stocks. The interest return on the bonds has generally been less than half the corresponding dividend yield on the stock—a factor that was calculated to offset the prior claim of the bondholders. Since the company maintained its $9 dividend rate for 40 years (from 1919 to the stock split in 1959) the result was the eventual conversion of virtually all the convertible issues into common stock. Thus the buyers of these convertibles have fared well through the years—but not quite so well as if they had bought the capital stock in the first place. This example establishes the soundness of American Telephone & Telegraph, but not the intrin- sic attractiveness of convertible bonds. To prove them sound in practice we should need to have a number of instances in which the convertible worked out well even though the common stock proved disappointing. Such instances are not easy to find.* * AT&T Corp. no longer is a significant issuer of convertible bonds. Among the largest issuers of convertibles today are General Motors, Merrill Lynch, Tyco International, and Roche. Effect of Convertible Issues on the Status of the Common Stock In a large number of cases convertibles have been issued in con- nection with mergers or new acquisitions. Perhaps the most strik- ing example of this financial operation was the issuance by the NVF Corp. of nearly $100,000,000 of its 5% convertible bonds (plus warrants) in exchange for most of the common stock of Sharon Steel Co. This extraordinary deal is discussed below pp. 429–433. Typically the transaction results in a pro forma increase in the reported earnings per share of common stock; the shares advance in response to their larger earnings, so-called, but also because the management has given evidence of its energy, enterprise, and abil- ity to make more money for the shareholders.* But there are two offsetting factors, one of which is practically ignored and the other entirely so in optimistic markets. The first is the actual dilution of the current and future earnings on the common stock that flows arithmetically from the new conversion rights. This dilution can be quantified by taking the recent earnings, or assuming some other figures, and calculating the adjusted earnings per share if all the convertible shares or bonds were actually converted. In the major- ity of companies the resulting reduction in per-share figures is not significant. But there are numerous exceptions to this statement, and there is danger that they will grow at an uncomfortable rate. The fast-expanding “conglomerates” have been the chief practi- tioners of convertible legerdemain. In Table 16-3 we list seven com- panies with large amounts of stock issuable on conversions or against warrants.† Indicated Switches from Common into Preferred Stocks For decades before, say, 1956, common stocks yielded more than the preferred stocks of the same companies; this was particularly * For a further discussion of “pro forma” financial results, see the commen- tary on Chapter 12. † In recent years, convertible bonds have been heavily issued by companies in the financial, health-care, and technology industries. TABLE 16-3 Companies with Large Amounts of Convertible Issues and Warrants at the End of 1969 (Shares in Thousands) Additional Common Stock Issuable On Conversion of Total Common Additional Stock Preferred Against Common Outstanding Bonds Stock Warrants Stock Avco Corp. 11,470 1,750 10.436 3,085 15,271 Gulf & Western Inc. 14,964 9,671 5,632 6,951 22,260 International Tel. & Tel. 67,393 48,115 48,305 Ling-Temco-Vought 4,410a 190 7,564 9,429 National General 4,910 1,180 685 12,170 16,700 Northwest Industriesb 7,433 4,530 1,513 12,980 Rapid American 3,591 11,467 8,000 9,929 a Includes “special stock.” b At end of 1970. true if the preferred stock had a conversion privilege close to the market. The reverse is generally true at present. As a result there are a considerable number of convertible preferred stocks which are clearly more attractive than the related common shares. Own- ers of the common have nothing to lose and important advantages to gain by switching from their junior shares into the senior issue. Example: A typical example was presented by Studebaker- Worthington Corp. at the close of 1970. The common sold at 57, while the $5 convertible preferred finished at 871⁄2. Each preferred share is exchangeable for 11⁄2 shares of common, then worth 851⁄2. This would indicate a small money difference against the buyer of the preferred. But dividends are being paid on the common at the annual rate of $1.20 (or $1.80 for the 11⁄2 shares), against the $5 obtainable on one share of preferred. Thus the original adverse dif- ference in price would probably be made up in less than a year, after which the preferred would probably return an appreciably higher dividend yield than the common for some time to come. But most important, of course, would be the senior position that the common shareholder would gain from the switch. At the low prices of 1968 and again in 1970 the preferred sold 15 points higher than 11⁄2 shares of common. Its conversion privilege guarantees that it could never sell lower than the common package.2 Stock-Option Warrants Let us mince no words at the outset. We consider the recent development of stock-option warrants as a near fraud, an existing menace, and a potential disaster. They have created huge aggregate dollar “values” out of thin air. They have no excuse for existence except to the extent that they mislead speculators and investors. They should be prohibited by law, or at least strictly limited to a minor part of the total capitalization of a company.* For an analogy in general history and in literature we refer the reader to the section of Faust (part 2), in which Goethe describes the invention of paper money. As an ominous precedent on Wall Street history, we may mention the warrants of American & For- eign Power Co., which in 1929 had a quoted market value of over a billion dollars, although they appeared only in a footnote to the company’s balance sheet. By 1932 this billion dollars had shrunk to $8 million, and in 1952 the warrants were wiped out in the company’s recapitalization—even though it had remained solvent. Originally, stock-option warrants were attached now and then to bond issues, and were usually equivalent to a partial conversion privilege. They were unimportant in amount, and hence did no harm. Their use expanded in the late 1920s, along with many other financial abuses, but they dropped from sight for long years there- after. They were bound to turn up again, like the bad pennies they are, and since 1967 they have become familiar “instruments of * Warrants were an extremely widespread technique of corporate finance in the nineteenth century and were fairly common even in Graham’s day. They have since diminished in importance and popularity—one of the few recent developments that would give Graham unreserved pleasure. As of year-end 2002, there were only seven remaining warrant issues on the New York Stock Exchange—only the ghostly vestige of a market. Because warrants are no longer commonly used by major companies, today’s investors should read the rest of Graham’s chapter only to see how his logic works. finance.” In fact a standard procedure has developed for raising the capital for new real-estate ventures, affiliates of large banks, by selling units of an equal number of common shares and warrants to buy additional common shares at the same price. Example: In 1971 CleveTrust Realty Investors sold 2,500,000 of these combina- tions of common stock (or “shares of beneficial interest”) and war- rants, for $20 per unit. Let us consider for a moment what is really involved in this financial setup. Ordinarily, a common-stock issue has the first right to buy additional common shares when the company’s directors find it desirable to raise capital in this manner. This so-called “pre- emptive right” is one of the elements of value entering into the ownership of common stock—along with the right to receive divi- dends, to participate in the company’s growth, and to vote for directors. When separate warrants are issued for the right to sub- scribe additional capital, that action takes away part of the value inherent in an ordinary common share and transfers it to a separate certificate. An analogous thing could be done by issuing separate certificates for the right to receive dividends (for a limited or unlimited period), or the right to share in the proceeds of sale or liquidation of the enterprise, or the right to vote the shares. Why then are these subscription warrants created as part of the original capital structure? Simply because people are inexpert in financial matters. They don’t realize that the common stock is worth less with warrants outstanding than otherwise. Hence the package of stock and warrants usually commands a better price in the market than would the stock alone. Note that in the usual company reports the per-share earnings are (or have been) computed without proper allowance for the effect of outstanding warrants. The result is, of course, to overstate the true relationship between the earnings and the market value of the company’s capitalization.* * Today, the last remnant of activity in warrants is in the cesspool of the NASDAQ “bulletin board,” or over-the-counter market for tiny companies, where common stock is often bundled with warrants into a “unit” (the con- temporary equivalent of what Graham calls a “package”). If a stockbroker ever offers to sell you “units” in any company, you can be 95% certain that warrants are involved, and at least 90% certain that the broker is either a thief or an idiot. Legitimate brokers and firms have no business in this area. The simplest and probably the best method of allowing for the existence of warrants is to add the equivalent of their market value to the common-share capitalization, thus increasing the “true” market price per share. Where large amounts of warrants have been issued in connection with the sale of senior securities, it is customary to make the adjustment by assuming that the proceeds of the stock payment are used to retire the related bonds or pre- ferred shares. This method does not allow adequately for the usual “premium value” of a warrant above exercisable value. In Table 16-4 we compare the effect of the two methods of calculation in the case of National General Corp. for the year 1970. Does the company itself derive an advantage from the creation of these warrants, in the sense that they assure it in some way of receiving additional capital when it needs some? Not at all. Ordi- narily there is no way in which the company can require the war- rant-holders to exercise their rights, and thus provide new capital to the company, prior to the expiration date of the warrants. In the meantime, if the company wants to raise additional common-stock funds it must offer the shares to its shareholders in the usual way— which means somewhat under the ruling market price. The war- rants are no help in such an operation; they merely complicate the situation by frequently requiring a downward revision in their own subscription price. Once more we assert that large issues of stock-option warrants serve no purpose, except to fabricate imagi- nary market values. The paper money that Goethe was familiar with, when he wrote his Faust, were the notorious French assignats that had been greeted as a marvelous invention, and were destined ultimately to lose all of their value—as did the billion dollars worth of American & Foreign Power warrants.* Some of the poet’s remarks apply * The “notorious French assignats” were issued during the Revolution of 1789. They were originally debts of the Revolutionary government, purport- edly secured by the value of the real estate that the radicals had seized from the Catholic church and the nobility. But the Revolutionaries were bad finan- cial managers. In 1790, the interest rate on assignats was cut; soon they stopped paying interest entirely and were reclassified as paper money. But the government refused to redeem them for gold or silver and issued massive amounts of new assignats. They were officially declared worthless in 1797. TABLE 16-4 Calculation of “True Market Price” and Adjusted Price/Earnings Ratio of a Common Stock with Large Amounts of Warrants Outstanding (Example: National General Corp. in June 1971) 1. Calculation of “True Market Price.” Market value of 3 issues of warrants, June 30, 1971 $94,000,000 Value of warrants per share of common stock $18.80 Price of common stock alone 24.50 Corrected price of common, adjusted for warrants 43.30 2. Calculation of P/E Ratio to Allow for Warrant Dilution Before After Warrant Dilution (1970 earnings) Dilution Company’s Our A. Before Special Items. Calculation Calculation Earned per share $ 2.33 $ 1.60 $ 2.33 Price of common 24.50 24.50 43.30 (adj.) P/E ratio 10.5ϫ 15.3ϫ 18.5ϫ B. After Special Items. Earned per share $ .90 $ 1.33 $ .90 Note that, after special charges, the effect of the company’s calculation is to increase the earnings per share and reduce the P/E ratio. This is manifestly absurd. By our suggested method the effect of the dilution is to increase the P/E ratio substantially, as it should be. equally well to one invention or another—such as the following (in Bayard Taylor’s translation): Faust: Imagination in its highest flight Exerts itself but cannot grasp it quite. Mephistopheles (the inventor): If one needs coin the brokers ready The Fool (finally): The magic paper . . . ! Practical Postscript The crime of the warrants is in “having been born.”* Once born they function as other security forms, and offer chances of profit as well as of loss. Nearly all the newer warrants run for a limited time—generally between five and ten years. The older warrants were often perpetual, and they were likely to have fascinating price histories over the years. Example: The record books will show that Tri-Continental Corp. warrants, which date from 1929, sold at a negligible 1/32 of a dol- lar each in the depth of the depression. From that lowly estate their price rose to a magnificent 753⁄4 in 1969, an astronomical advance of some 242,000%. (The warrants then sold considerably higher than the shares themselves; this is the kind of thing that occurs on Wall Street through technical developments, such as stock splits.) A recent example is supplied by Ling-Temco-Vought warrants, which in the first half of 1971 advanced from 21⁄2 to 121⁄2—and then fell No doubt shrewd operations can be carried on in warrants from time to time, but this is too technical a matter for discussion here. We might say that warrants tend to sell relatively higher than the corresponding market components related to the conversion privi- lege of bonds or preferred stocks. To that extent there is a valid argument for selling bonds with warrants attached rather than cre- ating an equivalent dilution factor by a convertible issue. If the warrant total is relatively small there is no point in taking its theo- retical aspect too seriously; if the warrant issue is large relative to the outstanding stock, that would probably indicate that the com- pany has a top-heavy senior capitalization. It should be selling additional common stock instead. Thus the main objective of our attack on warrants as a financial mechanism is not to condemn their use in connection with moderate-size bond issues, but to argue against the wanton creation of huge “paper-money” mon- strosities of this genre. * Graham, an enthusiastic reader of Spanish literature, is paraphrasing a line from the play Life Is a Dream by Pedro Calderon de la Barca (1600–1681): “The greatest crime of man is having been born.” That which thou sowest is not quickened, except it die. —I. Corinthians, XV:36. THE ZEAL OF THE CONVERT Although convertible bonds are called “bonds,” they behave like stocks, work like options, and are cloaked in obscurity. If you own a convertible, you also hold an option: You can either keep the bond and continue to earn interest on it, or you can exchange it for common stock of the issuing company at a predeter- mined ratio. (An option gives its owner the right to buy or sell another security at a given price within a specific period of time.) Because they are exchangeable into stock, convertibles pay lower rates of interest than most comparable bonds. On the other hand, if a company’s stock price soars, a convertible bond exchangeable into that stock will per- form much better than a conventional bond. (Conversely, the typical convertible—with its lower interest rate—will fare worse in a falling bond market.)1 1 As a brief example of how convertible bonds work in practice, consider the 4.75% convertible subordinated notes issued by DoubleClick Inc. in 1999. They pay $47.50 in interest per year and are each convertible into 24.24 shares of the company’s common stock, a “conversion ratio” of 24.24. As of year-end 2002, DoubleClick’s stock was priced at $5.66 a share, giving each bond a “conversion value” of $137.20 ($5.66 ϫ 24.24). Yet the bonds traded roughly six times higher, at $881.30—creating a “conversion pre- mium,” or excess over their conversion value, of 542%. If you bought at that price, your “break-even time,” or “payback period,” was very long. (You paid roughly $750 more than the conversion value of the bond, so it will take nearly 16 years of $47.50 interest payments for you to “earn back” that con- From 1957 through 2002, according to Ibbotson Associates, con- vertible bonds earned an annual average return of 8.3%—only two per- centage points below the total return on stocks, but with steadier prices and shallower losses.2 More income, less risk than stocks: No wonder Wall Street’s salespeople often describe convertibles as a “best of both worlds” investment. But the intelligent investor will quickly realize that convertibles offer less income and more risk than most other bonds. So they could, by the same logic and with equal justice, be called a “worst of both worlds” investment. Which side you come down on depends on how you use them. In truth, convertibles act more like stocks than bonds. The return on convertibles is about 83% correlated to the Standard & Poor’s 500- stock index—but only about 30% correlated to the performance of Treasury bonds. Thus, “converts” zig when most bonds zag. For con- servative investors with most or all of their assets in bonds, adding a diversified bundle of converts is a sensible way to seek stock-like returns without having to take the scary step of investing in stocks directly. You could call convertible bonds “stocks for chickens.” As convertibles expert F. Barry Nelson of Advent Capital Manage- ment points out, this roughly $200 billion market has blossomed since Graham’s day. Most converts are now medium-term, in the seven-to- 10-year range; roughly half are investment-grade; and many issues now carry some call protection (an assurance against early redemp- tion). All these factors make them less risky than they used to be.3 version premium.) Since each DoubleClick bond is convertible to just over 24 common shares, the stock will have to rise from $5.66 to more than $36 if conversion is to become a practical option before the bonds mature in 2006. Such a stock return is not impossible, but it borders on the miracu- lous. The cash yield on this particular bond scarcely seems adequate, given the low probability of conversion. 2 Like many of the track records commonly cited on Wall Street, this one is hypothetical. It indicates the return you would have earned in an imagin- ary index fund that owned all major convertibles. It does not include any management fees or trading costs (which are substantial for convertible securities). In the real world, your returns would have been roughly two per- centage points lower. 3 However, most convertible bonds remain junior to other long-term debt and bank loans—so, in a bankruptcy, convertible holders do not have prior It’s expensive to trade small lots of convertible bonds, and diversifi- cation is impractical unless you have well over $100,000 to invest in this sector alone. Fortunately, today’s intelligent investor has the con- venient recourse of buying a low-cost convertible bond fund. Fidelity and Vanguard offer mutual funds with annual expenses comfortably under 1%, while several closed-end funds are also available at a rea- sonable cost (and, occasionally, at discounts to net asset value).4 On Wall Street, cuteness and complexity go hand-in-hand—and convertibles are no exception. Among the newer varieties are a jumble of securities with acronymic nicknames like LYONS, ELKS, EYES, PERCS, MIPS, CHIPS, and YEELDS. These intricate securities put a “floor” under your potential losses, but also cap your potential profits and often compel you to convert into common stock on a fixed date. Like most investments that purport to ensure against loss (see sidebar on p. 421), these things are generally more trouble than they are worth. You can best shield yourself against loss not by buying one of these quirky contraptions, but by intelligently diversifying your entire portfolio across cash, bonds, and U.S. and foreign stocks. claim to the company’s assets. And, while they are not nearly as dicey as high-yield “junk” bonds, many converts are still issued by companies with less than sterling credit ratings. Finally, a large portion of the convertible market is held by hedge funds, whose rapid-fire trading can increase the volatility of prices. 4 For more detail, see www.fidelity.com, www.vanguard.com, and www. morningstar.com. The intelligent investor will never buy a convertible bond fund with annual operating expenses exceeding 1.0%. UNCOVERING COVERED CALLS As the bear market clawed its way through 2003, it dug up an old fad: writing covered call options. (A recent Google search on “covered call writing” turned up more than 2,600 hits.) What are covered calls, and how do they work? Imagine that you buy 100 shares of Ixnay Corp. at $95 apiece. You then sell (or “write”) a call option on your shares. In exchange, you get a cash payment known as a “call premium.” (Let’s say it’s $10 per share.) The buyer of the option, meanwhile, has the contractual right to buy your Ixnay shares at a mutually agreed-upon price— say, $100. You get to keep the stock so long as it stays below $100, and you earn a fat $1,000 in premium income, which will cushion the fall if Ixnay’s stock crashes. Less risk, more income. What’s not to like? Well, now imagine that Ixnay’s stock price jumps overnight to $110. Then your option buyer will exercise his rights, yanking your shares away for $100 apiece. You’ve still got your $1,000 in income, but he’s got your Ixnay—and the more it goes up, the harder you will kick yourself.1 Since the potential gain on a stock is unlimited, while no loss can exceed 100%, the only person you will enrich with this strat- egy is your broker. You’ve put a floor under your losses, but you’ve also slapped a ceiling over your gains. For individual investors, covering your downside is never worth surrendering most of your upside. 1 Alternatively, you could buy back the call option, but you would have to take a loss on it—and options can have even higher trading costs than stocks. Four Extremely Instructive Case Histories The word “extremely” in the title is a kind of pun, because the his- tories represent extremes of various sorts that were manifest on Wall Street in recent years. They hold instruction, and grave warn- ings, for everyone who has a serious connection with the world of stocks and bonds—not only for ordinary investors and speculators but for professionals, security analysts, fund managers, trust- account administrators, and even for bankers who lend money to corporations. The four companies to be reviewed, and the different extremes that they illustrate are: Penn Central (Railroad) Co. An extreme example of the neglect of the most elementary warning signals of financial weakness, by all those who had bonds or shares of this system under their supervi- sion. A crazily high market price for the stock of a tottering giant. Ling-Temco-Vought Inc. An extreme example of quick and unsound “empire building,” with ultimate collapse practically guaranteed; but helped by indiscriminate bank lending. NVF Corp. An extreme example of one corporate acquisition, in which a small company absorbed another seven times its size, incurring a huge debt and employing some startling accounting AAA Enterprises. An extreme example of public stock-financing of a small company; its value based on the magic word “franchis- ing,” and little else, sponsored by important stock-exchange houses. Bankruptcy followed within two years of the stock sale and the doubling of the initial inflated price in the heedless stock Four Extremely Instructive Case Histories 423 The Penn Central Case This is the country’s largest railroad in assets and gross rev- enues. Its bankruptcy in 1970 shocked the financial world. It has defaulted on most of its bond issues, and has been in danger of abandoning its operations entirely. Its security issues fell drasti- cally in price, the common stock collapsing from a high level of 861⁄2 as recently as 1968 to a low of 51⁄2 in 1970. (There seems little doubt that these shares will be wiped out in reorganization.)* Our basic point is that the application of the simplest rules of security analysis and the simplest standards of sound investment would have revealed the fundamental weakness of the Penn Cen- tral system long before its bankruptcy—certainly in 1968, when the shares were selling at their post-1929 record, and when most of its bond issues could have been exchanged at even prices for well- secured public-utility obligations with the same coupon rates. The following comments are in order: 1. In the S & P Bond Guide the interest charges of the system are shown to have been earned 1.91 times in 1967 and 1.98 times in 1968. The minimum coverage prescribed for railroad bonds in our textbook Security Analysis is 5 times before income taxes and 2.9 times after income taxes at regular rates. As far as we know the validity of these standards has never been questioned by any investment authority. On the basis of our requirements for earnings after taxes, the Penn Central fell short of the requirements for safety. But our after-tax requirement is based on a before-tax ratio of five times, with regular income tax deducted after the bond interest. In the case of Penn Central, it had been paying no income taxes to speak of for the past 11 years! Hence the coverage of its interest charges before taxes was less than two times—a totally inadequate figure against our conservative requirement of 5 times. * How “shocked” was the financial world by the Penn Central’s bankruptcy, which was filed over the weekend of June 20–21, 1970? The closing trade in Penn Central’s stock on Friday, June 19, was $11.25 per share—hardly a going-out-of-business price. In more recent times, stocks like Enron and WorldCom have also sold at relatively high prices shortly before filing for bankruptcy protection. 2. The fact that the company paid no income taxes over so long a period should have raised serious questions about the validity of its reported earnings. 3. The bonds of the Penn Central system could have been exchanged in 1968 and 1969, at no sacrifice of price or income, for far better secured issues. For example, in 1969, Pennsylvania RR 41⁄2s, due 1994 (part of Penn Central) had a range of 61 to 741⁄2, while Pennsylvania Electric Co. 43⁄8s, due 1994, had a range of 641⁄4 to 721⁄4. The public utility had earned its interest 4.20 times before taxes in 1968 against only 1.98 times for the Penn Central system; during 1969 the latter’s comparative showing grew steadily worse. An exchange of this sort was clearly called for, and it would have been a lifesaver for a Penn Central bondholder. (At the end of 1970 the railroad 41⁄4s were in default, and selling at only 181⁄2, while the utility’s 43⁄8s closed at 661⁄2.) 4. Penn Central reported earnings of $3.80 per share in 1968; its high price of 861⁄2 in that year was 24 times such earnings. But any analyst worth his salt would have wondered how “real” were earnings of this sort reported without the necessity of paying any income taxes thereon. 5. For 1966 the newly merged company* had reported “earn- ings” of $6.80 a share—in reflection of which the common stock later rose to its peak of 861⁄2. This was a valuation of over $2 billion for the equity. How many of these buyers knew at the time that the so lovely earnings were before a special charge of $275 million or $12 per share to be taken in 1971 for “costs and losses” incurred on the merger. O wondrous fairyland of Wall Street where a company can announce “profits” of $6.80 per share in one place and special “costs and losses” of $12 in another, and shareholders and specula- tors rub their hands with glee!† * Penn Central was the product of the merger, announced in 1966, of the Pennsylvania Railroad and the New York Central Railroad. † This kind of accounting legerdemain, in which profits are reported as if “unusual” or “extraordinary” or “nonrecurring” charges do not matter, antici- pates the reliance on “pro forma” financial statements that became popular in the late 1990s (see the commentary on Chapter 12). 6. A railroad analyst would have long since known that the operating picture of the Penn Central was very bad in comparison with the more profitable roads. For example, its transportation ratio was 47.5% in 1968 against 35.2% for its neighbor, Norfolk & Western.* 7. Along the way there were some strange transactions with peculiar accounting results.1 Details are too complicated to go into Conclusion: Whether better management could have saved the Penn Central bankruptcy may be arguable. But there is no doubt whatever that no bonds and no shares of the Penn Central system should have remained after 1968 at the latest in any securities account watched over by competent security analysts, fund man- agers, trust officers, or investment counsel. Moral: Security analysts should do their elementary jobs before they study stock-market movements, gaze into crystal balls, make elaborate mathematical calculations, or go on all-expense-paid field trips.† Ling-Temco-Vought Inc. This is a story of head-over-heels expansion and head-over- heels debt, ending up in terrific losses and a host of financial prob- lems. As usually happens in such cases, a fair-haired boy, or “young genius,” was chiefly responsible for both the creation of the great empire and its ignominious downfall; but there is plenty of blame to be accorded others as well.‡ * A railroad’s “transportation ratio” (now more commonly called its operating ratio) measures the expenses of running its trains divided by the railroad’s total revenues. The higher the ratio, the less efficient the railroad. Today even a ratio of 70% would be considered excellent. † Today, Penn Central is a faded memory. In 1976, it was absorbed into Consolidated Rail Corp. (Conrail), a federally-funded holding company that bailed out several failed railroads. Conrail sold shares to the public in 1987 and, in 1997, was taken over jointly by CSX Corp. and Norfolk South- ern Corp. ‡ Ling-Temco-Vought Inc. was founded in 1955 by James Joseph Ling, an electrical contractor who sold his first $1 million worth of shares to the pub- The rise and fall of Ling-Temco-Vought can be summarized by setting forth condensed income accounts and balance-sheet items for five years between 1958 and 1970. This is done in Table 17-1. The first column shows the company’s modest beginnings in 1958, when its sales were only $7 million. The next gives figures for 1960; the enterprise had grown twentyfold in only two years, but it was still comparatively small. Then came the heyday years to 1967 and 1968, in which sales again grew twentyfold to $2.8 billion with the debt figure expanding from $44 million to an awesome $1,653 mil- lion. In 1969 came new acquisitions, a further huge increase in debt (to a total of $1,865 million!), and the beginning of serious trouble. A large loss, after extraordinary items, was reported for the year; the stock price declined from its 1967 high of 1691⁄2 to a low of 24; the young genius was superseded as the head of the company. The 1970 results were even more dreadful. The enterprise reported a final net loss of close to $70 million; the stock fell away to a low price of 71⁄8, and its largest bond issue was quoted at one time at a pitiable 15 cents on the dollar. The company’s expansion policy was sharply reversed, various of its important interests were placed on the market, and some headway was made in reducing its mountainous obligations. The figures in our table speak so eloquently that few comments are called for. But here are some: lic by becoming his own investment banker, hawking prospectuses from a booth set up at the Texas State Fair. His success at that led him to acquire dozens of different companies, almost always using LTV’s stock to pay for them. The more companies LTV acquired, the higher its stock went; the higher its stock went, the more companies it could afford to acquire. By 1969, LTV was the 14th biggest firm on the Fortune 500 list of major U.S. corporations. And then, as Graham shows, the whole house of cards came crashing down. (LTV Corp., now exclusively a steelmaker, ended up seeking bankruptcy protection in late 2000.) Companies that grow primarily through acquisitions are called “serial acquirers”—and the similarity to the term “serial killers” is no accident. As the case of LTV demonstrates, serial acquir- ers nearly always leave financial death and destruction in their wake. Investors who understood this lesson of Graham’s would have avoided such darlings of the 1990s as Conseco, Tyco, and WorldCom. TABLE 17-1 Ling-Temco-Vought Inc., 1958–1970 (In Millions of Dollars Except Earned Per Share) A. Operating Results 1958 1960 1967 1969 1970 Sales $ 6.9 $143.0 $1,833.0 $3,750.0 $374.0 Net before taxes and interest Interest charges 0.552 7.287 95.6 124.4 88.0 (Times earned) .1 (est.) 1.5 (est.) 17.7 122.6 128.3 Income taxes (5.5 ϫ) (4.8 ϫ) (54 ϫ) Special items 0.225 2.686 35.6 (1.02 ϫ) (0.68 ϫ) Net after special items cr. 15.2 4.9 Balance for common stock 0.227 3.051 34.0 dr. 40.6 dr. 18.8 Earned per share of common 0.202 3.051 30.7 dr. 38.3 dr. 69.6 0.17 0.83 5.56 dr. 40.8 dr. 71.3 B. Financial Position def. 10.59 def. 17.18 Total assets 6.4 94.5 845.0 Debt payable within 1 year 1.5 29.3 165.0 2,944.0 2,582.0 Long-term debt .5 14.6 202.6 389.3 301.3 Shareholders’ equity 2.7 28.5 245.0† Ratios 1.27 ϫ 1.45 ϫ 1.80 ϫ def. 12.0* def. 69.0* Current assets/current liabilities 5.4 ϫ 2.0 ϫ 1.2 ϫ Equity/long-term debt 28–20 1691⁄2–109 1.52 ϫ 1.45 ϫ Market-price range 0.17 ϫ 0.13 ϫ 973⁄4–241⁄8 291⁄2–71⁄8 * Excluding debt-discount as an asset and deducting preferred stock at redemption value. † As published. cr.: credit. dr.: debit. def.: deficit. 1. The company’s expansion period was not without an inter- ruption. In 1961 it showed a small operating deficit, but—adopting a practice that was to be seen later in so many reports for 1970— evidently decided to throw all possible charges and reserves into the one bad year.* These amounted to a round $13 million, which was more than the combined net profits of the preceding three years. It was now ready to show “record earnings” in 1962, etc. 2. At the end of 1966 the net tangible assets are given as $7.66 per share of common (adjusted for a 3-for-2 split). Thus the market price in 1967 reached 22 times (!) its reported asset value at the time. At the end of 1968 the balance sheet showed $286 million available for 3,800,000 shares of common and Class AA stock, or about $77 per share. But if we deduct the preferred stock at full value and exclude the good-will items and the huge bond-discount “asset,”† there would remain $13 million for the common—a mere $3 per share. This tangible equity was wiped out by the losses of the following years. 3. Toward the end of 1967 two of our best-regarded banking firms offered 600,000 shares of Ling-Temco-Vought stock at $111 per share. It had been as high as 1691⁄2. In less than three years the price fell to 71⁄8.‡ * The sordid tradition of hiding a company’s true earnings picture under the cloak of restructuring charges is still with us. Piling up every possible charge in one year is sometimes called “big bath” or “kitchen sink” accounting. This bookkeeping gimmick enables companies to make an easy show of appar- ent growth in the following year—but investors should not mistake that for real business health. † The “bond-discount asset” appears to mean that LTV had purchased some bonds below their par value and was treating that discount as an asset, on the grounds that the bonds could eventually be sold at par. Gra- ham scoffs at this, since there is rarely any way to know what a bond’s mar- ket price will be on a given date in the future. If the bonds could be sold only at values below par, this “asset” would in fact be a liability. ‡ We can only imagine what Graham would have thought of the investment banking firms that brought InfoSpace, Inc. public in December 1998. The stock (adjusted for later splits) opened for trading at $31.25, peaked at 4. At the end of 1967 the bank loans had reached $161 million, and a year later they stood at $414 million—which should have been a frightening figure. In addition, the long-term debt amounted to $1,237 million. By 1969 combined debt reached a total of $1,869 million. This may have been the largest combined debt figure of any industrial company anywhere and at any time, with the single exception of the impregnable Standard Oil of N.J. 5. The losses in 1969 and 1970 far exceeded the total profits since the formation of the company. Moral: The primary question raised in our mind by the Ling- Temco-Vought story is how the commercial bankers could have been persuaded to lend the company such huge amounts of money during its expansion period. In 1966 and earlier the company’s coverage of interest charges did not meet conservative standards, and the same was true of the ratio of current assets to current liabil- ities and of stock equity to total debt. But in the next two years the banks advanced the enterprise nearly $400 million additional for further “diversification.” This was not good business for them, and it was worse in its implications for the company’s shareholders. If the Ling-Temco-Vought case will serve to keep commercial banks from aiding and abetting unsound expansions of this type in the future, some good may come of it at last.* The NVF Takeover of Sharon Steel (A Collector’s Item) At the end of 1968 NVF Company was a company with $4.6 mil- lion of long-term debt, $17.4 million of stock capital, $31 million of sales, and $502,000 of net income (before a special credit of $374,000). Its business was described as “vulcanized fiber and plas- tics.” The management decided to take over the Sharon Steel Corp., $1305.32 per share in March 2000, and finished 2002 at a princely $8.45 per share. * Graham would have been disappointed, though surely not surprised, to see that commercial banks have chronically kept supporting “unsound expansions.” Enron and WorldCom, two of the biggest collapses in corpo- rate history, were aided and abetted by billions of dollars in bank loans. which had $43 million of long-term debt, $101 million of stock cap- ital, $219 million of sales, and $2,929,000 of net earnings. The com- pany it wished to acquire was thus seven times the size of NVF. In early 1969 it made an offer for all the shares of Sharon. The terms per share were $70 face amount of NVF junior 5% bonds, due 1994, plus warrants to buy 11⁄2 shares of NVF stock at $22 per share of NVF. The management of Sharon strenuously resisted this takeover attempt, but in vain. NVF acquired 88% of the Sharon stock under the offer, issuing therefore $102 million of its 5% bonds and warrants for 2,197,000 of its shares. Had the offer been 100% operative the consolidated enterprise would, for the year 1968, have had $163 million in debt, only $2.2 million in tangible stock capital, $250 million of sales. The net-earnings question would have been a bit complicated, but the company subsequently stated them as a net loss of 50 cents per share of NVF stocks, before an extraordinary credit, and net earnings of 3 cents per share after such credit.* First Comment: Among all the takeovers effected in the year 1969 this was no doubt the most extreme in its financial dispropor- tions. The acquiring company had assumed responsibility for a new and top-heavy debt obligation, and it had changed its calcu- lated 1968 earnings from a profit to a loss into the bargain. A mea- sure of the impairment of the company’s financial position by this * In June 1972 (just after Graham finished this chapter), a Federal judge found that NVF’s chairman, Victor Posner, had improperly diverted the pen- sion assets of Sharon Steel “to assist affiliated companies in their takeovers of other corporations.” In 1977, the U.S. Securities and Exchange Commis- sion secured a permanent injunction against Posner, NVF, and Sharon Steel to prevent them from future violations of Federal laws against securities fraud. The Commission alleged that Posner and his family had improperly obtained $1.7 million in personal perks from NVF and Sharon, overstated Sharon’s pretax earnings by $13.9 million, misrecorded inventory, and “shifted income and expenses from one year to another.” Sharon Steel, which Graham had singled out with his cold and skeptical eye, became known among Wall Street wags as “Share and Steal.” Posner was later a central force in the wave of leveraged buyouts and hostile takeovers that swept the United States in the 1980s, as he became a major customer for the junk bonds underwritten by Drexel Burnham Lambert. step is found in the fact that the new 5% bonds did not sell higher than 42 cents on the dollar during the year of issuance. This would have indicated grave doubt of the safety of the bonds and of the company’s future; however, the management actually exploited the bond price in a way to save the company annual income taxes of about $1,000,000 as will be shown. The 1968 report, published after the Sharon takeover, contained a condensed picture of its results, carried back to the year-end. This contained two most unusual items: 1. There is listed as an asset $58,600,000 of “deferred debt expense.” This sum is greater than the entire “stockholders’ equity,” placed at $40,200,000. 2. However, not included in the shareholders’ equity is an item of $20,700,000 designated as “excess of equity over cost of invest- ment in Sharon.” Second Comment: If we eliminate the debt expense as an asset, which it hardly seems to be, and include the other item in the shareholders’ equity (where it would normally belong), then we have a more realistic statement of tangible equity for NVF stock, viz., $2,200,000. Thus the first effect of the deal was to reduce NVF’s “real equity” from $17,400,000 to $2,200,000 or from $23.71 per share to about $3 per share, on 731,000 shares. In addition the NVF shareholders had given to others the right to buy 31⁄2 times as many additional shares at six points below the market price at the close of 1968. The initial market value of the warrants was then about $12 each, or a total of some $30 million for those involved in the purchase offer. Actually, the market value of the warrants well exceeded the total market value of the outstanding NVF stock— another evidence of the tail-wagging-dog nature of the transaction. The Accounting Gimmicks When we pass from this pro forma balance sheet to the next year’s report we find several strange-appearing entries. In addition to the basic interest expense (a hefty $7,500,000), there is deducted $1,795,000 for “amortization of deferred debt expense.” But this last is nearly offset on the next line by a very unusual income item indeed: “amortization of equity over cost of investment in sub- sidiary: Cr. $1,650,000.” In one of the footnotes we find an entry, not appearing in any other report that we know of: Part of the stock capital is there designated as “fair market value of warrants issued in connection with acquisition, etc., $22,129,000.” What on earth do all these entries mean? None of them is even referred to in the descriptive text of the 1969 report. The trained security analyst has to figure out these mysteries by himself, almost in detective fashion. He finds that the underlying idea is to derive a tax advantage from the low initial price of the 5% deben- tures. For readers who may be interested in this ingenious arrange- ment we set forth our solution in Appendix 6. Other Unusual Items 1. Right after the close of 1969 the company bought in no less than 650,000 warrants at a price of $9.38 each. This was extraordi- nary when we consider that (a) NVF itself had only $700,000 in cash at the year-end, and had $4,400,000 of debt due in 1970 (evi- dently the $6 million paid for the warrants had to be borrowed); (b) it was buying in this warrant “paper money” at a time when its 5% bonds were selling at less than 40 cents on the dollar—ordinarily a warning that financial difficulties lay ahead. 2. As a partial offset to this, the company had retired $5,100,000 of its bonds along with 253,000 warrants in exchange for a like amount of common stock. This was possible because, by the vagaries of the securities markets, people were selling the 5% bonds at less than 40 while the common sold at an average price of 131⁄2, paying no dividend. 3. The company had plans in operation not only for selling stock to its employees, but also for selling them a larger number of war- rants to buy the stock. Like the stock purchases the warrants were to be paid for 5% down and the rest over many years in the future. This is the only such employee-purchase plan for warrants that we know of. Will someone soon invent and sell on installments a right to buy a right to buy a share, and so on? 4. In the year 1969 the newly controlled Sharon Steel Co. changed its method of arriving at its pension costs, and also adopted lower depreciation rates. These accounting changes added about $1 per share to the reported earnings of NVF before dilution. 5. At the end of 1970 Standard & Poor’s Stock Guide reported that NVF shares were selling at a price/earning ratio of only 2, the lowest figure for all the 4,500-odd issues in the booklet. As the old Wall Street saying went, this was “important if true.” The ratio was based on the year’s closing price of 83⁄4 and the computed “earnings” of $5.38 per share for the 12 months ended September 1970. (Using these figures the shares were selling at only 1.6 times earnings.) But this ratio did not allow for the large dilution factor,* nor for the adverse results actually realized in the last quarter of 1970. When the full year’s fig- ures finally appeared, they showed only $2.03 per share earned for the stock, before allowing for dilution, and $1.80 per share on a diluted basis. Note also that the aggregate market price of the stock and warrants on that date was about $14 million against a bonded debt of $135 million—a skimpy equity position indeed. AAA Enterprises About 15 years ago a college student named Williams began selling mobile homes (then called “trailers”).† In 1965 he incorpo- * The “large dilution factor” would be triggered when NVF employees exer- cised their warrants to buy common stock. The company would then have to issue more shares, and its net earnings would be divided across a much greater number of shares outstanding. † Jackie G. Williams founded AAA Enterprises in 1958. On its first day of trad- ing, the stock soared 56% to close at $20.25. Williams later announced that AAA would come up with a new franchising concept every month (if people would step into a mobile home to get their income taxes done by “Mr. Tax of America,” just imagine what else they might do inside a trailer!). But AAA ran out of time and money before Williams ran out of ideas. The history of AAA Enterprises is reminiscent of the saga of a later company with charismatic man- agement and scanty assets: ZZZZ Best achieved a stock-market value of roughly $200 million in the late 1980s, even though its purported industrial vacuum-cleaning business was little more than a telephone and a rented office run by a teenager named Barry Minkow. ZZZZ Best went bust and Minkow rated his business. In that year he sold $5,800,000 of mobile homes and earned $61,000 before corporate tax. By 1968 he had joined the “franchising” movement and was selling others the right to sell mobile homes under his business name. He also conceived the bright idea of going into the business of preparing income-tax returns, using his mobile homes as offices. He formed a subsidiary company called Mr. Tax of America, and of course started to sell franchises to others to use the idea and the name. He multiplied the number of corporate shares to 2,710,000 and was ready for a stock offering. He found that one of our largest stock-exchange houses, along with others, was willing to handle the deal. In March 1969 they offered the public 500,000 shares of AAA Enterprises at $13 per share. Of these, 300,000 were sold for Mr. Williams’s per- sonal account and 200,000 were sold for the company account, adding $2,400,000 to its resources. The price of the stock promptly doubled to 28, or a value of $84 million for the equity, against a book value of, say, $4,200,000 and maximum reported earnings of $690,000. The stock was thus selling at a tidy 115 times its current (and largest) earnings per share. No doubt Mr. Williams had selected the name AAA Enterprise so that it might be among the first in the phone books and the yellow pages. A collateral result was that his company was destined to appear as the first name in Standard & Poor’s Stock Guide. Like Abu-Ben-Adhem’s, it led all the rest.* This gives a special reason to select it as a harrowing example of 1969 new financing and “hot issues.” Comment: This was not a bad deal for Mr. Williams. The 300,000 shares he sold had a book value in December of 1968 of $180,000 and he netted therefor 20 times as much, or a cool $3,600,000. The underwriters and distributors split $500,000 between them, less expenses. went to jail. Even as you read this, another similar company is being formed, and a new generation of “investors” will be taken for a ride. No one who has read Graham, however, should climb on board. * In “Abou Ben Adhem,” by the British Romantic poet Leigh Hunt (1784–1859), a righteous Muslim sees an angel writing in a golden book “the names of those who love the Lord.” When the angel tells Abou that his name is not among them, Abou says, “I pray thee, then, write me as one that loves his fellow men.” The angel returns the next night to show Abou the book, in which now “Ben Adhem’s name led all the rest.” 1. This did not seem so brilliant a deal for the clients of the sell- ing houses. They were asked to pay about ten times the book value of the stock, after the bootstrap operation of increasing their equity per share from 59 cents to $1.35 with their own money.* Before the best year 1968, the company’s maximum earnings had been a ridiculous 7 cents per share. There were ambitious plans for the future, of course—but the public was being asked to pay heavily in advance for the hoped-for realization of these plans. 2. Nonetheless, the price of the stock doubled soon after original issuance, and any one of the brokerage-house clients could have gotten out at a handsome profit. Did this fact alter the flotation, or did the advance possibility that it might happen exonerate the original distributors of the issue from responsibility for this public offering and its later sequel? Not an easy question to answer, but it deserves careful consideration by Wall Street and the government regulatory agencies.† Subsequent History With its enlarged capital AAA Enterprises went into two addi- tional businesses. In 1969 it opened a chain of retail carpet stores, and it acquired a plant that manufactured mobile homes. The results reported for the first nine months were not exactly brilliant, but they were a little better than the year before—22 cents a share against 14 * By purchasing more common stock at a premium to its book value, the investing public increased the value of AAA’s equity per share. But investors were only pulling themselves up by their own bootstraps, since most of the rise in shareholders’ equity came from the public’s own willingness to over- pay for the stock. † Graham’s point is that investment banks are not entitled to take credit for the gains a hot stock may produce right after its initial public offering unless they are also willing to take the blame for the stock’s performance in the longer term. Many Internet IPOs rose 1,000% or more in 1999 and early 2000; most of them lost more than 95% in the subsequent three years. How could these early gains earned by a few investors justify the massive destruction of wealth suffered by the millions who came later? Many IPOs were, in fact, deliberately underpriced to “manufacture” immediate gains that would attract more attention for the next offering. cents. What happened in the next months was literally incredible. The company lost $4,365,000, or $1.49 per share. This consumed all its capital before the financing, plus the entire $2,400,000 received on the sale of stock plus two-thirds of the amount reported as earned in the first nine months of 1969. There was left a pathetic $242,000, or 8 cents per share, of capital for the public shareholders who had paid $13 for the new offering only seven months before. Nonetheless the shares closed the year 1969 at 81⁄8 bid, or a “valuation” of more than $25 mil- lion for the company. Further Comment: 1. It is too much to believe that the company had actually earned $686,000 from January to September 1969 and then lost $4,365,000 in the next three months. There was something sadly, badly, and accusingly wrong about the September 30 report. 2. The year’s closing price of 81⁄8 bid was even more of a demon- stration of the complete heedlessness of stock-market prices than were the original offering price of 13 or the subsequent “hot-issue” advance to a high bid of 28. These latter quotations at least were based on enthusiasm and hope—out of all proportion to reality and common sense, but at least comprehensible. The year-end valuation of $25 million was given to a company that had lost all but a minus- cule remnant of its capital, for which a completely insolvent condi- tion was imminent, and for which the words “enthusiasm” or “hope” would be only bitter sarcasms. (It is true the year-end figures had not been published by December 31, but it is the business of Wall Street houses associated with a company to have monthly operating state- ments and a fairly exact idea of how things are going.) Final Chapter For the first half of 1970 the company reported a further loss of $1 million. It now had a good-sized capital deficit. It was kept out of bankruptcy by loans made by Mr. Williams, up to a total of $2,500,000. No further statements seem to have been issued, until in January 1971 AAA Enterprises finally filed a petition in bank- ruptcy. The quotation for the stock at month-end was still 50 cents a share bid, or $1,500,000 for the entire issue, which evidently had no more than wallpaper value. End of our story. Moral and Questions: The speculative public is incorrigible. In

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professional_accounting

The position is for the duration of the project, subject to satisfactory performance. There will be a probation period of three months. Annual performance evaluations will be organized by the Director of the OMST. Support and facilitate work of the Kabul based finance team and operations officers in the universities and support them to build their capacity to manage and report on funds received from the Mastufiat/Treasury Department of the Ministry of Finance. Manage, plan, supervise, and control overall financial management activities related to the program. Follow up on all financial issues and ensure the MOF and World Bank FM procedures and guidelines are being implemented. Work closely with the Special Disbursement Unit (SDU) of MoF in making sure that the funds are being disbursement to the program related activities. Having full command of the Tax law and its implementation. Prepare monthly cash flow and cash forecasting. Report any mismanagement and misuse of the funds and assets to the management. Keep records of all M16s and any related documentation to the disbursements. Keep records of all financial documents for the internal and external auditors and facilitate the auditor missions in OMSU and in the partner universities. Provide full support for the section staff through development of weekly action plans. Support and facilitate the audit process both internal and external. Liaise with the Ministry of Finance relevant departments on financial issues. The candidate is required to hold a master’s degree or CA/ACCA/CPA or a chartered accountant from a recognized accounting Minimum of 5 years of relevant work experience in financial management and previous experience in a donor funded development project, a university or in the public or the private sector would be an advantage.

{'timestamp': '2019-04-21T06:36:54Z', 'url': 'https://www.jobs.af/jobs/financial-management-specialist-32', 'language': 'en', 'source': 'c4'}

professional_accounting

HAMILTON, Bermuda, May 24, 2017 /PRNewswire/ -- Höegh LNG Partners LP (NYSE: HMLP) (the "Partnership") today reported its financial results for the quarter ended March 31, 2017. Richard Tyrrell, Chief Executive Officer and Chief Financial Officer stated: "In the first quarter of 2017, the Partnership continued to deliver on its strategy of making accretive acquisitions and delivering distribution growth to unitholders. Having closed the acquisition of 51% of the Höegh Grace at the beginning of the quarter, the Partnership has expanded and diversified its fleet to five FSRUs and added Colombia to the growing list of markets utilizing floating storage and regasification units to participate in the global LNG trade. The acquisition enabled the Partnership to declare a 4.2% distribution increase for the first quarter of 2017 compared to the fourth quarter of 2016, representing an annualized cash distribution of $1.72 per unit – an increase of more than 27% since the IPO in mid-2014. The first quarter of 2017 was also a busy one for operations with the Höegh Grace recording its first full quarter of employment on a minimum 10 year contract, while the Neptune has been deployed as an FSRU to supplement the existing regasification capacity in Turkey. The attractive price of LNG, together with the speed and cost-effectiveness with which FSRU projects can be implemented, continues to be a highly compelling value proposition for a wide range of markets around the world. Following the acquisition of 51% of the Höegh Grace, the Partnership retains a right-of-first-offer on the remaining 49% and looks forward to be able to execute on this opportunity in the future. The Partnership also believes it is ideally positioned to benefit from the maturing dropdown pipeline of long-term FSRU contracts under development by Höegh LNG Holdings Ltd. which the Partnership believes, assuming their execution, will support the further growth of the Partnership's asset base and distributable cash flows." Segment EBITDA is a non-GAAP financial measure used by investors to measure financial and operating performance. Please see Appendix A for a reconciliation of Segment EBITDA to net income, the most directly comparable GAAP financial measure. Segment EBITDA does not include adjustments for (i) principal payment of direct financing lease of $0.8 million and $0.8 million for the three months ended March 31, 2017 and 2016, respectively, (ii) amortization in revenues for above market contracts of $0.9 million and $0.6 million for the three months ended March 31, 2017 and 2016, respectively, (iii) non-controlling interest: amortization in revenues for above market contracts of $0.9 million and $0.6 million for the three months ended March 31, 2017, or (iv) equity in earnings of JVs: amortization for deferred revenue of $(0.6) million and $(0.3) million for the three months ended March 31, 2017 and 2016, respectively. As of January 1, 2017, the Partnership began consolidating the Höegh Grace entities as a result of the acquisition of a 51% interest in the Höegh Grace entities. The revenues, expenses and net income in the consolidated income statement include 100% of the results of the Höegh Grace entities. This is reduced with the non-controlling interest in net income to arrive at the partners' interest in net income which reflects the Partnership's 51% interest in the net income of the Höegh Grace entities. Similarly, all of the assets and liabilities on the consolidated balance sheet include 100% of the Höegh Grace entities' assets and liabilities. Total equity is split between partners' capital (which includes the Partnership's 51% interest in the net assets of the Höegh Grace entities) and the non-controlling interest. Management monitors the results of operations of the Höegh Grace entities based on the Partnership's 51% interest in the Segment EBITDA of such entities and, therefore, subtracts the non-controlling interest in Segment EBITDA to present Segment EBITDA. The Partnership reported net income of $16.2 million for the three months ended March 31, 2017, an increase of $17.2 million from net loss of $1.0 million for the three months ended March 31, 2016. The net income (loss) for both periods was significantly impacted by unrealized gains and losses on derivative instruments mainly on the Partnership's share of equity in earnings of joint ventures. Excluding all of the unrealized gains and losses on derivative instruments, net income for the three months ended March 31, 2017 would have been $13.0 million, an increase of $5.4 million from $7.6 million for the three months ended March 31, 2016. The increase for the three months ended March 31, 2017 was primarily due to the inclusion of the results of the Höegh Grace consolidated on January 1, 2017. Net income of $2.7 million was attributable to non-controlling interest for the 49% interest in the Höegh Grace entities not owned by the Partnership. The partners' interest in net income, which includes the Partnership's 51% interest in the Höegh Grace entities, for the three months ended March 31, 2017 was $13.4 million, an increase of $14.5 million from a net loss of $1.0 million for the three months ended March 31, 2016. The PGN FSRU Lampung and the Höegh Grace were on-hire for the entire first quarter of 2017. The Höegh Gallant had several days of reduced hire due to unscheduled maintenance in the first quarter of 2017 compared with 15 days off-hire for scheduled maintenance in the first quarter of 2016. Equity in earnings of joint ventures was $4.8 million for the three months ended March 31, 2017, an increase of $11.5 million from equity in losses of joint ventures of $6.7 million for the three months ended March 31, 2016. The joint ventures own the Neptune and the GDF Suez Cape Ann. The reason for the increased earnings was unrealized gains on derivative instruments in the Partnership's share of the joint ventures for the three months ended March 31, 2017 of $2.5 million, compared to unrealized losses on derivative instruments of $9.0 million for three months ended March 31, 2016. The joint ventures do not apply hedge accounting for interest rate swaps and all changes in fair value are included in equity in earnings (losses) of joint ventures. For the three months ended March 31, 2017, the Partnership's share of operating income in the joint ventures was $5.9 million compared to $6.2 million for the three months ended March 31, 2016. The reduction was due in part to lower revenue due to reduced hire for the Neptune in its start up phase in Turkey. Operating income for the three months ended March 31, 2017 was $25.7 million, an increase of $19.5 million from $6.2 million for the three months ended March 31, 2016. Excluding the impact of the unrealized losses on derivative instruments for the three months ended March 31, 2017 and 2016 impacting the equity in earnings of joint ventures, operating income for the three months ended March 31, 2017 would have been $23.2 million, an increase of $8.0 million from $15.2 million for the three months ended March 31, 2016. The increase for the three months ended March 31, 2017 was primarily due to the inclusion of the results of the Höegh Grace consolidated from January 1, 2017. Segment EBITDA2 was $29.5 million for the three months ended March 31, 2017, an increase of $5.4 million from $24.1 million for the three months ended March 31, 2016. As of March 31, 2017, the Partnership had cash and cash equivalents of $18.8 million and an undrawn portion of the $85 million revolving credit facility of $74.8 million. In February 2017, the Partnership drew $1.6 million on the revolving credit facility. Current restricted cash for operating obligations of the PGN FSRU Lampung was $8.8 million, and long-term restricted cash required under the Lampung facility was $14.2 million as of March 31, 2017. During the first quarter of 2017, the Partnership made quarterly repayments of $4.8 million on the Lampung facility, $3.3 million on the Gallant facility and $3.3 million on the Grace facility. The Partnership's book value and outstanding principal of total long-term debt was $513.8 million and $519.8 million, respectively, as of March 31, 2017, repayable in quarterly installments of $11.4 million. This includes 100% of the long-term debt of the Höegh Grace entities which are consolidated. As of March 31, 2017, the Partnership's total current liabilities exceeded total current assets by $24.9 million. This is partly a result of mark-to-market valuations of its interest rate swaps (derivative instruments) of $4.2 million and the current portion of long-term debt of $45.5 million being classified current while the restricted cash of $14.2 million associated with the Lampung facility is classified as long-term. The Partnership does not plan to terminate the interest rate swaps before their maturity and, as a result, the Partnership will not realize these liabilities. Further, the current portion of long-term debt reflects principal payments for the next twelve months which will be funded, for the most part, by future cash flows from operations. The Partnership does not intend to maintain a cash balance to fund the next twelve months' net liabilities. The Partnership believes its current resources, including the undrawn balance under the revolving credit facility, are sufficient to meet the Partnership's working capital requirements for its current business for the next twelve months. As of March 31, 2017, the Partnership had outstanding interest rate swap agreements for a total notional amount of $444.6 million to hedge against the interest rate risks of its long-term debt under the Lampung, Gallant and Grace facilities. The Partnership applies hedge accounting for derivative instruments related to those facilities. The Partnership receives interest based on three month US dollar LIBOR and pays a fixed rate of 2.8% for the Lampung facility. The Partnership receives interest based on three month US dollar LIBOR and pays a fixed rate of approximately 1.9% for the Gallant facility. The Partnership receives interest based on three month US dollar LIBOR and pays a fixed rate of approximately 2.3% for the Grace facility. The carrying value of the liability for derivative instruments was $7.9 million as of March 31, 2017. The effective portion of the changes in fair value of the interest rate swaps are recorded in other comprehensive income. Gain on derivative instruments for the three months ended March 31, 2017 was $0.7 million, an increase of $0.4 million from $0.3 million for the three months ended March 31, 2016. Gain on derivative instruments for the three months ended March 31, 2017 related to the interest rate swaps for the Lampung, Gallant and Grace facilities, while the gain for the three months ended March 31, 2016 related to the Lampung and Gallant facilities. The increase is mainly due to amortization of the amount excluded from hedge effectiveness for the Grace facility. On May 15, 2017, the Partnership paid a $0.43 per unit distribution with respect to the first quarter of 2017, equivalent to $1.72 per unit on an annualized basis. The distribution's total amount was $14.4 million. In May 2017, the Partnership drew $10.1 million on the revolving credit facility. In the second quarter of 2017, the Partnership filed and was paid $0.6 million of claims for indemnification from Höegh LNG Holdings Ltd. ("Höegh LNG") for the three months ended March 31, 2017 for losses with respect to the commencement of services under the time charter with Höegh LNG Egypt LLC, a wholly owned subsidiary of Höegh LNG, pursuant to the contribution, purchase and sale agreement for the acquisition of the Höegh Gallant. In the second quarter of 2017, the Höegh Gallant has 8 days of scheduled maintenance and will be off-hire. Pursuant to the contribution, purchase and sale agreement the Partnership entered into with Höegh LNG with respect to the acquisition of 51% of the ownership interests in the Höegh Grace entities, the Partnership has a right of first offer to purchase the remaining 49% interest. Pursuant to the omnibus agreement that the Partnership entered into with Höegh LNG at the time of the initial public offering, Höegh LNG is obligated to offer to the Partnership any floating storage and regasification unit ("FSRU") or LNG carrier operating under a charter of five or more years. On May 26, 2015, Höegh LNG signed a contract with Penco LNG to provide an FSRU to service the Penco-Lirquén LNG import terminal to be located in Concepción Bay, Chile. The contract is for a period of 20 years and is subject to Penco LNG's completing financing and obtaining necessary environmental approvals. In February 2017, Penco LNG informed Höegh LNG that the environmental approval had been temporarily halted by the legal system in Chile which is expected to delay completion of the infrastructure and the commencement of the FSRU contract. On December 1, 2016, Höegh LNG signed an FSRU contract with Quantum Power Ghana Gas Limited ("Quantum Power") for the Tema LNG import terminal located close to Accra in Ghana ("Tema LNG Project"). The Tema LNG Project is supported by Ghana National Petroleum Corporation (GNPC), Ghana's national oil and gas company. The contract is for a period of 20 years with a five year extension option for the charterer. The contract is subject to Quantum Power obtaining necessary governmental approvals, financing and both parties' board approval. The infrastructure construction for the project is planned to start mid 2017 and the delivery time for the FSRU is expected approximately twelve months following commencement of the construction work. Höegh LNG is expected to service the contract with the Höegh Giant (HHI Hull No. 2552) which was delivered from the shipyard on April 27, 2017. On December 15, 2016, Höegh LNG signed an FSRU contract with Global Energy Infrastructure Limited ("GEI") for GEI's LNG import project in Port Qasim near Karachi, Pakistan. Time charter is for a period of 20 years with two five year extension options. GEI has a long-term LNG supply agreement with Qatargas and a consortium agreement that also includes ExxonMobil, Mitsubishi, Total and Höegh LNG. The contract is subject to certain conditions and both parties' board approval. The anticipated start of the FSRU contract is second half of 2018. Höegh LNG has three FSRUs on order. Pursuant to the terms of the omnibus agreement, the Partnership will have the right to purchase HHI Hull No. 2865, and HHI Hull No. 2909 and SHI Hull No.2220 (under a shipbuilding contract with Samsung Heavy Industries ("SHI")) following acceptance by the respective charterer of the related FSRU, subject to reaching an agreement with Höegh LNG regarding the purchase price. There can be no assurance that the Partnership will purchase any of these additional FSRUs. Depending on the ultimate timing of the start of projects, allocations of the hulls to projects is subject to change. Finally, although the Partnership's option to purchase Höegh LNG's interests in the FSRU Independence pursuant to the omnibus agreement has expired, the Partnership expects that Höegh LNG would offer the opportunity to purchase such interests in the event it receives the consent of the charterer of the Independence, AB Klapipedòs Nafta ("ABKN"). On December 5, 2014, the Independence began operating under its time charter with ABKN. The Partnership and Höegh LNG continue to pursue, but have not received ABKN's consent to the acquisition of the Independence by the Partnership. The Independence is located in the port of Klaipeda and provides Lithuania with the ability to diversify its gas supply by giving it access to the world market for LNG. The Independence is moored adjacent to a purpose-built jetty connected to a pipeline connecting to the existing grid in Lithuania. There can be no assurance that the Partnership will acquire the remaining 49% interest in the Höegh Grace entities or any vessels from Höegh LNG or of the terms upon which any such acquisition may be made. A presentation will be held today, Wednesday, May 24, 2017, at 8:30 A.M. (EDT) to discuss financial results for the first quarter of 2017. The results and presentation material will be available for download at http://www.hoeghlngpartners.com. Participants should ask to be joined into the Höegh LNG Partners LP call. For those unable to participate in the conference call, a replay will be available from one hour after the end of the conference call until May 31, 2017. Höegh LNG Partners LP (NYSE: HMLP) is a growth-oriented limited partnership formed by Höegh LNG Holdings Ltd. (Oslo Børs: HLNG), a leading floating LNG service provider. HMLP's strategy is to own, operate and acquire FSRUs and associated LNG infrastructure assets under long-term charters. Its FSRUs have an industry leading average remaining firm contract duration of 12.2 years plus options as of March 31, 2017. other factors listed from time to time in the reports and other documents that the Partnership files with the SEC, including the Partnership's Annual Report on Form 20-F for the year ended December 31, 2016 and subsequent quarterly reports on Form 6-K. All forward-looking statements included in this press release are made only as of the date of this press release. New factors emerge from time to time, and it is not possible for the Partnership to predict all of these factors. Further, the Partnership cannot assess the impact of each such factor on its business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. The Partnership does not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based. There are two operating segments. The segment profit measure is Segment EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization and other financial items (gains and losses on derivative instruments and other items, net) less the non-controlling interest in Segment EBITDA. Segment EBITDA is reconciled to operating income and net income in the segment presentation below. The two segments are "Majority held FSRUs" and "Joint venture FSRUs." In addition, unallocated corporate costs that are considered to benefit the entire organization, interest income from advances to joint ventures and interest expense related to the seller's credit note and the outstanding balance on the $85 million revolving credit facility are included in "Other." For the three months ended March 31, 2017, Majority held FSRUs includes the direct financing lease related to the PGN FSRU Lampung, the operating lease related to the Höegh Gallant and the operating lease related to the Höegh Grace consolidated on January 1, 2017. For the three months ended March 31, 2016, Majority held FSRUs includes only the direct financing lease related to the PGN FSRU Lampung and the operating lease related to the Höegh Gallant. As of March 31, 2017 and 2016, Joint Venture FSRUs include two 50% owned FSRUs, the Neptune and the GDF Suez Cape Ann, that operate under long term time charters with one charterer. The accounting policies applied to the segments are the same as those applied in the financial statements, except that i) Joint Venture FSRUs are presented under the proportional consolidation method for the segment note to the Partnership's financial statements and in the tables below, and under equity accounting for the consolidated financial statements and ii) non-controlling interest in Segment EBITDA is subtracted in the segment note and the tables below to reflect the Partnership's interest in Segment EBITDA as the Partnership's segment profit measure, Segment EBITDA. Under the proportional consolidation method, 50% of the Joint Venture FSRUs' revenues, expenses and assets are reflected in the segment note. Management monitors the results of operations of joint ventures under the proportional consolidation method and not the equity method of accounting. On January 1, 2017, the Partnership began consolidating its acquired 51% interest in the Höegh Grace entities. Since the Partnership obtained control of the Höegh Grace entities, it consolidates 100% of the revenues, expenses, assets and liabilities of the Höegh Grace entities and the interest not owned by the Partnership is reflected as non-controlling interest in net income and non-controlling interest in total equity under US GAAP. Management monitors the results of operations of the Höegh Grace entities based on the Partnership's 51% interest in Segment EBITDA of such entities and, therefore, subtracts the non-controlling interest in Segment EBITDA to present Segment EBITDA. The adjustment to non-controlling interest in Segment EBITDA is reversed to reconcile to operating income and net income in the segment presentation below. The following tables include the results for the segments for the three months ended March 31, 2017 and 2016. Eliminations reverse each of the income statement line items of the proportional amounts for Joint venture FSRUs and record the Partnership's share of the Joint venture FSRUs net income (loss) to Equity in earnings (loss) of joint ventures. Eliminations reverse the adjustment to Non-controlling interest in Segment EBITDA included for Segment EBITDA and the adjustment to reverse the Non-controlling interest in Segment EBITDA to reconcile to operating income and net income. Eliminations reverse each of the income statement line items of the proportional consolidation amounts for Joint venture FSRUs and record the Partnership's share of the Joint venture FSRUs' net income (loss) to Equity in earnings (loss) of joint ventures. The following table includes the financial income (expense), net for the three months ended March 31, 2017 and 2016. Eliminations reverse each of the income statement reconciling line items of the proportional amounts for Joint venture FSRUs that are reflected in the consolidated net income for the Partnership's share of the Joint venture FSRUs net income (loss) on the Equity in earnings (loss) of joint ventures line item in the consolidated income statement. Separate adjustments from the consolidated net income to Segment EBITDA for the Partnership's share of the Joint venture FSRUs are included in the reconciliation lines starting with "Equity in earnings of JVs." Other financial items consist of gains and losses on derivative instruments and other items, net including foreign exchange gains or losses and withholding tax on interest expense. There is no adjustment between net income for Total Segment reporting and the Consolidated reporting because the net income under the proportional consolidation and equity method of accounting is the same. Interest income and interest expense for the Joint venture FSRUs is eliminated from the Total Segment reporting to agree to the interest income and interest expense in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the line Equity in earnings of JVs: Interest (income) expense for the Consolidated reporting. Depreciation and amortization for the Joint venture FSRUs is eliminated from the Total Segment reporting to agree to the depreciation and amortization in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the line Equity in earnings of JVs: Depreciation and amortization for the Consolidated reporting. Other financial items for the Joint venture FSRUs is eliminated from the Segment reporting to agree to the Other financial items in the Consolidated reporting and reflected as a separate adjustment to the equity accounting on the line Equity in earnings of JVs: Other financial items for the Consolidated reporting. Distributable cash flow represents Segment EBITDA adjusted for cash collections on principal payments on the direct financing lease, amortization in revenues for above market contracts less non-controlling interest in amortization in revenues for above market contracts, amortization of deferred revenues for the joint ventures, interest income‎, interest expense less amortization of debt issuance cost and fair value of debt assumed, other items (net), unrealized foreign exchange losses (gains), current income tax expense, non-controlling interest in finance and tax items and other adjustments including indemnification paid by Hoegh LNG for non-budgeted expenses and losses and estimated maintenance and replacement capital expenditures. Cash collections on the direct financing lease investment with respect to the PGN FSRU Lampung consist of the difference between the payments under time charter and the revenues recognized as a financing lease (representing the payment of the principal recorded as a receivable). Amortization in revenues for above market contracts consist of the non-cash amortization of the intangible for the above market time charter contract related to the acquisitions of the Höegh Gallant and Höegh Grace. Amortization of deferred revenues for the joint ventures accounted for under the equity method consist of non-cash amortization to revenues of charterer payments for modifications and drydocking to the vessels. Estimated maintenance and replacement capital expenditures, including estimated expenditures for drydocking, represent capital expenditures required to maintain over the long-term the operating capacity of, or the revenue generated by, the Partnership's capital assets. Distributable cash flow is presented starting with Segment EBITDA taken from the total segment reporting using the proportional consolidation method for the Partnership's 50% interests in the joint ventures as shown in Appendix A. Therefore, the adjustments to Segment EBITDA include the Partnership's share of the joint venture's adjustments. The Partnership believes distributable cash flow is an important liquidity measure used by management and investors in publicly traded partnerships to compare cash generating performance of the Partnership' cash generating assets from period to period by adjusting for cash and non-cash items that could potentially have a disparate effect between periods, and to compare the cash generating performance for specific periods to the cash distributions (if any) that are expected to be paid to unitholders. The Partnership also believes distributable cash flow benefits investors in comparing its cash generating performance to other companies that account for time charters as operating leases rather than financial leases, or that do not have non-cash amortization of intangibles or deferred revenue. Distributable cash flow is a non-GAAP liquidity measure and should not be considered as an alternative to net cash provided by operating activities, or any other measure of the Partnership's liquidity or cash flows calculated in accordance with GAAP. Distributable cash flow excludes some, but not all, items that affect net cash provided by operating activities and the measures may vary among companies. For example, distributable cash flow does not reflect changes in working capital balances. Distributable cash flow also includes some items that do not affect net cash provided by operating activities. Therefore, distributable cash flow may not be comparable to similarly titled measures of other companies. Distributable cash flow is not the same measure as available cash or operating surplus, both of which are defined by the Partnership's partnership agreement. The first table below reconciles distributable cash flow to Segment EBITDA, which is reconciled to net income, the most directly comparable GAAP measure for Segment EBITDA, in Appendix A. Refer to Appendix A for the definition of Segment EBITDA. The second table below reconciles distributable cash flow to net cash provided by operating activities, the most directly comparable GAAP measures for liquidity.

{'timestamp': '2019-04-18T12:24:57Z', 'url': 'https://www.oilandgas360.com/hoegh-lng-partners-lp-reports-preliminary-financial-results-for-the-quarter-ended-march-31-2017/', 'language': 'en', 'source': 'c4'}

professional_accounting

An overall climate of scrutiny may feel stifling for auditors but if that leads to better audit quality, then it may be worth it. Photo: iStock Mayday, Mayday: Auditors on high alert 8 min read . Updated: 16 Aug 2018, 11:17 AM IST Ravi Ananthanarayanan The regulatory glare on auditors is increasing. The ripple effects are being felt across the Indian business ecosystem long-reads mint-india-wire Company auditJet airways auditjet airways resultsauditorsauditor resignationssebi Mumbai: How many companies or their managements are still riding a tiger they can’t get off? That’s a question that should worry investors, and their reaction to auditor resignations in recent months shows that it does. To jog some memories, ‘riding a tiger’ is how B. Ramalinga Raju described his state when, as promoter and chairman of Satyam Computer Services Ltd, he confessed that the company’s books had been cooked for several years. An investigation by the Securities and Exchange Board of India (Sebi) reported Satyam’s cash and bank balances were overstated for all the years between 2001 and 2008. The amount on its books that did not exist was ₹ 5,040crore. All this happened right under the nose of Satyam’s statutory auditor since 1 April 2000, Price Waterhouse, Chartered Accountants. Nearly a decade later, for an investor, it does not seem like much has changed. Take last week’s incident, when Jet Airways (India) Ltd decided to defer its June quarter results, because the management needed time for closure of pending matters. Its shares fell by 8.4% on Friday, 10 August, after the announcement. In this case, the auditors had not resigned. Still, deferring reasons at the last minute without specifying a reason seems to have spooked investors. Any untoward development related to a company’s financial statements has become a red flag for investors. Auditor resignations Auditors are leaving their assignments in fairly large numbers, with The Indian Express reporting that external auditors in 204 listed companies left their posts between 1 January and 17 July, with reasons including lack of information, inconsistencies in financials and health concerns. In April and May, three companies—Vakrangee Ltd, Manpasand Beverages Ltd and Atlanta Ltd—said that their auditors had resigned before completing their audit of the annual financial statements. The main reason was the auditors did not get enough information to complete their audits. Their shares dropped off the cliff, as the news spread panic among investors. Also read: Why auditors are under scrutiny from regulators and investors, globally Since the auditors were not forthcoming about the specific reasons for resigning mid-way, and reassurances from the company management were unconvincing, shares plunged. In the following weeks, more auditors resigned, but the reasons became mundane, such as personal reasons or for preoccupation with other work. Even in those cases, shares of companies fell. The government has ordered probe into some of these resignations, to understand if there are specific concerns that auditors had that needs following up. If those investigations lead to something substantive, then some purpose could be served by these resignations. Otherwise, they will be taken as a sign of auditor discomfort in continuing with the assignment. Investors and audits Investors have a single-minded focus, which is to grow their wealth. A do-it-yourself investor would typically use the financial statements as a central pillar around which the investment case is built. The financial statements are prepared by the management to be presented to the shareholders and regulatory authorities. The auditor’s signature on those accounts gives the investor confidence that these numbers can be relied upon. When that confidence is shattered, or even a shadow of doubt emerges, all hell breaks loose. But is investor memory short? Consider the same three companies mentioned above. All three companies have seen their shares move up sharply in recent weeks. How should one read this? If the shares fell in the first place because auditor resignations caused concern, why are investors coming back? Maybe, the sharp fall in prices meant that the risk was priced in. But, if at a certain price, investors are willing to ignore even serious concerns about financials, what message are they sending? It may embolden company managements to carry on as usual, knowing investors will come back. Do investors really care about corporate governance, or more about knowing that all the risks are fairly priced in? Trust in financials is an important ingredient to build trust in Indian companies among the investor community. The debate on why investors are willing to ignore auditor resignations now should take place, but it is also a fact that investors, holding shares before these resignations became public, have lost a lot of money. A collection of such events can not only harm returns to investors but also hurt India’s reputation. Auditors have a key role to play in protecting and enhancing this reputation. Take the massive problem around the huge build-up of non-performing assets (NPAs) in Indian banks. While the management of banks and the borrowers do take a lion’s share of the blame, auditors have not covered themselves in glory either. Wide divergences were reported in the estimates of bad loans in the audited financials of banks, compared with that found when the Reserve Bank of India audited these banks. This meant that the reported net profits for the period where the divergence was found should have been lower. The divergences in NPAs as of 31 March 2017 were more than ₹ 60,000 crore, compared with ₹ 43,000 crore a year ago, according to a Mint report quoting rating agency ICRA’s estimates. Then, there are the cases of banking fraud, which appear to have missed the statutory auditors’ gaze altogether. More instances of companies playing fast and loose with their financials have come up since Satyam. Many are linked to the bank NPA pile-up, with banks alleging that the money has been siphoned off or diverted by the promoters. In some cases, banks have asked for forensic audits to be done, to ascertain the true status of financials and also to trace where the money went. In some cases, Sebi has launched investigation into the auditors. Apart from Satyam, Parekh Aluminex Ltd and Arvind Remedies Ltd are examples of cases where Sebi has issued show-cause notices to the statutory auditors. The Quality Review Board, established under the Chartered Accountants Act, 1949, is tasked with assessing the quality of audits. Its 2017-18 report says that of the 395 audits, whose reviews were finalized, 38.7% were closed as they were acceptable; in 54%, the board issued advisories to improve quality of services and, in the remaining 7.3%, it recommended to the The Institute of Chartered Accountants of India to take action. Uncovering fraud A student of accounting may come across this phrase of an auditor being a watchdog and not a bloodhound. What this means is, while conducting an audit, if the auditor comes across something suspicious, the auditor will point it out. But the auditor’s role is not to come in looking for fraud. In fact, auditors rely on the management to provide them with information and clarifications in the course of an audit. They are not supposed to mistrust the senior management, unless they have good reasons to do so. The regulatory glare on auditors is increasing and moves are afoot for greater oversight, on multiple fronts. The government has taken cabinet approval to set up a National Financial Reporting Authority, which will take over several critical roles pertaining to the accounting and auditing function. It will frame accounting/auditing standards and policies, monitor and enforce them, oversee quality of the audit profession and investigate and order action against professional misconduct. It will have powers to act both against the individual and the auditing firm. But that’s not all. Sebi has mandated that when companies appoint an auditor, they will need to inform the basis on which the auditor was selected and the fees payable. If the fees are higher than the outgoing auditor’s fees, then the reasons have to be mentioned. If an auditor resigns, then detailed reasons have to be given. While the government may be tightening the screws on auditors, inexplicably, it has relaxed one provision—where shareholders had to annually ratify the auditor’s appointment, even if the tenure was for five years. Why this was done is not clear, and 84 out of the 161 firms that held annual general meetings between 1 May and 15 July did not seek ratification. If this had been retained, it would have put that extra pressure on auditors. Meanwhile, Sebi has issued a consultation paper on regulating fiduciaries such as chartered accountants, citing the recommendation of the Committee on Corporate Governance headed by Uday Kotak. The recommendation says that Sebi should have the powers to act against the auditors of listed entities and can take action under the securities law. While Sebi has acted in cases such as Satyam, it has had to face challenges to its authority to do so. These regulations will give it powers to act if it comes across negligence or fraud by auditors. The Reserve Bank of India, too, appears to have realized the need for direct intervention in the audit of banks. It has decided to implement an enforcement framework, allowing it to take action if lapses in statutory audit are observed. It has listed five different heads under which lapses will be considered, which include misstatement in financial statements. RBI would conduct an enquiry and, depending on the severity, it can bar a firm from conducting statutory audit of banks. RBI has also retained the right to take action based on enforcement actions conducted by other regulators. The Kotak committee has made certain other recommendations, such as allowing auditors to seek an external opinion on issues such as valuation but at the cost of the firm. Also, it has proposed that a company should disclose total fees paid to the auditor and network firms. This is to ensure that shareholders are made aware of any non-audit fees—such as for valuation or consultancy—paid to the other arms of the group to which the audit firm belongs to. This will improve transparency. In conclusion, the coming years will see independent auditors more tightly regulated and under greater scrutiny. How serious the regulators are about pulling up auditors when they slip up will be watched for. An overall climate of scrutiny may feel stifling for auditors but if that leads to better audit quality and more investor confidence in the financial statements of companies, then it may be worth it. A decade from now, investors should be able to say much has changed for the better since Satyam.

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professional_accounting

Sempra Energy Reports Higher First-Quarter 2019 Earnings SAN DIEGO, May 7, 2019 /PRNewswire/ -- Sempra Energy (NYSE: SRE) today reported first-quarter 2019 earnings of $441 million, or $1.59 per diluted share, up from first-quarter 2018 earnings of $347 million, or $1.33 per diluted share. On an adjusted basis, the company's first-quarter 2019 earnings increased to $534 million, or $1.92 per diluted share, from $372 million, or $1.43 per diluted share, in the first quarter 2018. "Our earnings performance this quarter reflects our strategic focus, improved capital investments and commitment to a high-performance culture, as we work to achieve our mission to be North America's premier energy infrastructure company," said Jeffrey W. Martin, chairman and CEO of Sempra Energy. "Sempra Energy is well positioned at the intersection of two key trends – the transition toward cleaner energy, and the U.S.' rise as a global energy leader – and this creates a unique opportunity for our company's continued growth." These financial results reflect certain significant items, as described on an after-tax basis in the following table of GAAP earnings reconciled to adjusted earnings for the first quarter of 2018 and 2019. (Unaudited; Dollars, except EPS, and shares, in millions) GAAP Earnings Tax Impacts From Expected Sale of South American Businesses(1) Impact From the Tax Cuts and Jobs Act of 2017 Adjusted Earnings(2) Adjusted diluted weighted-average shares outstanding(2),(3) Adjusted Earnings Per Diluted Common Share(2) $ 1.92(4) GAAP diluted weighted-average shares outstanding GAAP Earnings Per Diluted Common Share $103 million increase to adjusted earnings due to change in indefinite reinvestment assertion of basis differences in discontinued operations, partially offset by $10 million reduction in tax valuation allowance against certain NOL carryforwards at Parent & Other. Sempra Energy Adjusted Earnings, Adjusted EPS and Adjusted Diluted Weighted-Average Shares Outstanding are non-GAAP financial measures. See Table A for information regarding non-GAAP financial measures and descriptions of adjustments above. Adjusted diluted weighted-average shares outstanding include 13,951 shares of Series A mandatory convertible preferred stock for the three months ended March 31, 2019 due to their dilutive effect. Preferred dividends of $26 million have been added back to adjusted earnings for the three months ended March 31, 2019 because of the dilutive effect of Series A mandatory convertible preferred stock. OPERATING HIGHLIGHTS In April, Oncor Electric Delivery Company LLC (Oncor) and Sempra Energy reached a settlement agreement with several Texas stakeholders for Oncor's proposed acquisition of InfraREIT, Inc. and Sempra Energy's proposed acquisition of 50% of Sharyland Utilities, LP. The last regulatory step in the transaction is approval of a final order from the Public Utility Commission of Texas (PUCT). If approved by the PUCT, Oncor and Sempra Energy expect to close the transaction in mid-2019. San Diego Gas & Electric Company and Southern California Gas Co. are awaiting a proposed decision for their 2019 General Rate Case from the California Public Utilities Commission (CPUC), which is expected in mid-2019. Additionally, the California utilities filed their application in the Cost-of-Capital proceeding with the CPUC on April 22. Sempra Energy also announced in April that Cameron LNG has begun pipeline feed gas flow to the first liquefaction train, which is the final commissioning step for Train 1 of the liquefaction-export facility in Hackberry, La. Production of LNG at the facility is expected to occur this quarter. In March, Sempra Energy also increased its projected share of full run-rate earnings from the first three trains at Cameron LNG to be between $400 million and $450 million annually, up from the previous projection of $365 million to $425 million. Sempra Energy expects to begin recognizing earnings from Train 1 in mid-2019. Additionally, IEnova recently announced two new capacity contracts with a global integrated oil company. This included an additional contract for 740,000 barrels of storage at the previously announced Manzanillo marine terminal development project, as well as the storage of up to 290,000 barrels of capacity at a new storage terminal project in Guadalajara. The Guadalajara terminal is IEnova's seventh terminal project and one of 12 projects currently in development or under construction. The sales process of Sempra Energy's equity interests in its South American businesses, including its 83.6% stake in Luz del Sur S.A.A. in Peru and 100% stake in Chilquinta Energía S.A. in Chile, also remains on track. First-round bids are expected in June. 2019 EARNINGS GUIDANCE Sempra Energy today affirmed its 2019 adjusted earnings-per-share guidance range of $5.70 to $6.30 and 2020 earnings-per-share guidance range of $6.70 to $7.50. The earnings-per-share guidance range for 2020 does not include impacts from the planned sale of Sempra Energy's South American businesses. Non-GAAP financial measures for Sempra Energy include first-quarter 2018 and 2019 adjusted earnings, adjusted diluted weighted-average shares outstanding, adjusted earnings per share and 2019 adjusted earnings-per-share guidance. See Table A for additional information regarding these non-GAAP financial measures. INTERNET BROADCAST Sempra Energy will broadcast a live discussion of its earnings results over the Internet today at 12 p.m. ET with senior management of the company. Access is available by logging onto the website at www.sempra.com. For those unable to log onto the live webcast, the teleconference will be available on replay a few hours after its conclusion by dialing (888) 203-1112 and entering passcode 7994290. Sempra Energy's mission is to be North America's premier energy infrastructure company. With 2018 reported revenues of more than $11.6 billion, the San Diego- based company is the utility holding company with the largest U.S. customer base. The Sempra Energy companies' more than 20,000 employees are focused on delivering energy with purpose to approximately 40 million consumers worldwide. Sempra Energy has been consistently recognized for its leadership in diversity and inclusion, and social responsibility, and is a member of the S&P 500 Utilities Index and the Dow Jones Utility Index. This press release contains statements that are not historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by words such as "believes," "expects," "anticipates," "plans," "estimates," "projects," "forecasts," "contemplates," "assumes," "depends," "should," "could," "would," "will," "confident," "may," "can," "potential," "possible," "proposed," "target," "pursue," "outlook," "maintain," or similar expressions, or when we discuss our guidance, strategy, plans, goals, vision, mission, opportunities, projections, initiatives, objectives or intentions. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future results may differ materially from those expressed in the forward-looking statements. Factors, among others, that could cause our actual results and future actions to differ materially from those described in any forward-looking statements include risks and uncertainties relating to the greater degree and prevalence of wildfires in California in recent years and the risk that we may be found liable for damages regardless of fault, such as where inverse condemnation applies, and risk that we may not be able to recover any such costs in rates from customers in California; actions and the timing of actions, including decisions, new regulations and issuances of authorizations by the California Public Utilities Commission, U.S. Department of Energy, California Department of Conservation's Division of Oil, Gas, and Geothermal Resources, Los Angeles County Department of Public Health, U.S. Environmental Protection Agency, Federal Energy Regulatory Commission, Pipeline and Hazardous Materials Safety Administration, Public Utility Commission of Texas, states, cities and counties, and other regulatory and governmental bodies in the U.S. and other countries in which we operate; the success of business development efforts, construction projects, major acquisitions, divestitures and internal structural changes, including risks in (i) obtaining or maintaining authorizations; (ii) completing construction projects on schedule and budget; (iii) obtaining the consent of partners; (iv) counterparties' ability to fulfill contractual commitments; (v) winning competitively bid infrastructure projects; (vi) disruption caused by the announcement of contemplated acquisitions and/or divestitures or internal structural changes; (vii) the ability to complete contemplated acquisitions and/or divestitures; and (viii) the ability to realize anticipated benefits from any of these efforts once completed; the resolution of civil and criminal litigation and regulatory investigations and proceedings; actions by credit rating agencies to downgrade our credit ratings or those of our subsidiaries or to place those ratings on negative outlook and our ability to borrow at favorable interest rates; deviations from regulatory precedent or practice that result in a reallocation of benefits or burdens among shareholders and ratepayers; denial of approvals of proposed settlements; delays in, or denial of, regulatory agency authorizations to recover costs in rates from customers or regulatory agency approval for projects required to enhance safety and reliability; and moves to reduce or eliminate reliance on natural gas; the availability of electric power and natural gas and natural gas storage capacity, including disruptions caused by failures in the transmission grid, limitations on the withdrawal or injection of natural gas from or into storage facilities, and equipment failures; risks posed by actions of third parties who control the operations of our investments; weather conditions, natural disasters, accidents, equipment failures, computer system outages, explosions, terrorist attacks and other events that disrupt our operations, damage our facilities and systems, cause the release of harmful materials, cause fires and subject us to third-party liability for property damage or personal injuries, fines and penalties, some of which may not be covered by insurance (including costs in excess of applicable policy limits), may be disputed by insurers or may otherwise not be recoverable through regulatory mechanisms or may impact our ability to obtain satisfactory levels of affordable insurance; cybersecurity threats to the energy grid, storage and pipeline infrastructure, the information and systems used to operate our businesses and the confidentiality of our proprietary information and the personal information of our customers and employees; actions of activist shareholders, which could impact the market price of our securities and disrupt our operations as a result of, among other things, requiring significant time by management and our board of directors; changes in capital markets, energy markets and economic conditions, including the availability of credit; and volatility in currency exchange, interest and inflation rates and commodity prices and our ability to effectively hedge the risk of such volatility; the impact of federal or state tax reform and our ability to mitigate adverse impacts; changes in foreign and domestic trade policies and laws, including border tariffs and revisions to or replacement of international trade agreements, such as the North American Free Trade Agreement or the United States-Mexico-Canada Agreement (subject to congressional approval), that may increase our costs or impair our ability to resolve trade disputes; expropriation of assets by foreign governments and title and other property disputes; the impact at San Diego Gas & Electric Company on competitive customer rates and reliability of electric transmission and distribution systems due to the growth in distributed and local power generation and from possible departing retail load resulting from customers transferring to Direct Access and Community Choice Aggregation or other forms of distributed and local power generation and the potential risk of nonrecovery for stranded assets and contractual obligations; Oncor Electric Delivery Company LLC's (Oncor) ability to eliminate or reduce its quarterly dividends due to regulatory capital requirements and other regulatory and governance commitments, including the determination by a majority of Oncor's independent directors or a minority member director to retain such amounts to meet future requirements; and other uncertainties, some of which may be difficult to predict and are beyond our control. These risks and uncertainties are further discussed in the reports that Sempra Energy has filed with the U.S. Securities and Exchange Commission (SEC). These reports are available through the EDGAR system free-of-charge on the SEC's website, www.sec.gov, and on the company's website at www.sempra.com. Investors should not rely unduly on any forward-looking statements. These forward-looking statements speak only as of the date hereof, and the company undertakes no obligation to update or revise these forecasts or projections or other forward-looking statements, whether as a result of new information, future events or otherwise. Table A Three months ended March 31, (Dollars in millions, except per share amounts; shares in thousands) Energy-related businesses EXPENSES AND OTHER INCOME Cost of natural gas Cost of electric fuel and purchased power Energy-related businesses cost of sales Franchise fees and other taxes Other income, net Income from continuing operations before income taxes and equity earnings (losses) of unconsolidated entities Income tax expense Equity earnings (losses) Income from continuing operations, net of income tax (Loss) income from discontinued operations, net of income tax (Earnings) losses attributable to noncontrolling interests Mandatory convertible preferred stock dividends Earnings attributable to common shares Basic earnings (losses) per common share: Earnings from continuing operations attributable to common shares (Losses) earnings from discontinued operations attributable to common shares Weighted-average common shares outstanding Diluted earnings (losses) per common share: Amounts have been retrospectively adjusted for discontinued operations Table A (Continued) RECONCILIATION OF SEMPRA ENERGY ADJUSTED EARNINGS TO SEMPRA ENERGY GAAP EARNINGS (Unaudited) Sempra Energy Adjusted Earnings and Adjusted Earnings Per Common Share (Adjusted EPS) exclude items in 2019 and 2018 as follows: Three months ended March 31, 2019: Associated with holding the South American businesses for sale: $(103) million income tax expense from outside basis differences in our South American businesses primarily related to the change in our indefinite reinvestment assertion from our decision in January 2019 to hold these businesses for sale $10 million income tax benefit from a reduction in a valuation allowance against certain net operating loss (NOL) carryforwards as a result of our decision to sell our South American businesses $(25) million income tax expense to adjust the Tax Cuts and Jobs Act of 2017 (TCJA) provisional amounts recorded in 2017 Sempra Energy Adjusted Earnings, Weighted-Average Shares Outstanding – Adjusted and Adjusted EPS are non-GAAP financial measures (GAAP represents accounting principles generally accepted in the United States of America). Because of the significance and/or nature of the excluded items, management believes that these non-GAAP financial measures provide a meaningful comparison of the performance of Sempra Energy's business operations from 2019 to 2018 and to future periods. Non-GAAP financial measures are supplementary information that should be considered in addition to, but not as a substitute for, the information prepared in accordance with GAAP. The table below reconciles for historical periods these non-GAAP financial measures to Sempra Energy GAAP Earnings, Weighted-Average Shares Outstanding – GAAP and GAAP Diluted Earnings Per Common Share (GAAP EPS), which we consider to be the most directly comparable financial measures calculated in accordance with GAAP. (benefit) Three months ended March 31, 2019 Sempra Energy GAAP Earnings Change in indefinite reinvestment assertion of basis differences in discontinued operations Reduction in tax valuation allowance against certain NOL carryforwards Impact from the TCJA Sempra Energy Adjusted Earnings Weighted-average shares outstanding, diluted – GAAP Sempra Energy GAAP EPS Sempra Energy Adjusted Earnings for Adjusted EPS(1) Weighted-average shares outstanding, diluted – Adjusted(1) Sempra Energy Adjusted EPS(1) In the three months ended March 31, 2019, the assumed conversion of the series A preferred stock and the series B preferred stock are antidilutive for GAAP earnings, however, the series A preferred stock is dilutive for the higher Adjusted Earnings. As such, the series A preferred stock dividends of $26 million have been added back to the numerator and the dilutive effect of the series A preferred stock shares of 13,951 has been added to the denominator when calculating Adjusted EPS. SEMPRA ENERGY 2019 ADJUSTED EPS GUIDANCE RANGE (Unaudited) Sempra Energy 2019 Adjusted EPS Guidance Range of $5.70 to $6.30 excludes: $103 million income tax expense recorded in the first quarter of 2019 from outside basis differences in our South American businesses primarily related to the change in our indefinite reinvestment assertion from our decision in January 2019 to hold these businesses for sale $10 million income tax benefit from a reduction in a valuation allowance against certain NOL carryforwards as a result of our decision to sell our South American businesses an approximate $35 million after-tax(1) (approximately $50 million pretax) gain, plus working capital and other customary adjustments, related to our sale of the remaining U.S. renewables assets and investments to American Electric Power, which closed in April 2019 any potential gain from the planned sale of our South American businesses Sempra Energy 2019 Adjusted EPS Guidance is a non-GAAP financial measure. Because of the significance and nature of the excluded items, management believes that this non-GAAP financial measure provides better clarity into the ongoing results of the business and the comparability of such results to prior and future periods. Sempra Energy 2019 Adjusted EPS Guidance should not be considered an alternative to GAAP EPS Guidance. Non-GAAP financial measures are supplementary information that should be considered in addition to, but not as a substitute for, the information prepared in accordance with GAAP. Because the sale process for the planned divestiture of our South American businesses initiated in January 2019 is ongoing, the terms and structure of any potential sale transaction or transactions are unknown, including the terms that would impact the final income tax expense resulting from the expected change in our assertion regarding indefinite reinvestment of foreign undistributed earnings, including timing and amounts of repatriation of such earnings. As a result, 2019 GAAP EPS Guidance, the most directly comparable financial measure calculated in accordance with GAAP, is inestimable. Income taxes on estimated gain were calculated based on applicable statutory tax rates. Table B March 31, Restricted cash Due from unconsolidated affiliates Income taxes receivable Regulatory assets Greenhouse gas allowances Assets held for sale Assets held for sale in discontinued operations Other assets: Nuclear decommissioning trusts Investment in Oncor Holdings Dedicated assets in support of certain benefit plans Insurance receivable for Aliso Canyon costs Right-of-use assets – operating leases Total other assets Property, plant and equipment, net Derived from audited financial statements, which have been retrospectively adjusted for discontinued operations. Table B (Continued) Liabilities and Equity Short-term debt Accounts payable, net Due to unconsolidated affiliates Dividends and interest payable Accrued compensation and benefits Regulatory liabilities Current portion of long-term debt and finance leases Reserve for Aliso Canyon costs Greenhouse gas obligations Liabilities held for sale in discontinued operations Long-term debt and finance leases Deferred credits and other liabilities: Pension and other postretirement benefit plan obligations, net of plan assets Deferred investment tax credits Deferred credits and other Total deferred credits and other liabilities Sempra Energy shareholders' equity Preferred stock of subsidiary Other noncontrolling interests Total liabilities and equity Cash Flows from Operating Activities Loss (income) from discontinued operations, net of income tax Deferred income taxes and investment tax credits Equity (earnings) losses Fixed-price contracts and other derivatives Intercompany activities with discontinued operations, net Net change in other working capital components Changes in other noncurrent assets and liabilities, net Net cash provided by continuing operations Net cash provided by discontinued operations Net cash provided by operating activities Cash Flows from Investing Activities Expenditures for property, plant and equipment Expenditures for investments and acquisitions, net of cash and cash equivalents acquired Proceeds from sale of assets Purchases of nuclear decommissioning trust assets Proceeds from sales of nuclear decommissioning trust assets Advances to unconsolidated affiliates Repayments of advances to unconsolidated affiliates Net cash used in continuing operations Net cash used in discontinued operations Net cash used in investing activities Cash Flows from Financing Activities Common dividends paid Preferred dividends paid Issuances of mandatory convertible preferred stock, net of $32 in offering costs Issuances of common stock, net of $24 in offering costs in 2018 Repurchases of common stock Issuances of debt (maturities greater than 90 days) Payments on debt (maturities greater than 90 days) and finance leases Increase in short-term debt, net Purchases of and distributions to noncontrolling interests Net cash (used in) provided by continuing operations Net cash (used in) provided by financing activities Effect of exchange rate changes in continuing operations Effect of exchange rate changes in discontinued operations Effect of exchange rate changes on cash, cash equivalents and restricted cash Decrease in cash, cash equivalents and restricted cash, including discontinued operations Cash, cash equivalents and restricted cash, including discontinued operations, January 1 Cash, cash equivalents and restricted cash, including discontinued operations, March 31 Amounts have been retrospectively adjusted for discontinued operations. Table D SEGMENT EARNINGS (LOSSES) AND CAPITAL EXPENDITURES, INVESTMENTS AND ACQUISITIONS Earnings (Losses) SDG&E SoCalGas Sempra Texas Utility Sempra Mexico Sempra Renewables Sempra LNG Parent and other Discontinued operations Capital Expenditures, Investments and Acquisitions Table E OTHER OPERATING STATISTICS (Unaudited) SDG&E and SoCalGas Gas sales (Bcf)(1) Transportation (Bcf)(1) Total deliveries (Bcf)(1) Total gas customer meters (thousands) Electric sales (millions of kWhs)(1) Direct Access and Community Choice Aggregation (millions of kWhs) Total deliveries (millions of kWhs)(1) Total electric customer meters (thousands) Oncor(2) Total deliveries (millions of kWhs) Natural gas sales (Bcf) Natural gas customer meters (thousands) Power generated and sold (millions of kWhs) Sempra Mexico(3) Sempra Renewables(4) Includes intercompany sales. Includes 100 percent of the electric deliveries and customer meters of Oncor Electric Delivery Company LLC (Oncor), in which we hold an 80.25-percent interest through our March 2018 acquisition of our equity method investment in Oncor Electric Delivery Holdings Company LLC (Oncor Holdings). Total deliveries for the three months ended March 31, 2018 only include volumes from the March 9, 2018 acquisition date. Includes power generated and sold at the TdM natural gas-fired power plant and the Ventika wind power generation facilities. Also includes 50 percent of total power generated and sold at the Energía Sierra Juárez wind power generation facility, in which Sempra Energy has a 50-percent ownership interest. Energía Sierra Juárez is not consolidated within Sempra Energy, and the related investment is accounted for under the equity method. We include 50 percent of total power generated and sold related to U.S. solar and wind projects in which Sempra Energy has a 50-percent ownership. These subsidiaries are not consolidated within Sempra Energy, and the related investments are accounted for under the equity method. On June 25, 2018, our board of directors approved a plan to sell all U.S. wind and solar assets and investments, resulting in the sale of all Sempra Renewables' solar and wind projects in separate transactions that closed in December 2018 and April 2019, respectively. Table F (Unaudited) STATEMENTS OF OPERATIONS DATA BY SEGMENT Sempra Consolidating Adjustments, Parent & Cost of sales and other expenses Income (loss) before interest and tax(1) Net interest (expense) income Income tax (expense) benefit Equity earnings, net Earnings attributable to noncontrolling interests Preferred dividends Earnings (losses) from continuing operations Loss from discontinued operations Three months ended March 31, 2018(2) Equity earnings (losses), net Losses attributable to noncontrolling interests Earnings from discontinued operations Management believes Income (Loss) Before Interest and Tax is a useful measurement of our segments' performance because it can be used to evaluate the effectiveness of our operations exclusive of interest and income tax, neither of which is directly relevant to the efficiency of those operations. [SRE-F] View original content to download multimedia:http://www.prnewswire.com/news-releases/sempra-energy-reports-higher-first-quarter-2019-earnings-300844818.html Media Contact: Amber Albrecht, Sempra Energy, (877) 340-8875, [email protected], or Financial Contact: Patrick Billings, Sempra Energy, (877) 736-7727, [email protected]

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professional_accounting

Gregory C. Picken, J.D, LL.M Attorney Gregory C. Picken Gary, Dytrych, & Ryan P.A. Basic Planning Common Estate Planning Errors Florida Domicile Laws Advanced Strategies > Gifting Discounted Interests Overview of Generation Skipping Trusts Reviewing Your Documents A Low Cost Trust Alternative Basic Estate Planning Definitions Client Letter on New Power of Attorney Law Statute Text – New Florida Powers of Attorney Law IWILL Are there dangers in holding property jointly? What if I don't like my Spouse's Will or Trust Who Can File For Probate In Florida? What assets are subject to Florida Probate? Basic Estate and Probate Terminology The following are terms commonly used by estate planning attorneys and industry experts in connection with Estate Planning. 401(k) Plan: A qualified profit sharing or stock bonus plan under which plan participants have an option to put money into the plan or receive the same amount as taxable cash compensation. Amounts contributed to the plan are not taxable to the participants until withdrawn. Generally funded entirely or in part through salary reductions elected by employees. Salary reductions are subject to an annual limit. 403(b) Plan: A tax-deferred annuity retirement plan available to employees of public schools and certain nonprofit organizations. Absolute Assignment: A policy assignment under which the assignee receives full control over the policy and full rights to its benefits. As a general rule, when a policy is assigned to secure a debt, the owner retains all rights in the policy in excess of such debt, even though the assignment may be absolute in form. The insurance company does not guarantee the validity of the assignment. Before-Tax Earnings: A taxpayer’s gross income from salary, commissions, sales, fees, etc., before deductions for federal, state or other income taxes. Beneficial Interest: A financial or other valuable interest arising from an insurance policy regardless of who formally owns the policy. Beneficiary: An individual, institution, trustee or estate which receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract. Book Value: An accounting term. The book value of a stock is determined from a company’s records, by adding all assets then deducting all debts and other liabilities, plus the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding and the result is book value per common share. Book value of the assets of a company or a security may have little relationship to fair market value. Broker: An individual or firm which acts as an intermediary between a buyer and seller, usually charging a commission. For securities and most other products, a license is required. Buy-Sell Agreement: An agreement between the owners of a business that provides that the shares owned by any one of them who dies or withdraws from the business shall be sold to and will be purchased by the surviving co-owners or by the entity itself at a value or formula previously agreed upon by the parties and stipulated in the agreement. Also applies to buyout arrangements between owners and key employees. Bypass Trust: An estate planning device (also called a credit shelter trust, family trust, or B trust in “AB” plans where the A trust funds for the marital deduction) used to minimize the combined estate taxes payable by spouses whereby, at the death of the first spouse, the estate is divided into two parts and one part is placed in trust usually to benefit the surviving spouse without being taxed at the surviving spouse’s death, while the other part passes outright to the surviving spouse or is placed in a marital deduction trust. A by-pass trust permits a maximum of $1.350,000 transfer to heirs of the spouses on an estate tax free basis under the unified gift and estate tax credits as they exist in 2001. Capital Gain or Capital Loss: The profit or loss from the sale of a capital asset. Capitalization: The total amount of the various securities issued by a corporation. Capitalization may include bonds, debentures, preferred and common stock, long term debt and surplus. Bonds and debentures are usually carried on the books of the issuing company in terms of their par or face value. Preferred and common shares may be carried in terms of par or stated value. Stated value may be an arbitrary figure decided upon by the board of directors or may represent the amount received by the company from the sale of the securities at the time of issuance. Cash Basis Method: A method of determining when income must be reported and when expenses can be deducted. It is used by most individual taxpayers. Certain partnerships, corporations, and other taxpayers may not use the cash method. Under the cash method, income is generally reported in the tax year money is received, and expenses are usually deducted in the tax year they are paid. Cash Surrender Value: The equity amount available to the owner of a life insurance policy should he or she decide it is no longer wanted. Calculated separately from the legal reserve. Cash Value: The equity amount available to the policy owner when a life insurance policy is surrendered to the company, or the amount upon which the total available for a policy loan is determined. During the early policy years in a traditional whole life policy, the cash value is the reserve less a surrender charge; in the later policy years, the cash surrender value usually equals or closely approximates the reserve value. Certified Financial Planner (CFP): Professional designation granted to someone who has attained a high degree of technical competency in financial planning and has passed a series of professional examinations by the College for Financial Planning. Charitable Gift Annuity: An arrangement whereby the donor makes a gift to charity and receives back a guaranteed lifetime (or joint lifetime) income based on the age(s) of the annuitant(s). Charitable Lead Trust: An arrangement whereby the charity receives an income from a trust for a period of years, then the remainder is paid to non-charitable beneficiaries (generally either the donor or his or her heirs). Charitable Remainder Annuity Trust: A charitable trust arrangement whereby the donor or other beneficiary is paid annually an income of a fixed amount of at least 5% but not more than 50% of the initial fair market value of property placed in the trust, for life or for a period of up to 20 years; one or more qualified charitable organizations must be named to receive the remainder interest upon the death of the donor or other income beneficiaries, and the value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer. Charitable Remainder Trust: An arrangement wherein the remainder interest goes to a legal charity upon the termination or failure of a prior interest. Charitable Remainder Unitrust: A charitable trust arrangement whereby the donor or other beneficiary is paid annually an income of a fixed percentage of at least 5% but not more than 50% of the annually revalued trust assets, for life or for a period of up to 20 years; one or more qualified charitable organizations must be named to receive the remainder interest upon the death of the donor or other income beneficiaries, and the value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer. Chartered Financial Consultant (ChFC): Professional designation granted to an individual who has attained a high degree of technical competency in the fields of financial planning, investments, and life and health insurance and has passed ten professional examinations administered by The American College. Chartered Life Underwriter (CLU): Professional designation granted to an individual who has attained a high degree of technical competency in the fields of life and health insurance and who is expected to abide by a code of ethics. Must have minimum of three years of experience in life or health insurance sales and have passed ten professional examinations administered by The American College. Codicil: A legal document, which supplements and changes an existing will. Generally utilized to make minor changes to the original will. Collateral Assignment: When a life insurance contract is transferred to an individual or other party as security for a debt. This usually temporary assignment does not transfer all policy rights. Collateral Assignment Method (Split Dollar): A policy ownership arrangement under a split-dollar arrangement using life insurance where the employee (or a third party) owns the policy and names a personal beneficiary but assigns part of the policy or death benefit to the employer as collateral for the employer’s premium advances under the policy. Community Property: Ten states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) use some form of the community property system to determine the interest of a husband and wife in property acquired during marriage. Concealment: Deliberate failure of an applicant for insurance to reveal a material fact to the insurer. Conditions: Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform. Consideration: One of the elements of a binding contract; the exchange of values by the parties to the contract. Such values may be money, promises, property, etc. In insurance, the policy owner’s consideration is the first premium payment and the application; the insurance company’s consideration is the contract itself. Constructive Receipt Doctrine: A federal tax rule, which provides that when a taxpayer has an unrestricted right to receive a pecuniary benefit, that is when it is made available without a substantial risk of forfeiture, the benefit is considered to have been received for income tax purposes whether or not it was actually received. Contingent Beneficiary: Beneficiary of a life insurance policy who is entitled to receive the policy proceeds on the insured’s death if the primary beneficiary dies before the insured; or the beneficiary who receives the remaining payments if the primary beneficiary dies before receiving the guaranteed number of payments. Convertible: Term life insurance that can be exchanged for a cash value life insurance policy without evidence of insurability. Corporate Owned Life Insurance (COLI): Life insurance owed by a corporation, insuring the lives of its employees. Corpus of a Trust: The term used to designate the body of assets placed in a trust. The trust holds title to all property included in the corpus. Cost of Insurance (COI): The cost of insurance rate charged on the difference between the death benefit and account value, also known as the net amount at risk. The cost of insurance rate is set to cover more than the cost of providing the death benefit. The cost of insurance rate helps cover administrative costs, taxes, and other expenses. The cost is deducted from the account value monthly. Credit Shelter Trust: An estate planning device (also called a bypass trust, family trust, or B trust in “AB” plans where the A trust funds for the marital deduction) used to minimize the combined estate taxes payable by spouses whereby, at the death of the first spouse, the estate is divided into two parts and one part is placed in trust usually to benefit the surviving spouse without being taxed at the surviving spouse’s death, while the other part passes outright to the surviving spouse or is placed in a marital deduction trust. A credit shelter trust permits a maximum of $1.350,000 transfer to heirs of the spouses on an estate tax free basis under the unified gift and estate tax credits as they exist in 2001. Cross Purchase Buy Sell Plan: In a cross purchase plan, the surviving owners (rather than the business itself) agreed to buy the deceased or departing owner’s business interests. That purchase is made for an agreed-on price or according to an agreed-on formula. Crummy Trust: A trust established granting a beneficiary a limited power to withdraw income or principal or both. This power is exercisable during a limited period of time each year and is non-cumulative. The power of withdrawal is generally limited to the amount excludable from gift tax liability under the annual gift tax exclusion or to the greater of $5,000 or 5 percent of the trust property. Cumulative Planned Premium: The total of the planned premiums scheduled to be paid to date by the policy owner. Cumulative Loan: The total of the annual loans and loan interest, if accrued, to date. Cumulative Retirement Income: The total of the annual retirement income distributions projected to be taken to date from an insurance policy whether by way of loans or withdrawals. Custodianship: An ownership arrangement in which property management rights are given to a custodian for the benefit of a child beneficiary under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act; a custodian’s duties resemble those of a trustee, although the custodian does not take legal title to the trust property and custodianship ends when the minor reaches the age of majority as specified by state law. May also apply to property management rights of individuals who are determined to be incompetent to handle their own affairs. Death Benefit Only Arrangement (DBO): A type of deferred compensation arrangement in which an employer agrees to pay only a death benefit to a deceased employee’s heirs rather than the customary retirement benefit (and perhaps ancillary benefits) associated with conventional deferred compensation. Decedent: The person who has died. Declarations: Statements in an insurance contract that provide information about the property or life to be insured and used for underwriting and rating purposes and identification of the property or life to be insured. Deferred Compensation Plan: A plan in which the executive elects to defer compensation into an account in the expectation of receiving the deferrals plus earnings at retirement; may involve company contributions. Defined Benefit Plan: A plan in which the company specifies the benefit the plan will deliver. Typically involves only company contributions; company bears the investment risk. (Examples: pension or cash balance plan). Defined Contribution Plan: A plan in which the company defines the contribution it will make to the employee’s account in the plan rather than a fixed benefit the employee will receive. Typically involves both company and employee contributions; employee bears the investment risk. Direct Skip: An outright generation-skipping transfer, either by gift or at death, to a recipient, known as a “skip person,” who is two or more generation levels below the transferor. This type of property transfer prompts the generation-skipping transfer tax. Direct Transfer: The movement of a tax-deferred retirement asset from one plan or custodian directly to another. A direct transfer is not a withdrawal and does not incur any taxes or penalties. Donor: A person who makes a gift. The person setting up a trust can be called donor, trustor, grantor, or settlor. Dower: The life estate of a widow in the property of her husband. At common law a wife had a life estate in one-third (in value) of the property of her husband who died without leaving a valid will or from whose will she dissented. In many states common law dower has been abolished by statute or never has been recognized. Durable Power of Attorney: A written legal document which allows one person (the principal) to authorize another person (the attorney-in-fact or agent) to act on his or her behalf with respect to specified types of property, and which may remain in effect during a subsequent disability or incompetency of the principal. Durable Power of Attorney for Health Care: A written legal document which grants decision-making powers related to health care to an agent; generally provides for removal of a physician, the right to have the incompetent patient discharged against medical advice, the right to medical records, and the right to have the patient moved or to engage other treatment. Economic Benefit: The value of the death benefit protection provided to employee under a split dollar plan, as defined by IRS revenue rulings and notices. The economic benefit amount is equal to the employee death benefit multiplied by the economic benefit rate, plus the cost of “other benefits” that are owned, controlled by or otherwise provided to the employee under the policy. The economic benefit rate is an age specific rate per thousand, which may be determined from government tables (i.e., IRS Table 2001 for individual policies, or the rate calculated by applying the Greenberg to Greenberg formula to IRS Table 2001 rates for joint survivor policies) or by using rates found in ING Security Life’s alternative term products (single life alternative term or joint survivor alternative term). Economic Benefit Doctrine: A federal tax rule, which provides that when an employer provides an economic benefit to an employee, that benefit is includable in the employee’s gross income even if not received in cash or property. Employee Benefit Plan: A plan established or maintained by an employer or employee organization, or both, for the purpose of providing employees a certain benefit, such as pension, profit-sharing, stock bonus, thrift medical, sickness accident, or disability benefits. Employee Benefit Trust: A trust established to hold the assets of an employee benefit plan. Employee Stock Ownership Plan: An Employee Stock Ownership Plan (ESOP) is essentially a stock bonus plan in which employer stock is used for contributions. A “KSOP” plan also includes §401(k) Plan features. Employer contributions are tax deductible and are not currently taxed to the employee. Earnings accumulate income tax deferred and distributions are generally taxed as ordinary income. Endorsement: Written provision that adds to, deletes, or modifies the provisions in the original contract. Endorsement Method (Split Dollar): A life insurance policy ownership arrangement under a split-dollar arrangement in which the employer owns the policy and an endorsement to the policy spells out the employee’s rights. Equity Split-Dollar: An arrangement in which the employer’s share of the cash value and death benefit of life insurance on an employee’s life is confined to its aggregate net premium payments; any cash value in excess of the employer’s premiums inures to the benefit of the other party (employee or third party). The taxation of this arrangement is addressed in IRS Notice 2001-10. ERISA: The acronym for the Employee Retirement Income Security Act of 1974, a federal law that established minimum standards for certain employee benefit plans, especially qualified employer retirement plans. Errors and Omissions Insurance: Liability insurance policy that provides protection against loss incurred by a client because of some negligent act, error, or omission by the insured. Escheat: Assignment of property to the state because there is no verifiable legal owner – typically, where there is no heir to property. Estate: Everything of value (all property) that a person owns while living or at the time of death. Estate Planning: Process designed to conserve estate assets before and after death, distribute property according to the individual’s wishes, minimize federal estate and state inheritance taxes, provide estate liquidity to meet costs of estate settlement, and provide for the family’s financial needs. Estate Tax: A tax imposed on the transfer of property from a decedent to his or her heirs, legatees or devisees. Executor or Executrix: An individual or institution nominated in a will and appointed by a court to settle the estate of a deceased. Fair Market Value: The price at which an item can be sold at the present time between two unrelated people, neither under compulsion to buy or sell. Family Attribution Rules: A federal tax rule that may cause the ownership of stock by one family member to be attributed to another for purposes of determining the income tax consequences of a distribution by the corporation in redemption of the stock. Fee Simple Ownership: Outright ownership of property with absolute rights to dispose of or gift it to anyone. Fiduciary: A person in the position of great trust and responsibility, such as the executor of a will or the trustee of a trust. Five and Five Power: A provision that allows a trust beneficiary to withdraw the greater of $5,000 or five percent of the principal from a trust without causing the entire trust property to be included in his or her estate for federal estate taxation. Fixed-Period Option: Life insurance settlement option in which the policy proceeds are paid out over a fixed period of time. Funding Instrument: An insurance contract or trust agreement that states the terms under which the funding agency will accumulate, administer, and disburse the pension funds. Future Interest: An ownership interest in property in which unlimited possession or enjoyment of property is delayed until some future time. General Partner: A general partner is a partner of a partnership who is personally liable for all partnership debts and is permitted to participate in the management of the partnership. General Partnership: A partnership that has only general partners and no limited partners. Each partner is liable for all partnership debts and there is no limited liability. General Power of Appointment: A power of the donee (the one who is given the power) to pass on an interest in property to whomever he pleases, including himself or his estate. Generation Skipping Transfer (GST): A transfer of property, usually in trust, that is designed to provide benefits for beneficiaries who are two or more generations younger than the generation of the grantor. Generation Skipping Transfer Tax (GST): A transfer tax generally assessed on transfers to grandchildren, great grandchildren and others who are at least two generations younger than the donor. Generation Skipping Transfer Tax Exemption: An exemption from generation-skipping tax for transfers by an individual either during life or at death. Generation Skipping Trust: Any trust having beneficiaries who belong to two or more generations younger than the grantor. Gift: A voluntary transfer of property for which nothing of value is received in return. If the Internal Revenue Service is to recognize a transfer as a gift, the donor(s) must unconditionally transfer all title and control of the property to the recipient(s) at the time the gift is given. Gifting: A means of implementation of an estate plan through gifts to intended successors in the ownership of assets owned by the person(s) making the gifts. Grace Period: Period of time during which a policyowner may pay an overdue premium without causing the policy to lapse. Grantee: A person to whom property is transferred by deed or to whom property rights are granted by means of a trust instrument or some other document. Grantor: The person who establishes the trust. Also called the creator, settlor, donor or trustor. Grantor Retained Annuity Trust (GRAT): A trust in which the grantor retains the right to a set annual dollar amount (the annuity) for a fixed term and gives the principal to others, such as the grantor’s children, at the end of that term. If the grantor survives until the end of the annuity term, all of the trust principal will be excluded from the grantor’s estate for estate tax purposes. A grantor retained annuity trust is sometimes referred to as a “GRAT.” Grantor Trust: For purposes of the income taxation of trusts, a trust in which the grantor or a third party, because of certain rights to income or principal or certain powers over the disposition of income and principal, is treated as the owner of the trust and taxed on the income thereof. Consequently, a grantor trust is not treated as a separate entity for income tax purposes. Gross Estate: The total value of all property in which a deceased had an interest. This must be included in his or her estate for federal tax purposes. Group “Carve Out” Life Insurance Plan: This plan is an alternative to group term insurance. It provides life insurance coverage to selected employees by “carving out” all or a portion of their coverage under an employer sponsored group term plan and then provides them with individual policies. The plan can be designed as either a Bonus §162 Plan or a split dollar plan. Group Life Insurance: Life insurance provided on a number of persons in a single master contract. Physical examinations are not required, and certificates of insurance are issued to members of the group as evidence of insurance. Group-Term Life Insurance Program: An employer may provide employees with life insurance coverage through an IRC §79 group-term policy, the first $50,000 of which generally produces no taxable cost to the employee. Guaranteed Investment Contract (GIC): A debt instrument issued by an insurance company, usually in a large denomination, and often bought for retirement plans. The interest rate paid is guaranteed, but the principal is not. Guaranteed Insurability: An insurance policy in which the insurer is required to renew the policy for a specified amount of time regardless of changes to the health of the insured. The agreement requires that premiums are paid on time and that the insurer makes no changes except if a premium change is made for an entire class of policyholders. Also called guaranteed renewable or conversion privilege or convertible term insurance. Guaranteed Net Surrender Value: The guaranteed surrender value which equals the guaranteed net policy value minus the surrender charge, if any. Guardian: A person legally entrusted with the care of, and managing the property and rights of, another person, usually a minor child. Heir: A person entitled by law to inherit part or all of the estate of an ancestor who died without leaving a valid will. Holographic Will: A will written entirely in the testator’s own handwriting. Human Life Value: For purposes of life insurance, the present value of the family’s share of the deceased breadwinner’s future earnings. Incapacity: The lack of ability to act on your own behalf. Incidents of Ownership: Includes a variety of rights and powers that an insured decedent may have held over a life insurance policy; the possession of one or more of these incidents of ownership within three years of death will bring the policy proceeds into the insured’s gross estate. Income Beneficiary: The beneficiary of a trust who is entitled to receive the income from it. Income in Respect of a Decedent (IRD): Income earned by a decedent or income to which the decedent had a right prior to death, but which was not properly includible in his or her gross income prior to death. Incontestable Clause: A provision in a life insurance policy that prevents the insurer from revoking coverage because of alleged misstatements by the insured after a specified period, usually about two years. Individual Retirement Account (IRA): A tax-deferred retirement account for an individual that can be established by a person with earned income. Earnings accumulate tax-deferred until the funds are withdrawn beginning at age 59 ½ or later (or earlier, with a 10% penalty). Initial Reserve: In life insurance, the reserve at the beginning of any policy year. Installment Sale: A sale in which taxable gain is recognized over a number of years as the payment for the property sold is received. Insurable Interest: The expectation of a monetary loss that can be covered by insurance. Insurance: Pooling of fortuitous losses by transfer of risks to insurers who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk. Insurance Trust: An irrevocable trust established to own an insurance policy or policies and thereby prevent them from being included in the insured’s estate. Insuring Agreement: That part of an insurance contract that states the promises of the insurer. Intangible Property: Property that cannot be touched and that represents real value such as bonds, stock certificates, promissory notes, certificates of deposit, bank accounts, contracts, leases, and other similar items. Inter vivos Trust: A type of trust created during the settlor’s lifetime. Interest Credit: The nonguaranteed amount credited to the policy’s account value based upon a rate of interest specified by the insurance company. Interest Option: Life insurance settlement option in which the principal is retained by the insurer and interest is paid periodically. Intergenerational Succession: Succession in property ownership in which the property is transferred from one generation to another; usually from members of an older generation to members of a younger generation. Intestate: A person who dies without having made and left a valid will. Intestate Succession: The distribution of property to heirs according to the statutes of the state of residency upon the death of a person who owned the property but did not leave a valid will. Investment Gain/Loss: The total increase or decrease in account value as a result of investment division performance during the policy year. Irrevocable Beneficiary: Beneficiary designation allowing no change to be made in the beneficiary of an insurance policy without the beneficiary’s consent. Irrevocable Trust: A trust that cannot be changed or terminated after it is established. Joint Tenancy: A form of ownership shared with an unlimited number of individuals. Each tenant owns an equal undivided share of the property. Joint Tenancy with Rights of Survivorship (JTWRS): The holding of property by two or more individuals in a manner that upon the death of one tenant, the survivor(s) succeed to full ownership by operation of law. Keogh Plan (HR-10 Plan): Retirement plan individually adopted by self-employed persons. Kiddie Tax: Unearned income (dividends, rents, interest, etc) of a child under age 14 will be taxed to the child at the parent’s highest income tax rate. Lack of Marketability Discount: When the value of an asset is less than its initial or expected fair market value due to unusual circumstances that make it not readily saleable. For example, a limited partnership interest. Lateral Succession: Succession in property ownership in which the property is transferred between members of the same generation. Law of Large Numbers: Concept that the greater the number of exposures, the more closely will actual results approach the probable results expected from an infinite number of exposures. Legal Reserve: Liability item on a life insurer’s balance sheet representing the redundant or excessive premiums paid under the level-premium method during the early years. Assets must be accumulated to offset the legal reserve liability. Purpose of the legal reserve is to provide lifetime protection. Letters of Administration: Document issued by the probate court giving the administrator authority to administer the estate. Letters Testamentary: Document issued by the probate court giving the executor authority to administer the estate under the provisions of the decedent’s will. Liability: A financial obligation, debt, claim, or potential loss. Life Income Option: Life insurance settlement option in which the policy proceeds are paid during the lifetime of the beneficiary. A certain number of guaranteed payments may also be payable. Life Insurance Planning: Systematic method of determining the insured’s financial goals, which are translated into specific amounts of life insurance, then periodically reviewed for possible changes. Limited Liability Company (LLC): An entity formed under state statute that has the legal characteristic of limited liability similar to that of a corporation, while it may qualify to be treated as a partnership for tax purposes. Limited Partner: A partner in a partnership who can’t participate in the management of the partnership’s business. A limited partner’s liability is limited to loss of his investment in the partnership. Limited Partnership: Form of partnership composed of both a general partner(s) and a limited partner(s); the limited partners have no control in the management of the company and are usually financially liable only to the extent of their investment in the partnership. Living Trust: A written legal document into which you place all of your property, with instructions for its management and distribution upon your disability or death. Loan: Money that is lent. In life insurance a loan can be taken against the cash value of a life insurance policy. If the insured dies while there is an outstanding loan balance, the amount of the loan and any unpaid interest due will be deducted from the death proceeds. Loan Interest Charge: The annual interest expense charged to the policy owner on the amount borrowed from a policy’s cash value. If loan interest is not paid in cash, it is added to the outstanding loan balance. The unpaid loan interest will then increase the amount borrowed. Marital Deduction: A deduction allowing for the unlimited transfer of any or all property from one spouse to the other generally free of estate and gift tax. Medical Information Bureau (MIB): Bureau whose purpose is to supply underwriting information in life and health insurance to member companies, which report any health impairments of an applicant for insurance. Minor Child: A person who has not yet reached the legal age of majority. This age can differ with each state, but generally is between 16 and 21 years. The term does not apply to an emancipated minor. Minority Discount: A discount applied to the value of an interest in a corporation, limited liability company or limited partnership that is not publicly marketable to reflect the fact that a minority interest in the company has less value than a controlling interest, since the holder of the former cannot control business actions. National Association of Insurance Commissioners (NAIC): Group founded in 1871 that meets periodically to discuss industry problems and draft model laws in various areas and recommends adoption of these proposals by state legislatures. The NAIC opposes federal regulation of insurance. Needs Approach: Method for estimating amount of life insurance appropriate for a family by analyzing various family needs that must be met if the family head should die and converting them into specific amounts of life insurance. Financial assets are considered in determining the amount of life insurance needed. Net Amount at Risk: In life insurance, the difference between the face value of a life insurance policy and its cash value (also known as “pure amount of protection”). Nonforfeiture Law: State law requiring insurance companies to provide at least a minimum nonforfeiture value to policyowners who surrender their cash value life insurance policies. Nonqualified Deferred Compensation Plan: A contractual arrangement that calls for paying an individual or group of executives future benefits. It does not qualify for favorable tax treatment, but has far fewer restrictions than qualified plans. Non-qualified plans are unsecured and subject to risks; they must remain “unfunded” to avoid current taxation. Ownership Clause: Provision in life insurance policies under which the policyowner possesses all contractual rights in the policy while the insured is living. These rights can generally be exercised without the beneficiary’s consent. Partition: The judicial separation of the respective interests in property of joint owners or tenants in common so each may take possession, enjoy, and control his or her share of the property. Partnership: A type of unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for its debts. Paul v. Virginia: Landmark legal decision of 1869 establishing the right of the states, and not the federal government, to regulate insurance. Ruled that insurance was not interstate commerce. Per Stirpes: A way of distributing an estate so that the surviving descendants will receive only what their immediate ancestor would have received if he or she had been alive at the time of death. State law definitions can vary. Personal Representative: An executor, administrator, or anyone else who is in charge of a decedent’s property. Phantom Stock Plan: An incentive compensation arrangement where the employee is credited with a hypothetical number of shares (phantom stock units) of the company. These units are credited to the employee’s account, which is dynamic in that it includes future dividends and stock splits. Upon termination of employment, the employee is entitled to a cash amount based on the per share equivalent value of each of the phantom stock units credited to his or her account. Planned Premium: The premium amount specified by the policy owner as the amounts intended to be paid at fixed intervals over a specified period of time. Premiums may be paid on a monthly, quarterly, semi-annual or annual basis. If policy values are adequate, the specified premium need not be paid, and can be changed at any time. Within limits, premium payments that are more or less than the specified premium amount may be permitted. Policy Basis: The policy basis represents the policy owner’s investment in the policy. Policy basis is used in determining the taxable portion of a policy distributions when a taxable event occurs. For example, the portion of the surrender proceeds or withdrawal distribution that exceeds the policy basis is reported as taxable income (gain). Policy Loan: A loan made by an insurance company to a policyholder on the security of the cash value of the policy. Pooled Income Fund: A trust arrangement which accepts gifts of cash or certain properties from persons who want to provide support for the charitable organization; gifts made to the fund are commingled and invested by the trustee and units of participation are awarded to the donor for his or her gift; income is then paid to the donor proportionate to his or her share of fund earnings. Pour Over Will: This is a Will used to transfer (pour over) into a trust any property that is left in a person’s estate after death. Power of Appointment: A right given to another in a written instrument, such as a will or trust that allows the other to decide how to distribute your property. The power of appointment is “general” if it places no restrictions on who the distributees may be. A power is “limited” or “special” if it limits the eventual distributee. Power of Attorney: A written legal document that gives an individual the authority to act for another. If the authority is to act for the principal in all matters, it is a general power of attorney. If the authority granted is limited to certain specified things, it is a special power of attorney. If the authority granted survives the disability of the principal it is a durable power of attorney. Primary Beneficiary: Beneficiary of a life insurance policy who is first entitled to receive the policy proceeds on the insured’s death. Probate: A court procedure for settling the personal affairs of a decedent by formally proving the validity of a will and establishing the legal transfer of property to beneficiaries, or appointing an administrator and supervising the legal transfer to property to heirs if there is no valid will. Projected Benefit Obligation (PBO): An accounting term representing the anticipated value of retirement benefits to be earned by an employee by his/her retirement date. Qualified Domestic Trust: A trust arrangement which allows property transferred to a surviving spouse who is not a U.S. citizen to qualify for a special exclusion in lieu of the regular marital deduction; and which ensures that, at the death of the surviving spouse who is not a United States citizen, the assets placed in such a trust will incur federal estate taxation since the tax was avoided at the first spouse’s death. Qualified Plan: Plans that qualify for favorable tax treatment under the Internal Revenue Code, and are subject to restrictive rules and extensive regulations. Qualified plans are secured by a trust, as opposed to a nonqualified plan. Qualified Stock Option Plan: A tax favored plan for compensating executives by granting incentive stock options (ISOs) to buy company stock. If the plan meets the requirements of IRC §422, the executive is not taxed at the time of the grant or the time of the exercise of the option. Taxation occurs when the stock purchased under the option is sold by the executive. Corporation granting the option does not ordinarily receive a tax deduction. Qualified Terminable Interest Property (QTIP): Property qualifying for the marital deduction at the election of the donor or the decedent’s personal representative. The spouse retains a qualified income interest in the property for life, with the income payable at least annually. The corpus ultimately passes to a specified remainderman, under a special power of appointment given to the spouse. Rabbi Trust: A trust, owned by the company, that holds assets to help meet non-qualified benefit payments. Rabbi trusts are taxable trusts, and trust assets must be available to corporate creditors in the event of a bankruptcy. Rate: Price per unit of insurance. Ratio Percentage Test: A test that a qualified pension plan must meet to receive favorable income tax treatment. The pension plan must benefit a percentage of employees that is at least 70 percent of the highly compensated employees covered by the plan. Rebating: A practice-illegal in virtually all states-of giving a premium reduction or some other financial advantage to an individual as an inducement to purchase the policy. Representative: Someone who is authorized to act on your behalf, such as an executor or a trustee. Revocable Beneficiary: Beneficiary designation allowing the policyowner the right to change the beneficiary without consent of the beneficiary. Revocable Trust: A trust that can be changed after it is established. Assets can be added or removed from the corpus of the trust, the beneficiary(ies) can be changed, and other changes including termination of the trust, are allowed. Rider: Term used in insurance contracts to describe a document that amends or changes the original policy. Rule Against Perpetuities: A rule of common law that makes void any estate or interest in property so limited that it will not take effect or vest within a period measured by a life or lives in being at the time of the creation of the estate plus 21 years and the period of gestation. In many states the rule has been modified by statute. Sometimes it is known as the rule against remoteness of vesting. S Corporation: A corporation whose income is generally taxed to its shareholders, thus avoiding a corporate level tax. An election available to a corporation to be treated as a partnership for income tax purposes. To be eligible to make the election, a corporation must meet certain requirements as to kind and number of shareholders, classes of stock, and sources of income. Section 2503(c) Trust for Minors: A trust designed to comply with Section 2503(c) of the Internal Revenue Code so that a gift placed in such a trust for the benefit of a minor will qualify for the gift tax annual exclusion although they are not gifts of a present interest. Section 303 Stock Redemption: When certain requirements are met, this section of the Internal Revenue Code allows a shareholder’s estate or heirs to sell to the deceased’s closely held corporation enough stock to pay federal and state death taxes, costs of estate administration, and funeral expenses without the corporation’s distribution being treated as a dividend for income tax purposes. Section 401(k) Plan: A qualified profit sharing or thrift plan that allows participants the option of putting money into the plan or receiving funds as cash. The employee can voluntarily elect to have his or her salary reduced up to some maximum limit, which is then invested in the employer’s Section 401(k) plan. Section 457 Plan: A plan which provides an exclusion from gross income for a certain portion of salary deferred by a participant under the plan of a state or local government, a tax-exempt organization (excluding churches), or of an independent contractor of such government or organization (e.g., a physician providing independent services to a hospital). Section 6166: A section of the Internal Revenue Code that allows for a 14-year spreadout of the estate tax for estates that qualify (generally estates that include closely held businesses or farms). Secular Trust: An irrevocable trust which is a separate tax-paying entity from the company. Assets contributed to a secular trust are currently taxable to the trust beneficiary. In contrast to a rabbi trust, a secular trust is beyond reach of corporate creditors in the event of bankruptcy. Settlement Option: Ways in which life insurance policy proceeds can be paid other than in a lump sum, including interest, fixed period, fixed amount, and life income options. Simplified Employee Pension (SEP) IRA: A retirement program for self-employed people or owners of small companies allowing them to defer taxes on investments intended for retirement. Sinking Fund Approach: A benefit funding technique wherein assets are set aside in order to accumulate the necessary funds to pay future benefit expenses. Sound Mind: The testator possesses sound mind for the purposes of making a will if he or she: (1) understands the nature of the act of making a will or codicil thereto, (2) knows the extent and character of the property subject to the will, (3) knows and understands the proposed disposition of that property, and (4) knows the natural objects of his or her bounty (i.e. his or her heirs). Whether the testator was of sound mind is tested (determined) by the state of the testator’s mind at the time the will or codicil is executed (written and signed) and varies by state. Split Dollar Plans: A method of purchasing life insurance in which the premium payments and policy benefits are divided, usually between an employer and employee. Many types of split dollar designs are possible. It can be a valuable executive benefit that provides life insurance protection for an executive’s survivors at a minimal cost (the economic benefit cost) to the employee. State Death or Inheritance Taxes: The tax imposed by the state in which you live and/or where your property is located, if different, on the transfer of that property to another at your death. Statute of Limitations: A statute, which bars lawsuits upon valid claims after the expiration of a specified period of time. The period varies by state law and for different kinds of claims. Step Up In Basis: A decedent’s capital gains property that passes to others escaping capital gains tax when sold by the person who inherits the property. Persons inheriting capital gains property receive the property at date-of-death fair market value. In effect, the basis in this property is deemed to be “stepped up” and does not reflect the decedent’s original cost basis for determining applicable capital gains tax on the sale of the property. Stock Appreciation Rights Plan (SAR): A right granted to an employee to receive cash and/or stock equal to the increase in value of the company’s stock after the date the stock appreciation right (SAR) is granted. Generally no tax consequences to the employer or employee upon the grant of the right. It is treated as an unfunded, unsecured promise to pay money in the future. The employee is ordinarily given the right to decide when the SAR will be exercised and will recognize ordinary income upon exercise in an amount equal to the cash and/or fair market value of the other assets received. Stock Bonus Plan: A method of compensating selected executives by issuing company stock in lieu of or in addition to cash bonus compensation. The executive is taxed on the value of the stock as ordinary income and any increase in value of the stock is owned by the executive. The bonus is deductible by the employer if it is reasonable compensation for services rendered. Stock Company: Company owned by stockholders who share in the profits of the company. Stock Redemption Plan: In a stock redemption or entity purchase plan, the business agrees to purchase a deceased or departing owner’s interest. The purchase is made for an agreed-on price or according to an agreed-on formula. Succession: A term used to describe transfers of asset ownership through inheritance, gifting, preferential sale, or other means that fulfill the wishes of the person(s) with present ownership of the assets. Suicide Clause: Contractual provision in a life insurance policy stating that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; only premiums paid will be refunded. Supplemental Executive Retirement Plan: A type of non-qualified deferred compensation plan often used to attract and retain executives. Generally, the promised benefits are paid from the employer’s general assets, and no amounts are specifically earmarked for future benefit payments. Usually the employee has no option to receive the funds as current compensation. Surrender Charge: The fee charged to a policy owner when a life insurance policy or annuity is surrendered for its cash value. Tangible Property: Property that is capable of being perceived by the senses – generally refers to real estate, personal property, and moveable property that has value of its own and is not merely a representation of real value. Land, machinery, buildings, crops, and livestock are examples of tangible property. Tax Basis: The owner’s cost of an asset for income and estate tax purposes as determined under the Internal Revenue Code and IRS regulations. Tenants In Common: A form of asset ownership in which two or more persons have an undivided interest in the asset and the ownership shares are not required to be equal. Term Insurance: Type of life insurance that provides temporary protection for a specified number of years. Testamentary Trust: A trust established after the death of the grantor under the provisions of the grantor’s will. Testator: One who writes or has written and signs a will. Transfer for Value Rule: A federal income tax rule which states that if ownership of a life insurance policy was transferred for a valuable consideration, a portion of the death proceeds may be includible in gross income rather than qualifying for the usual income tax exemption of death proceeds. Five “safe harbor” exceptions to this rule exist. They include: a transfer to the insured, to a partner of the insured, to a partnership in which the insured is a partner, to a corporation in which the insured is a shareholder or officer, and to a corporation from another corporation in a tax-free reorganization. Trust: A legal arrangement in which an individual (the trustor) gives fiduciary control of property to a person or institution (the trustee) for the benefit of beneficiaries. Trust Declaration or Trust Instrument: A document defining the nature and duration of the trust, the powers of the trustee, and identifying the trust’s beneficiary(ies). Trustee: An individual or organization which holds or manages and invests assets for the benefit of another. Trusteed Cross-Purchase Buy-Sell Agreement: The use of a third party (“trustee”) to hold the life insurance policies that fund a cross-purchase agreement, and to see that the terms of the agreement are fulfilled at an owner’s death; may be used to avoid a multiplicity of policies when several owners are involved. Twisting: Excessive trading in a client’s account by a broker seeking to maximize commissions regardless of the client’s best interests, in violation of NASD rules, also called churning or overtrading. Underwriting: The selection and classification of applicants for insurance through a clearly stated company policy consistent with company objectives. Undivided Interest: The interest or right in property owned by each joint tenant or tenant in common. Each tenant has equal right to use and enjoy the entire property. Unless an agreement to the contrary exists, each tenant is entitled to an income share proportional to his or her ownership interest. If the property is sold, the sale proceeds are shared among tenants in proportion to the ownership shares held by each tenant. Unified Tax Credit: Tax credit that can be used to reduce the amount of the federal estate or gift tax. Uniform Gifts (Transfers) To Minors Act (UGMA or UTMA): A method to hold property for the benefit of a minor, which is similar to a trust but the rules are governed by state law. Universal Life Insurance: Life insurance which combines the low-cost protection of term insurance with a savings component that is invested in a tax-deferred account, the cash value of which may be available for a loan to the policy holder. Unrelated Business Taxable Income (Ubti): Income earned by an otherwise tax-exempt organization from activities unrelated to their tax-exempt purpose can be subject to taxation. Vest: To confer an immediate, fixed right of immediate or future possession and enjoyment of property. Vesting: An ERISA guideline stipulating that employees must be entitled to their entire retirement benefits within a certain period of time even if they are no longer with the employer. Voting Right: The right of a common stockholder to vote for members of the board of directors and on matters of corporate policy – particularly the issuance of senior securities, stock splits and substantial changes in the corporation’s business. A variation of this right is extended to variable annuity contract holders and mutual fund shareholders, who may vote on material policy issues. Wait-and-See Buy-Sell Agreement: A special type of buy-sell agreement between the owners of a business and the business itself, in which, typically, the business entity has a first option to purchase a deceased owner’s interest; the surviving owners then have a second option to purchase any portion of the interest not already acquired by the business; and finally, the business entity is required to purchase any remaining interest not already sold under the two options. Waiver-of-Premium Provision: Benefit that can be added to a life insurance policy providing for waiver of all premiums coming due during a period of total disability of the insured. Will: A person’s written declaration of desires for disposal of his or her property after death. We strive to explain complex estate planning issues in language that is clear, concise and approachable for all clients. Contact us today and we can walk you through the planning process. Gary, Dytrych & Ryan, P.A. 701 U.S. Highway One Suite# 402 Wills, Trusts, Probate & Estate Planning Law Email: [email protected] @2016 Gary, Dytrych & Ryan, P.A. Legal Notice and Disclaimer: The materials within this web site are for informational purposes only. They are not legal advice and should not be used as such. Transmission of the information in this web site is not intended to create, and receipt does not constitute, an attorney-client relationship. Internet users and readers should not act upon this information without first seeking professional legal counsel. The information in this web site is provided only as general information which may or may not reflect the most current legal developments. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Attorney Gregory Picken and Pickenlaw.com provide legal representation to individuals and families throughout South Florida. We represent clients in the legal practice areas of Estate Planning, Wills and Trusts, and Probate throughout Palm Beach County, including North Palm Beach, Jupiter, Tequesta, Juno Beach, Palm Beach, Lantana, West Palm Beach, Royal Palm Beach, Stuart, Hobe Sound, Lake Worth, Boynton Beach, Boca Raton, Delray Beach, and Wellington as well as the surrounding communities within Palm Beach County. Gregory Picken and Pickenlaw.com is a North Palm Beach Estate Planning Lawyer, a Palm Beach Probate Attorney, a Probate Attorney in St. Lucie County, a Broward County Probate Attorney, a Palm Beach Gardens Estate Planning Attorney, and a North Palm Beach Wills and Trusts Lawyer. Picken Law Website by Square D Marketing

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professional_accounting

Business Economics Depreciation A delivery truck was acquired on January 1, 1998. The cash price of the truck was $142,400 and... A delivery truck was acquired on January 1, 1998. The cash price of the truck was $142,400 and $16,000 was spent preparing the truck for operation. During the first year of operations, the truck s oil was changed several times for a total cost of $1,000. The truck has an 8-year useful life and a $32,000 residual value; double-declining balance depreciation is being used. What is reported on the income statement as depreciation expense for the year ended December 31, 2000? What Is The Double Declining Depreciation Method: The Double Declining Depreciation Method is one of the acceptable depreciation methods under GAAP. Because the Double Declining Depreciation Method has a higher initial depreciation, it is best used for assets that give most of their economic benefits if the first few years of its existence. Step 1: The cost of the asset is: =142,400 +16,000 =$158,400 Step 2: The deprecation rate is: Step 3: The 2000 depreciation expense... Methods of Depreciation When completing financial reports, depreciation, or a loss in value, can be reported using three different methods: straight-line, double declining balance, and units of production. Learn to calculate depreciation using each of these methods. On January 1, 2015, Johnson Company purchased a delivery truck for $114,000 paying $13,000 cash and financing the rest with a 5 year, 5% note, with monthly payments of $1,910. (1) Prepare the journal entry for the purchase on January 1. (2) Prepare the j On January 1, 2015, Johnson Company purchased a delivery truck for $67,000, paying $6,000 cash and financing the rest with a 4 year, 5% note, with monthly payments of $1,405. Required: (1) Prepare the journal entry for the purchase on January 1. (2) Prepa On January 1, 2017, Xirt Company bought a new delivery truck for $30,000. Xirt plans to use the truck for 4 years, after which it expects the truck will be sold for $6,000. What depreciation expense should be recorded in 2019, the third year of use, using On May 1, 2012, Iris purchased a truck costing $16,000 and used it for personal activities. On January 1, 2013, the truck has a fair market value of $10,100 and Iris transfers the truck to her business, which is operated as a sole proprietorship. What is On December 31, 2018, Fine Company acquired a new delivery truck in exchange for an old delivery truck that it had acquired in 2012. The old truck was purchased for $70,000 and had a book value of $26,600. On the date of the exchange, the old truck had Oil Products Company purchases an oil tanker depot on January 1, 2014 at a cost of $645,600. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle t Oil Products Company purchases an oil tanker depot on January 1, 2014, at a cost of $645,600. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle Waco Company was started on January 1, 2011, when it issued common stock for $15,000 cash. Also on January 1, 2011, the company purchased office equipment that cost $15,000 cash. The equipment was delivered under terms of FOB shipping point, and the trans On January 1, 2012, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2014: a. The building was painted at a cost Vis-u-tek Company sold a delivery truck on April 1, 2013. Swann had acquired the truck on January 1, 2009, for $41,100. At acquisition, Vis-u-tek had estimated that the truck would have an estimated l Sandhill Co. had the following assets on January 1, 2017. During 2017, each of the assets was removed from service. The machinery was retired on January 1. The forklift was sold on June 30 for $11,040. The truck was discarded on December 31. Journalize Precision Construction entered into the following transactions during a recent year. January 2 Purchased a bulldozer for $266,000 by paying $28,000 cash and signing a $238,000 note due in five years January 3 Replaced the steel tracks on the bulldozer at June 22 The used company truck was traded in for a new truck. The cost of the used truck in $10,000.00 and on March 31, the end of the previous quarter, it had depreciated $7530 (at $60 per month). January 2 Purchased a bulldozer for $250,000 by paying $20,000 cash and signing a $230,000 note due in five years. January 3 Replaced the steel tracks on the bulldozer at a cost of $20,000, purchased Precision Construction entered into the following transactions during a recent year. January 2- Purchased a bulldozer for $288,000 by paying $39,000 cash and signing a $249,000 note due in five years On January 1, 2012, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2014: 1. Determine which of those costs shoul On January 1, 2014, Hansel Company purchased a truck. The company issued a note to the seller of the truck agreeing to pay $200,000 on December 31, 2017 (i.e. single large payment four years later). N On January 1, Jones Company acquired a new delivery truck for $40,000 cash. Additional cash payments during the year were as follows: Taxes and fees on delivery truck $3,200 Installation of the GPS system and painting of logo for truck $3,000 Auto and lia On December 2, 2011, Part Company, which operates a furniture rental business, traded in a used delivery truck with a carrying amount of $5,400 for a new delivery truck having a list price of $16,000 and paid a cash difference of $7,500 to the dealer. The On January 1, 2017, Waterway Corporation sold a building that cost $255,260 and that had accumulated depreciation of $102,770 on the date of sale. Waterway received as consideration a $245,260 non-int Racerback Company negotiates a lump-sum purchase of several assets from a contractor who is relocating. The purchase is completed on January 1, 2011, at a total cash price of $1,610,000 for a building, land, land improvements, and six trucks. The estimate The Hunter Company purchased a light truck on January 2, 2010 for $18,000. The truck, which will be used for deliveries, has the following characteristics: On January 2, Summers Company received a machine that the company had ordered with an invoice price of $102,000. Freight costs of $720 were paid by the vendor per the sales agreement. The company exchanged the following on January 2 to acquire the machine Golden Manufacturing Company started operations by acquiring $150,000 cash from the issue of common stock. On January 1, 2016, the company purchased equipment that cost $120,000 cash, had an expected On January 1, 2015, Johnson Company purchased a delivery truck for $67,000, paying $6,000 cash and financing the rest with a 4 year, 5% note, with monthly payments of $1,405. Complete the loan amortization schedule below for the payments made on February Veneable Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order. Debit 1. Cost of filling and grad On January 1, 2022, Jackson Company purchased a truck, a machine, and a small office building for $160,000. On the date of purchase, the market values of the three assets were: Long River Company had the following transactions during the month of January. 1. Paid $5,000 cash for supplies, of which $600 was used during January, and $4,400 will be used from February through April. 2. Paid $24,480 for salaries, one-half of which em Pam Corporation holds 70 percent ownership of Northern Enterprises. On December 31, 20X6, Northern paid Pam $31,000 for a truck that Pam had purchased for $36,000 on January 1, 20X2. The truck was considered to have a 20-year life from January 1, 20X2, an XYZ Company purchased a refrigerated delivery truck for $65,000 on January 1, 2015. The XYZ Company purchased a refrigerated delivery truck for $65,000 on January 1, On January 1, 2001, Bilbo company bought all the outstanding stock of Froto company at book value. On January 1, 2010 Bilbo company purchased a truck for $80,000. This truck is expected to last 9 year ON JANUARY 1, 2001 BILBO COMPANY BOUGHT ALL THE OUTSTANDING STOCK OF FROTO COMPANY AT BOOK VALUE. ON JANUARY 1, 2010 BILBO COMPANY PURCHASED A TRUCK FOR $80,000. THIS TRUCK IS EXPECTED TO LAST 9 YEARS Onslow Co. purchases a used machine for $240,000 cash on January 2 and readies it for use the next day at a $6,000 cost. On January 3, it is installed on a required operating platform costing $1,200, and it is further readied for operations. The company p Onslow Co. purchases a used machine for $240,000 cash on January 2 and readies it for use the next day at an $8,000 cost. On January 3, it is installed on a required operating platform costing $1,600, and it is further readied for operations. The company Onslow Co. purchases a used machine for $240,000 cash on January 2 and readies it for use the next day at a $10,000 cost. On January 3, it is installed on a required operating platform costing $2,000, and it is further readied for operations. The company Listed below are selected transactions of Jian Furniture Store for the current year ending December 31. 1. On December 1, the store purchased for cash two delivery trucks for $70,000. The trucks were Carrot Company was incorporated on January 1, 2015, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and e P Companys fiscal year runs from January to December 31. P Co.acquires and installs into operations a new truck on October 1, 2013 at a total cost of$360,000 and has an estimated useful life of four y Luke's Lubricants starts a business on January 1. The following operations data are available for January for the one lubricant it produces: Beginning inventory: 0 Gallons Started in January: 153,000 North Dakota Corporation began operations in January 2012 and purchased a machine for $20,000. North Dakota uses a straight-line depreciation over a four-year period for financial reporting purposes. Capital versus Revenue Expenditures On January 1, 2012, Jose Company purchased a building for $200.000 and a delivery truck for $20.000. The following expenditures have been incurred during 2014: The On January 1, Garcia Supply leased a truck for a three-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $12,000 due on December 31 of each y Huang Trucking Company was organized on January 1, 2014. At the end of the first quarter (three months) of operations, the owner prepared a summary of its activities as shown in the first row of the f Siesta Oil Co. uses the calendar year for financial reporting. In December 2011, the company drilled an exploratory well and paid $305,000 to the contractor. On January 20, 2012, the well was determined to be dry and was plugged at an additional cost of $ Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $40,000. Southern Atlantic plans to use straight-line depreciation over a four-year expected useful l Luke's Lubricants starts a business on January 1. The following operations data are available for January for the one lubricant it produces: Gallons Beginning Inventory 0 Started in January 900,000 E Jing Company was started on January 1, 2016, when it issued common stock for $45,000 cash. Also, on January 1, 2016, the company purchased office equipment that cost $18,500 cash. The equipment was delivered under terms FOB shipping point, and the transpo On January 1, 2008, Mike's Company purchased a machine. The seller quoted the price at $60,000. Cash was paid for installation $3,000 and transportation $2,000, and sales tax was $4,000. Give the entry so the acquisition can be recorded. Saturn Co. purchases a used machine for $167,000 cash on January 2 and readies it for use the next day at a $3,420 cost. On January 3, it is installed on a required operating platform costing $1,080, and it is further readied for operations. The compan North Dakota Corporation began operations in January 2015 and purchased a machine for $29,000. North Dakota uses straight-line depreciation over a four-year period for financial reporting purposes. Fo Onslow Co. purchases a used machine for $178,000 cash on January 2 and readies it for use the next day at a $2,840 cost. On January 3, it is installed on a required operating platform costing $1,160, On April 15, Compton Co. paid $2,800 to upgrade a delivery truck and $125 for an oil change. Journalize the entries for the upgrade to delivery truck and oil change expenditures. Bensen Company began operations when it acquired $27,100 cash from the issue of common stock on January 1, 2018. The cash acquired was immediately used to purchase equipment for $27,100 that had a $4, The Sellers Company began business on January 1, 2014. The company's year-end is December 31. The following events occurred during the first year of operations: Apr. 1 Acquired a building by borrowing $400,000. Depreciation expense per year is $18,000. Th On January 1, 2015, Johnson Company purchased a delivery truck for $114,000 paying $13,000 cash and financing the rest with a 5 year, 5% note, with monthly payments of $1,910. Required: Complete the loan amortization schedule below for the payments on Feb EZ Delivery Service records the following information for its delivery truck in 2014: Month Miles Driven Truck Operating Costs January 15,800 $5,460 February 17,300 $5,748 March 14,600 $4,935 April 16,000 $5,310 May 17,100 $5,830 June 15,400 $5,420 July 1 Onslow Co. purchases a used machine for $240,000 cash on January 2 and readies it for use the next day at an $8,000 cost. On January 3, it is installed on a required operating platform costing $1,600, Onslow Co. purchases a used machine for $288,000 cash on January 2 and readies it for use the next day at a $10,000 cost. On January 3, it is installed on a required operating platform costing $2,000, Onslow Co. purchases a used machine for $240,000 cash on January 2 and readies it for use the next day at an $10,000 cost. On January 3, it is installed on a required operating platform costing $2,000 Onslow Co. purchases a used machine for $240,000 cash on January 2nd and readies it for use the next day at an $8,000 cost. On January 3, it is installed on a required operating platform costing $1,60 Selected transactions completed by Kornett Company during its first fiscal year ended December 31, 2014, were as follows: 1. Journalize the selected transactions. Assume 360 days per year. January 3 On January 1, 2015, the City of Verga leased a large truck for five years and made the initial annual payment of $21,500 immediately. The present value of these five payments based on an 7 percent int Palmona Co. establishes a $140 petty cash fund on January 1. On January 8, the fund shows $33 in cash along with receipts for the following expenditures: postage, $46; transportation-in, $12; delivery Yellow Cab Co. began operations on January 2, 2010. It employs 15 drivers who work 8-hour days. Each employee earns 10 paid vacation days annually. Vacation days may be taken after January 10 of the year following the year in which they are earned. The av Saturn Co. purchases a used machine for $167,000 cash on January 2 and readies it for use the next day at a $3,420 cost. On January 3, it is installed on a required operating platform costing $1,080, and it is further readied for operations. The compa Palmona Co. establishes a $260 petty cash fund on January 1. On January 8, the fund shows $155 in cash along with receipts for the following expenditures: postage, $47; transportation-in, $10; deliver Redneck Roofers Co. is a small shingle roofing business that began operations on January 2, 2012. The following are some of the transactions that occurred during the first several years of operation. Seger Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order, Cost of real estate purch Southern Atlantic Distributors began operations in January 2013, and purchased a delivery truck for $100,000. Southern Atlantic plans to use straight-line depreciation, over a four-year expected usefu On January 1 of this year, Shannon Company completed the following transactions (assume a 8% annual interest rate): (FV of $1, PV of $1, FVA of $1, and PVA of $1) a. Bought a delivery truck and agreed On January 1 of this year, Shannon Company completed the following transactions (assume a 9% annual interest rate): (FV of $1, PV of $1, FVA of $1, and PVA of $1) a. Bought a delivery truck and agree Following are the transactions of Dennen, Inc., for the month of January 2015. a. Borrowed $22,000 from a local bank. b. Lent $14,900 to an affiliate; accepted a note due in one year. c. Sold 60 addit On January 2, Well Corporation sold merchandise with a gross price of $140,000 to Priority Corporation with terms of 2/10, n/30. How much sales discounts would be recorded if payment was received on January 8? a. $2,800 b. $0 c. $137,200 d. $140,000 DND Company was started on January 1, 2009. The company incurred the following transactions during the year. (Assume all transactions are for cash unless otherwise indicated.) 1. Acquired $2,500 by issuing common stock. 2. Purchased $700 of direct raw m Saturn Co. purchases a used machine for $167,000 cash on January 2 and readies it for use the next day at a $3,420 cost. On January 3, it is installed on a required operating platform costing $1,080, and it is further readied for operations. The company p Saturn Co. purchases a used machine for $167,000 cash on January 2 and readies it for use the next day at a $3,420 cost. On January 3, it is installed on a required operating platform costing $1,080, and it is further readied for operations. The company Southern Atlantic Distributors began operations in January 2016 and purchased a delivery truck for $120,000. Southern Atlantic plans to use straight-line depreciation over a four-year expected useful Sam's Subs purchased a delivery van on January 1, 2014, for $29,500. In addition, Sam's paid sales tax and title fees of $1,110 for the van. The van is expected to have a four-year life and a salvage Sam's Subs purchased a delivery van on January 1. 2014, for $29,800. In addition Sam's paid sales tax and title fees of $1,020 for the van. The van is expected to have a four-year life and a salvage v On January 1, Espinoza Moving and Storage leased a truck for a four-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $10,000 due on Decembe On January 1, Year 1, Prairie Enterprises purchased a parcel of land for $11,000 cash. At the time of purchase, the company planned to use the land for a warehouse site. In Year 3, Prairie Enterprise

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professional_accounting

Din Branche Automobil og mobilitet Mode og luksusvarer Financielle tjenesteydelser Højteknologi og medier Detail og e-handel Forsyning og offentlige sektorer Rejse og fritid Vores Løsninger Kommerciel assistance Rådgivningsydelser Analyser & Managed services it-løsninger Sundhedstjenester Erhvervstjenester Regulerede & KYC-tjenester Vores kultur Risk management and internal control procedures Risk management and internal control definition and objectives Definition of internal control Webhelp group has adopted the definition set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013): Internal Control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, and compliance. The system that has been defined and implemented within Webhelp specifically aims to ensure: Control Environment: standards, processes, and structures that provide the basis for carrying out internal control across the organization Risk assessment: iterative process for identifying and analyzing risks to achieving the entity’s objectives Control activities: policies and procedures to help ensure that management directives to mitigate risks to the achievement of objectives are carried out Information and communication: to understand internal control responsibilities and their importance to the achievement of objectives Monitoring activities: evaluations to ascertain whether each of the five components of internal control are present and functioning Internal control and risk management The internal control system relies on the risk management system to identify the main risks that need to be controlled. The risk management system includes controls that are part of the internal control system. Risk management and internal control system components Control environment, values and Code of Conduct The control environment is a fundamental component of risk management and internal control systems and forms the common basis of the systems. Webhelp values The Group’s internal control system is based on five core values: Recognition, Integrity, Unity, Commitment and Way of Working (WOW). These values infuse the Group’s leadership strategy and form the key value charter for our employees and our subsidiaries. The Group’s values are brought to the attention of all Webhelp personnel. It places great emphasis on its managers’ ability to live up to these values daily. Webhelp’s Code of conduct is a fundamental reference in terms of ethics, social, and environmental responsibility and in terms of financial and legal compliance. The management is responsible for ensuring that the Code is strictly and consistently respected across the Group. Organization and responsibilities The Executive Committee’s role mainly consists in validating strategic decisions and policies. Members of the Executive committee are in charge of implementing decisions taken. For instance, the Executive Committee oversees the development and monitoring of policies that enable the Group to attain its various objectives in terms of global growth, technological decisions, the implementation of identical operating procedures for the entire network, as well as development of human resources. The Global Management Committee holds regular meetings to implement, deploy and monitor Executive Committee’s decisions. Group management and the Information Systems Department determine the Group’s strategic directions for production tools and information systems for subsidiaries. They ensure that the development of information systems is consistent with Group objectives. The Information Systems Department also issues directives on security, data protection and business continuity. These directives are based on compliance with international standards, ISO 27001, PCI (Payment Card Industry) and the European Data Protection Regulation (GDPR) in coordination with the Legal and Compliance department in order to satisfy regulatory requirements specific to each business sector or to obtain the certifications requested by clients. Management and industry procedures The internal control system also depends on subsidiaries implementing the “WOW” (Way Of Working) operating model. It defines a homogeneous vision of the way Webhelp does business: a consistent global framework tailored locally to country culture and client needs. The Group has been developing the use of this methodology, providing training for all its managers, to develop a common language grounded in the notions of measurement, analysis and control. The implementation and application of these procedures and standards enable the Group to make its global network more internally consistent, while providing greater control over our operations. Risk management system In the operation of its business, the Group is exposed to a variety of risks that could affect the Company’s personnel, assets, environment, objectives or reputation. Risk management is a lever for anticipating the main potential threats to Webhelp, whether internal or external, in order to preserve its value, assets and reputation, help it achieve its targets, ensure that actions taken are consistent with Group values and rally employees in support of a shared vision of key risks. Organizational framework Group management is particularly vigilant when implementing the measures and procedures necessary to manage our business and prevent risks, according to Webhelp’s objectives and strategy. The Group is currently strengthening a monitoring process regarding the management controls to be adopted with respect to the analysis of these risks. Process and control A first risk mapping exercise was conducted in order to identify and analyse Wehbelp’s major risks & measures that can be used to limit their consequences. A follow-up of this risk assessment exercise will be made in the future and supervised by the Board. Control activities Centralized control procedures The internal control procedures centralized at headquarters cover areas common to all companies within the Group. These procedures involve in particular finance, legal, IT. Financial procedures Group’s central finance and accounting department includes Group financial control, Consolidation & Cash, and Global Performance. The Group’s finance department is headed and managed by a central team based in Paris, with decentralized and autonomous financial teams within each cluster. Group’s financial information is prepared and monitored using key software applications. A reporting on the Key figures is communicated on a monthly basis through a bottom up approach, followed by a top down review to confirm the reliability on the financial data. The consolidation tool is common to all Group’s subsidiaries. The profitability per project as well as the costs of the different functions are monitored on a monthly basis, and this management reporting is aligned with the consolidation every month. The Group consolidated financial statements are prepared in accordance with IFRS. Statutory accounts and consolidated accounts are prepared on a monthly basis (an accounting handbook written by the Group Financial Department and communicated all over Webhelp ensures the compliance with IFRS and the consistency of the consolidated financial data). Year-end consolidated financial statements are consolidated and audited. The Group prepares quarterly reporting for its financing banks, as required by its financing agreements. Management also issues a more complete and comprehensive report at financial year ends. The reporting pack reports on key financial statement items and aggregates. The Group has a policy for managing foreign exchange and interest rate risks, which aims to limit these risks, preserve sales margins and control interest charges. Legal procedures As part of its responsibilities, the Group Legal and Compliance Department oversees the Group’s compliance with applicable laws and regulations in the countries where it operates, through its local network of lawyers. It also plays a central role in monitoring changes in laws and regulations and advising the various Group entities. The Group Legal Department is centralized and headed in the Paris headquarters. It initiates Group policies in the areas of Group compliance, business ethics, regulatory requirements and data protection. The network of local inhouse lawyers is in charge of deploying the policies in their relevant region as well as monitoring additional local requirements. The Group Legal and Compliance Department has issued the Code of Conduct and related trainings. The Code of Conduct is regularly updated and is completed by several procedures in the compliance matters. IT and security procedures The Group has streamlined its security technology to reflect best market practices and to introduce the technology required contractually by its clients or pursuant to applicable regulations. This technology aims to reduce the introduction of malware, protect personal data and detect and prevent intrusions. All personal data is collected and processed in accordance with applicable laws and the Group’s Policies applicable at each Webhelp site, both from a Controller and a Processor responsibility point of view, specifically designed to prevent potential acts of fraud or breaches of security standards. The third-party certifications requested by clients and audits conducted by clients also serve as a guarantee that the application of strict control procedures will be verified in order to ensure compliance with security and/or quality standards and processes. The Group has a policy of internally releasing all relevant financial or operating information enabling employees to perform their job. The Group relies on several internal communication systems (WISE, Teams) to be sharing all policies and practices within the relevant teams. Group information and procedures are also regularly communicated to the managers of all subsidiaries at international seminars or presentations. These rules are also reiterated at Company Board meetings. Subsidiary executives are expected to communicate instructions from Group management to their employees. The heads of corporate support departments (Finance, IT, HR, Legal) also inform their teams of specialized personnel at meetings and training sessions. Oversight of the internal control system Group senior management The Executive Committee monitors the internal control system to ensure that the system is relevant and suited to the Group’s objectives. This includes regular reviews on the part of management and supervisory staff. It falls within the scope of their day-to-day activities and ensures that each organizational process is consistent with the Group’s vision and strategy. As part of the monitoring, internal audits are performed with the assistance of an external audit firm. Those audits aim at ensuring that internal rules are known, and internal control is consistent within the Group. In 2019, audits have been conducted in subsidiaries in South Africa, Turkey, Italy, Czech Republic and Morocco. Vi vil meget gerne hjælpe dig. Har du lyst til at arbejde sammen eller bare sige hej? Send os en besked Forretningsløsninger Medier og analytikere kontakt Besøg venligst vores websted om karrierer Her kan du se vores aktuelle liste over jobmuligheder eller klikke her for at komme i kontakt med vores rekrutteringsteam. 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professional_accounting

Noah Education Announces Unaudited Third Quarter Fiscal Year 2011 Financial Results Noah Education Holdings Ltd. Education services revenue rose 115.5% year-over-year to RMB23.1 million, exceeding guidance Education services net income rose 158.2% year-over-year SHENZHEN, China, May 13, 2011 /PRNewswire-Asia-FirstCall/ -- Noah Education Holdings Ltd. (NYSE: NED) ("Noah" or "the Company"), a leading provider of education services in China, today announced its unaudited financial results for the third quarter ended March 31, 2011. Third Quarter Fiscal 2011 Financial Highlights On March 31, 2011, Noah entered into a definitive agreement to sell its Electronic Learning Product ("ELP") business and operating assets ("discontinued operations"). As a result, the Company adopted the following accounting policy in relation to the discontinued business: Profits and losses relating to the ELP business are presented as discontinued operations, while profits and losses for the remaining business are presented as continuing operations The assets and liabilities of the discontinued operations are classified as assets/liabilities held-for-sale on the face of the balance sheet Net revenue for the quarter decreased by 71.3% to RMB72.7 million (US$11.1 million), compared with RMB253.7 million in the third quarter of fiscal 2010 Net revenue from the education services business was RMB23.1 million (US$3.5 million), a 115.5% increase compared with RMB10.7 million in the third quarter of fiscal 2010 Net revenue from the ELP business was RMB49.6 million (US$7.6 million), a 79.6% decrease from RMB242.9 million in the third quarter of fiscal 2010 Total operating loss was RMB43.3 million (US$6.6 million), compared with operating income of RMB32.9 million in the third quarter of fiscal 2010 Operating loss from continuing operations was RMB6.0 million (US$0.9 million) Operating loss from discontinued operations was RMB37.3 million (US$5.7 million) Net loss was RMB290.9 million (US$44.4 million) compared with net income of RMB36.0 million in the third quarter of fiscal 2010 Net loss from discontinued operations (ELP business) was RMB293.2 million (US$44.8 million), which included an impairment loss of RMB 221.7 million relating to the sale of the ELP business Net income from continuing operations was RMB2.3 million (US$0.3 million) Basic and diluted losses per share were RMB8.04 (US$1.23), compared with basic and diluted earnings per share of RMB0.94 and RMB0.92 respectively for the third quarter of fiscal 2010. Non-GAAP basic and diluted losses per share, excluding share-based compensation expenses, were RMB7.99 (US$1.22), compared with basic and diluted earnings per share of RMB1.00 and RMB0.98 respectively for the third quarter of fiscal 2010 Basic and diluted earnings per share from continuing operations for the third fiscal quarter were RMB0.04 (US$0.01), impacted by legal and financial advisory fees relating to the sale of the ELP business. Excluding these fees, pro-forma basic and diluted earnings per share for the third fiscal quarter were RMB0.10 (US$0.02) Basic and diluted losses per share from discontinued operations for the third fiscal quarter were RMB8.07 (US$1.23) Commenting on the results, Mr. Jerry He, Noah's Chief Executive Officer ("CEO"), said, "Our education services business continued to enjoy profitable growth during the third fiscal quarter, with 115.5% top-line expansion translating into 158.2% net income growth. This quarter, we benefitted from an increased contribution from Wentai Education as the attractive margin profile of this business enabled our bottom line to outpace revenue growth. As we continue to expand the Wentai brand, we look forward to building on this trend of profitable growth within the education services space. "This quarter, we further executed on our objective of acquisitive growth by entering into a definitive agreement to acquire an 80% interest in Yuanbo Education. Operating under the Qingan brand name, Yuanbo's 16 kindergartens in the affluent Yangtze Delta region offer world-class courses and are an ideal complement to Wentai Education's portfolio of schools. Yuanbo has built an impressive track record since its establishment in 2001 and we are confident that the fresh capital from this acquisition, coupled with Noah's extensive experience in the education services sector, will facilitate the ongoing growth of this brand and make it earnings accretive in our fiscal year 2012. "As we shift our focus to the education services space, we remain on track with the sale of our ELP business. In April, we received the first installment payment and expect the deal to close by the end of May 2011. The sale of this business will enable us to better conserve cash and further strengthen our balance sheet and afford us the financial flexibility to continue investing in our future growth. As a result of our stringent cash flow control, our cash flow from operations was RMB 9.8 million despite the loss incurred from the ELP business. "With a business structure that allows us to concentrate exclusively on our more stable and higher-margin education services segment, we are in the process of assembling a dedicated management team with relevant experience in the education services segment to ensure we execute on this initiative and capitalize on the robust growth opportunities. "Looking ahead, our growth remains on track. The four Wentai kindergartens that were under conversion during the third fiscal quarter are due to contribute to revenue in the quarter ended June 2011, three new schools or kindergartens are scheduled to open by September 2011, and contracts have been signed to open three kindergartens and one school in 2012. The US$75 million cash, cash equivalents and short-term investments on our balance sheet at the end of March stands us in good stead to continue our organic and acquisitive growth. As we progress through this transitional period, we anticipate revenue in the range of RMB24.5 million – RMB26 million during the fourth fiscal quarter from Little New Star and Wentai Education, which constitute our existing education services portfolio." Third Quarter Fiscal 2011 Unaudited Financial Results The following table provides selected financial results for Noah's ELP and education services businesses RMB million (except Gross margin) Q3FY11 ELP Business R&D expenses S&M expenses G&A expenses – discontinued operation G&A expenses – continued operation Operating income/(loss) – discontinued operation Operating income/(loss) – continued operation (12.2)* Impairment loss on assets held for sale Net income – discontinued operation Net income(loss) – continued operation Net Revenue. Net revenue from Noah's traditional ELP business was RMB49.6 million (US$7.6 million), representing a 79.6% decrease from RMB242.9 million in the same period of the previous fiscal year. Net revenue from the education services business was RMB23.1 million (US$3.5 million), a 115.5% increase compared with the third quarter of fiscal 2010. Net revenue from the Little New Star ("LNS") business was RMB10.3 million (US$1.6 million), a 4.1% decrease compared with RMB10.7 million for the third quarter of fiscal 2010, due to lower sales of teaching materials. Net revenue from Shenzhen Wentai Education Industry Development Co., Ltd ("Wentai Education") was RMB12.8 million (US$2.0 million). The following table provides a breakdown of sales volume and net revenue for Noah's traditional ELP business in the third quarter of fiscal year 2011: Net Revenue (RMBm ) Inc/(Dec) (%) E-dictionary Gross Profit and Gross Margin. Gross profit in the third quarter of fiscal 2011 was RMB23.9 million (US$3.7 million), an 80.8% decrease compared with gross profit of RMB124.3 million in the third quarter of fiscal 2010. The gross margin for the third quarter of fiscal 2011 was 33.0%. Gross margin for the traditional ELP business was 23.1%, compared with 49.0% in the third quarter of fiscal 2010. The decrease in ELP gross profit margin was primarily due to a reduction in ELP selling prices amid strong market competition, as well as pricing policies designed to reduce inventory to appropriate levels. The gross margin for the education services business was 54.1%, compared with 49.5% in the same quarter of fiscal 2010. Operating Expenses. Total operating expenses for the third quarter of fiscal 2011 were RMB71.9 million (US$11.0 million), representing a 34.0% decrease from RMB108.9 million in the third quarter of fiscal 2010. Research and development ("R&D") expenses for the third quarter of fiscal 2011 were RMB10.8 million (US$1.7 million), representing a 20.1% decrease from RMB13.5 million in the third quarter of fiscal 2010. The total decrease in R&D expenses was mainly attributable to lower expenses relating to product development and third party software and content development. Sales and marketing expenses for the third quarter of fiscal 2011 were RMB36.0 million (US$5.5 million), a 50.8% decrease from RMB73.2 million in the third quarter of fiscal 2010, mainly reflecting lower expenditure on advertising and marketing. General and administrative ("G&A") expenses for the third quarter of fiscal 2011 totaled RMB25.1 million (US$3.8 million), a 14.1% increase from RMB22.0 million in the third quarter of fiscal 2010. The increase in G&A expenses was mainly attributable to the incremental expenses arising from Wentai Education, which was not consolidated in the third quarter of fiscal 2010. Loss from Operations. Operating loss for the third quarter of fiscal 2011 was RMB43.3 million (US$6.6 million), compared to operating income of RMB33.0 million in the third quarter of fiscal 2010. Operating loss from continuing operations was RMB6.0 million (US$0.9 million), and operating loss from discontinued operations was RMB37.3 million (US$5.7 million). Impairment Loss on Assets Held for Sale. As of March 31, 2011, the carrying value of assets held for sale and liabilities held for sale amounted to RMB388.6 million (US$59.3 million) and RMB66.9 million (US$10.2 million) respectively. Based on the definitive agreement signed by the Company and First Win Technologies Ltd. dated March 31, 2011, the consideration of the disposal is RMB100 million and the closing is currently expected to occur by the end of May 2011. As such, the Company recognized an impairment loss on assets held for sale of RMB221.7 million (US$33.9 million) during the third quarter of fiscal 2011. The impairment loss on assets held for sale includes an impairment loss on trade receivables of RMB140.3 million (US$21.4 million) and inventories of RMB81.4 million (US$12.4 million), and represents the difference between the fair value of assets held for sale and their carrying amount. Other Income, Net. Interest income was RMB0.23 million (US$0.04 million) in the third quarter of fiscal 2011. Investment income was RMB2.6 million (US$0.4 million) in the third quarter of fiscal 2011. Other non-operating income was RMB7.3 million (US$1.1 million) in the third quarter of fiscal 2011. Other non-operating income includes RMB6.9 million (US$1.1 million) from foreign exchange gains in the third quarter of fiscal 2011, primarily due to the impact of the U.S dollar depreciation on intercompany loans. Income Tax Expenses. The Company reported income tax expenses of RMB36.0 million (US$5.5 million). Total tax expenses include accrued withholding tax liabilities of RMB32.1 million (US$4.9 million) relating to the discontinued ELP operation as a result of the waiver of intercompany balances from the discontinued ELP operation due to the Company. Net Loss. The Company reported a net loss of RMB290.9 million (US$44.4 million), or a loss of RMB8.04 (US$1.23) per basic and diluted share, for the third quarter of fiscal 2011. This compares with net income of RMB36.0 million, or RMB0.94 and RMB0.92 per basic and diluted share respectively, for the third quarter of fiscal 2010. Net loss excluding share-based compensation expenses (non-GAAP) for the third fiscal quarter ended March 31, 2011 amounted to RMB289.3 million (US$44.2 million), or losses of RMB7.99 (US$1.22) per basic and diluted share. Liquidity. As of March 31, 2011, Noah had cash, cash equivalents and short-term investments of RMB491.2 million (US$75.0 million). This compares with cash, cash equivalents, short-term deposits and short-term investments of RMB495.7 million as of December 31, 2010. Business and Operational Highlights ELP Business Sale On April 1, 2011, Noah announced that it had entered into a definitive agreement to sell its ELP business and operating assets to First Win Technologies Ltd., a company wholly owned by Mr. Benguo Tang, one of Noah's founders and the former President and Chief Operating Officer of the Company, for the U.S. dollar equivalent of RMB100 million. The Company received the initial installment of the U.S. dollar equivalent of RMB40 million on April 12, 2011. The closing is currently expected to occur by the end of May 2011. The final financial impact is subject to certain adjustments upon closing. The sale of the ELP business will enable Noah to focus more attention on pursuing growth opportunities in the more stable and higher-margin education services space. Concurrently with its April 1, 2011 announcement regarding the sale of the ELP business, the Company announced the election of Chief Financial Officer ("CFO") Jerry He as a member of the Board and his appointment as CEO, effective April 1, 2011. Mr. He took over the position from Mr. Dong Xu, who now combines his role as Chairman with the post of Chief Strategy Officer. Dora Li was simultaneously appointed interim CFO, in recognition of her successful track record in senior finance roles since joining Noah in 2007. Acquisition of Yuanbo Education On April 13, 2011, Noah entered into a definitive agreement to acquire an 80% interest in Shanghai Yuanbo Education Information and Consulting Corporation Ltd. ("Yuanbo Education"), a company focused on early childhood education services in the Yangtze Delta region, for a total consideration of RMB102.4 million to be funded by the Company's current cash reserve. The transaction is expected to close by July 1, 2011. Yuanbo Education operates 16 kindergartens in the economically developed and prosperous Yangtze Delta region under the brand name Qingan. Its management team, which has successfully grown the company since its establishment in 2001, will retain a 20% stake in Yuanbo Education. Of the RMB102.4 million investment, RMB50 million will be used for expansion. With revenue of RMB35 million in 2010 for Yuanbo Education, the acquisition is expected to be accretive to Noah's earnings in the fiscal year ending June 30, 2012. Financial Outlook for Fourth Quarter and Full Year Fiscal 2011 Based on current estimates and market conditions, Noah expects to generate in the range of RMB24.5 million (US$3.7 million) to RMB26 million (US$4.0 million) in revenue from education services for the fourth quarter of fiscal 2011. For the full fiscal year 2011, Noah expects to generate education services revenue between RMB88.5 million (US$13.5 million) and RMB90 million (US$13.7 million). This forecast reflects Noah's current and preliminary view, which is subject to change. Noah's senior management will host a conference call at 8:00 a.m. (Eastern) / 5:00 a.m. (Pacific) / 8:00 p.m. (China) on Friday, May 13 to discuss its third quarter fiscal 2011 financial results and recent business activities. The conference call may be accessed by calling: China -- South China Telecom -- South China Netcom -- North China Telecom Pass code "Noah Education" or "Noah" or "NED" Please dial in 10 minutes before the call is scheduled to begin. A telephone replay will be available shortly after the call until May 20, 2011 by dialing the following numbers: International Dial In A live webcast and replay will be available on the investor relations page of Noah's website at http://ir.noahedu.com.cn. Statement Regarding Unaudited Financial Information The unaudited financial information set forth above is subject to adjustments that may be identified when audit work is performed on our year-end financial statements, which could result in significant differences from this unaudited financial information. Currency Convenience Translation For the convenience of readers, certain RMB amounts have been translated into US dollars at the rate of RMB6.5483 to US$1.00, the noon buying rate for US dollars in effect on March 31, 2011 for cable transfers of RMB per US dollar as certified for customs purposes by the Federal Reserve Bank of New York. In addition to consolidated financial results under GAAP, the Company also provides non-GAAP financial measures, including non-GAAP net income which excludes non-cash share-based compensation. The Company believes that the non-GAAP financial measures provide investors with another method for assessing the Company's operating results in a manner that is focused on the performance of its ongoing operations. Readers are cautioned not to view non-GAAP results on a stand-alone basis or as a substitute for results under GAAP, or as being comparable to results reported or forecasted by other companies. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the performance of the Company's liquidity and when planning and forecasting future periods. About Noah Education Holdings Ltd. Noah is a leading provider of education services in China. The Company's brands include Wentai Education, which operates and manages high-end kindergartens, primary and secondary schools, and Little New Star, which provides English language training for children aged 3-19 in its directly owned and franchised training centers. Noah was founded in 2004 and is listed on the New York Stock Exchange under the ticker symbol NED. For more information about Noah, please visit http://www.noahedu.com.cn. This press release contains forward-looking statements that reflect Noah's current expectations and views of future events that involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Noah has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. You should understand that our actual future results may be materially different from and worse than what Noah expects. Information regarding these risks, uncertainties and other factors is included in Noah's most recent Annual Report on Form 20-F and other filings with the SEC. Lea Wu Tel: +86 (755) 8204 3194 Email: [email protected] Kelly Gawlik Taylor Rafferty Email: [email protected] Investor Relations (Hong Kong) Mahmoud Siddig – FINANCIAL TABLES FOLLOW– Consolidated Statements of Operations Nine months ended Net revenue Gross profit（loss) Research & development expenses Sales & marketing expenses General and administrative expenses Other operating income Other Non-Operating income Income tax (expenses) credit Net income (loss) from continuing operations less: Net income attributable to non-controlling interest Net income attributable to controlling interest from continuing operations Income/(Loss) from discontinued operation before income tax (including impairment loss on assets held for sale of RMB221,680,403) Loss from discontinued operations Net income per share from continued operation Net income per share from discontinued operation Weighted average ordinary shares outstanding Consolidated Balance Sheet Held to maturity investment Accounts receivables, net of allowance Related party receivables Prepaid expenses, and other current assets Assets held for sale (note) Deposit for investment Deferred tax asset Liabilities and Shareholders' Equity Accountants payable (including account payables of the consolidated VIEs without recourse to Noah of RM70,807 as of March 31, 2011) Other payables and accruals (including other payables, accruals of the consolidated VIEs without recourse to Noah of RMB13,605,141 as of March 31, 2011) Advances from customers Income tax payable (including income tax payables of the consolidated VIEs without recourse to Noah of RMB1,700,223 as of March 31, 2011) Deferred revenue (including deferred revenue of the consolidated VIEs without recourse to Noah of RMB16,333,258 as of March 31, 2011) Liabilities held for sale (note) Deferred revenues-non current Total non-current liabilities Shareholders' Equity Ordinary shares Total shareholders' equity Total liabilities and shareholders' equity Net Assets classified as held for sale as of March 31, 2011 Accounts Receivables (net of allowance) Property, plant and equipment, (net) Intangible assets(net) Account Payables Advances from customer Other payables and accruals Reconciliation of Non-GAAP to GAAP % of Rev GAAP net revenue GAAP gross profit (loss) Share-based compensation Non-GAAP gross profit GAAP operating income (loss) Non-GAAP operating income(loss) GAAP net income(loss) Non-GAAP net income GAAP net income(loss) per share -continuing operations Non-GAAP net income(loss) per share – continuing operation Note: This reconciliation is for illustration purpose to compare GAAP and Non-GAAP performance for the continuing operations Consolidated Cash Flow Statements For Three Months Ended For Nine Months Ended Net income (loss) Adjustments to reconcile net income (loss) Depreciation of PPE Write down of inventories Share-based compensation expense Unrealized loss on trading investments Realized gain on trading investments Unrealized Exchange difference Impairment loss on long term investment Changes in current assets & liab Trading investments Prepaid and others Operating cash from continued operation Operating cash from discontinued operation Total operating cash flow Acquisition of PPE Acquisition of Intangible assets Acquisition of LNS Acquisition of Wentai Repayment of deposit for investment Deposits for acquisition of kindergartens in Wentai (Increase) Decrease in short-term fixed deposits Decrease in short-term investments (held-to-maturity investment) Increase in long-term investment (Franklin) Decrease in AFS short-term investment Investing cash flow from continued operation -19,391,957 Investing cash flow from discontinued operation Total investing cash flow Dividend paid to minority shareholders Proceed from exercise of employee share options Shares repurchases Repayment of short-term borrowing of LNS Financing cash flow from continued operation Financing cash flow from discontinued operation Total financing cash flow Effect of exchange rate changes on cash Net increase (decrease) in cash from continued operation Net increase (decrease) in cash from discontinued operation Cash and cash equivalents at beginning of yr Cash and cash equivalents at end of yr Source: Noah Education Holdings Ltd. NYSE:NED Keywords: Banking/Financial Service Education Noah Education Holdings Ltd. Announces Completion of Merger Noah Education Holdings Ltd. Announces Shareholders' Approval of Merger Agreement Noah Education Holdings Ltd. Announces Extraordinary General Meeting of Shareholders Noah Education Holdings Ltd. Enters into Definitive Merger Agreement for Going Private Transaction Noah Education Announces Unaudited Second Quarter 2014 Results Noah to Announce Second Quarter Fiscal 2014 Unaudited Financial Results on Wednesday, February 26, 2014 TAL Education Group Announces Changes to Board of Directors Xinyuan Real Estate Announces New Bond Repurchase Program

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professional_accounting

Bombardier Reports Third Quarter 2018 Results, Announces Sale of Non-Core Assets and Strategic Actions to Streamline the Company and Drive Productivity Earnings(1) up 48% year over year to $271M on $3.6B revenues Free cash flow usage(2) improved by $125M, 25% year over year ~$900M net proceeds expected mainly from the sale of non-core assets: Q Series program and Business Aircraft’s flight and technical training activities(3) Global 7500(4) certified by Transport Canada and the FAA; on track for entry into service before year end Enterprise-wide productivity initiatives launched, expected to generate $250M in annual recurring savings by 2021(3) 2018 guidance(3) updated: Revenues ~$16.5B; EBIT(1) ~$1B; and free cash flow(2) breakeven ±$150M, including net proceeds from Downsview sale 2019 guidance(3) provided: Revenues targeted to grow by ~10%; EBIT(1) targeted to increase by ~20% with improved cash generation MONTRÉAL, Nov. 08, 2018 (GLOBE NEWSWIRE) -- Bombardier (BBD-B.TO) today reported its third quarter 2018 results marked by strong earnings growth. The Company also announced a number of strategic actions, including the launch of an enterprise-wide productivity program. This program is expected to generate annual savings of $250 million at full run rate, which we expect by 2021. Bombardier reached definitive agreements for the sale of non-core assets and the monetization of royalties, which is expected to generate approximately $900 million in net proceeds, increasing financial flexibility as the Company approaches the final – deleveraging – phase of its turnaround plan. Other highlights in the quarter include the certification of the Global 7500 business jet, paving the way for the aircraft’s entry into service in December 2018, and marking the end of the Company’s heavy investment cycle. “With our heavy investment cycle now completed, we continue to make solid progress executing our turnaround plan,” said Alain Bellemare, President and Chief Executive Officer, Bombardier Inc. “With today’s announcements we have set in motion the next round of actions necessary to unleash the full potential of the Bombardier portfolio. During the earnings and cash flow building phase of our turnaround, we will continue to be proactive in focusing and streamlining the organization, and disciplined in the allocation of capital. I am very proud of what we have accomplished, and very excited about our future.” For the quarter, Bombardier’s revenues reached $3.6 billion, representing 3% organic growth year over year, from Transportation, Business Aircraft and Aerostructures, as the Company deconsolidated revenues from the C Series program following the closing of the Airbus partnership. For the full year, Bombardier expects revenues of approximately $16.5 billion, at the low end of its guidance range. The Company delivered strong profitability in the third quarter, achieving its best quarterly performance in years. EBIT before special items(2) grew 48% year over year to $271 million, and the Company remains on track to reach the top end of its guidance for the full year of approximately $1.0 billion. Over the same period, EBIT margin before special items(2) increased by 260 basis points to 7.4%, as margins(5) continued to trend above 8% at Transportation, Business Aircraft and Aerostructures. At Commercial Aircraft, EBIT before special items was near the breakeven point due to the deconsolidation of C Series losses net of the associated equity pick-up. Free cash flow usage for the quarter was $370 million, an improvement of 25% year over year. Cash usage in the third quarter was driven by working capital build-up at Transportation, as the Company continues to work through the intense delivery phase. This will carry through the fourth quarter, and is targeted to largely recover in 2019. As a result, Bombardier is adjusting its free cash flow guidance for 2018 to include the Downsview proceeds. With this, the Company still expects reported free cash flow for the full year to be breakeven plus or minus $150 million. Focusing the Portfolio, Divesting Non-Core Assets Bombardier also announced today the sale of a number of non-core assets, in line with its strategy of focusing on growth opportunities in its Transportation, Business Aircraft and Aerostructures segments. The Company entered into definitive agreements for (i) the sale of the Q Series aircraft program and de Havilland trademark to a wholly owned subsidiary of Longview Aviation Capital Corp. for approximately $300 million; and (ii) the sale of Business Aircraft’s flight and technical training activities to CAE and the monetization of royalties for approximately $800 million. Both transactions are expected to close by the second half of 2019, following the usual regulatory approvals. Net proceeds from the transactions are expected to be approximately $900 million after the assumption of certain liabilities, fees, and closing adjustments. Streamlining the Organization Bombardier also launched a new enterprise-wide productivity program to further streamline, lean out and simplify the Company. The initiative includes two actions. First, with the heavy aerospace investment phase successfully completed, Bombardier will right-size and redeploy its central aerospace engineering team. Key engineering team members will be redeployed to the business segments, with the largest group moving to Business Aircraft, to ensure they have all the necessary capabilities for future business jet development programs. Bombardier will also establish a new Advanced Technologies Office (ATO), which will be led by François Caza, who has been appointed Bombardier’s Chief Technology Officer. The ATO will focus on systems design and engineering, including applying experience from Bombardier’s aerospace programs to its rail transportation business. In addition to right-sizing and redeploying central engineering, Bombardier has launched a company-wide restructuring initiative focused on optimizing production and management processes, flattening management structures and further reducing indirect costs. Collectively, these actions will result in a reduction of approximately 5,000 positions across the organization over the next 12 to 18 months, leading to annualized savings of approximately $250 million at full run rate, which we expect by 2021. Bombardier anticipates recording a restructuring charge in 2019 of approximately the same amount as special items.(3) In parallel, the Company continued to strengthen its leadership team, with the appointment of Sam Abdelmalek as Chief Transformation and Supply Chain Officer in October. Bombardier also announced today that Danny Di Perna has been appointed President, Aerostructures and Engineering Services (BAES), effective immediately. Michael Ryan will assume the role of Chief Operating Officer for BAES. Together, they will focus on accelerating productivity, achieving world-class financial and operational performance, and delivering on the Company’s growth potential. Introducing 2019 Guidance With the numerous portfolio announcements made today, Bombardier introduced its guidance for the 2019 fiscal year. Revenues are targeted to grow by approximately 10% to $18 billion or more, as deliveries of the Global 7500 business jet accelerate. Profitability is anticipated to grow at a faster pace, with EBIT before special items targeted to grow by approximately 20% to a range of $1.15 billion to $1.25 billion, and EBITDA before special items(2) anticipated to increase by approximately 30% to a range of $1.65 billion to $1.8 billion. Bombardier is targeting to achieve free cash flow generation in the range of $250 million to $500 million, which is anticipated to be offset by the $250 million restructuring charge mentioned above, as well as a $250 million contingency to reflect the working capital volatility as the Company progresses through its intense growth phase at Business Aircraft and Transportation. Accordingly, free cash flow guidance for 2019 is targeting breakeven plus or minus $250 million. Bombardier is also reaffirming its 2020 financial targets, even after the divestiture of the Q Series program and Business Aircraft’s flight and technical training activities. Further details on the Company’s financial performance and growth opportunities will be provided at Bombardier’s Investor Day on Thursday, December 6, 2018. SELECTED RESULTS RESULTS OF THE QUARTER Three-month periods ended September 30 2018 2017 restated(6) Variance Revenues $ 3,643 $ 3,839 (5 )% EBIT $ 267 $ 133 101 % EBIT margin 7.3 % 3.5 % 380 bps EBIT before special items $ 271 $ 183 48 % EBIT margin before special items 7.4 % 4.8 % 260 bps EBITDA before special items $ 333 $ 254 31 % EBITDA margin before special items(2) 9.1 % 6.6 % 250 bps Net income (loss) $ 149 $ (100 ) nmf Diluted EPS (in dollars) $ 0.04 $ (0.04 ) $ 0.08 Adjusted net income (loss)(2) $ 167 $ (11 ) nmf Adjusted EPS (in dollars)(2) $ 0.04 $ 0.00 $ 0.04 Net additions to PP&E and intangible assets $ 229 $ 287 (20 )% Cash flows from operating activities $ (141 ) $ (208 ) 32 % Free cash flow usage $ (370 ) $ (495 ) 25 % RESULTS OF THE NINE-MONTH PERIOD Nine-month periods ended September 30 2018 2017 Variance restated Revenues $ 11,933 $ 11,588 3 % EBITDA margin before special items 7.8 % 7.1 % 70 bps Adjusted net income $ 289 $ 119 143 % Adjusted EPS (in dollars) $ 0.09 $ 0.06 $ 0.03 Net additions to PP&E and intangible assets $ 167 $ 952 nmf Cash flows from operating activities $ (692 ) $ (706 ) 2 % Free cash flow usage $ (859 ) $ (1,658 ) 48 % As at September 30, 2018 December 31, 2017 Available short-term capital resources(7)(8) $ 3,560 $ 4,225 (16 ) % All amounts in this press release are in U.S. dollars unless otherwise indicated. Amounts in tables are in millions except per share amounts, unless otherwise indicated. SEGMENTED RESULTS AND HIGHLIGHTS Three-month periods ended September 30 2018 2017 Variance Revenues $ 1,083 $ 1,074 1 % Aircraft deliveries (in units) 31 30 1 EBIT $ 80 $ 87 (8 )% EBIT margin 7.4 % 8.1 % (70 ) bps EBIT before special items $ 89 $ 90 (1 )% EBIT margin before special items 8.2 % 8.4 % (20 ) bps EBITDA before special items $ 113 $ 111 2 % EBITDA margin before special items 10.4 % 10.3 % — Order backlog (in billions of dollars) $ 14.3 $ 13.8 4 % Business Aircraft’s third quarter performance shows solid execution on deliveries and sales, continued growth in the aftermarket, as well as the certification of the Global 7500 aircraft, the largest and longest range business jet in the industry. Transport Canada Type Certification of the Global 7500 aircraft was awarded on September 27, 2018, followed by FAA type certification, paving the way for entry into service in December 2018. Third quarter net order intake was strong, growing the backlog to $14.3 billion. Interest continues to grow in the Global family, including the new Global 5500 and Global 6500 aircraft offering.(4) During the quarter, revenues totalled $1.1 billion on 31 deliveries including a strong mix of medium sized aircraft. With 96 deliveries year-to-date, this represents more than 70% of planned deliveries for the year, tracking to full year guidance on deliveries and revenue. EBIT margin before special items during the quarter continued to trend above 8% driven by seasonal changes in aircraft mix, with year-to-date EBIT margin before special items of 8.5%. Subsequent to the quarter, on October 15, 2018, the Global 5500 and Global 6500 aircraft program completed 70% of total flight test hours required for certification, tracking to entry into service at the end of 2019. On October 3, 2018, we announced a further expansion of our service network with a new centre in Miami. Planned for inauguration in 2020, the new 300,000 sq. ft. centre will benefit our U.S. and Latin American customers and continue to fuel our growth. On November 7, 2018, the Corporation entered into a definitive agreement to sell its activities consisting of flight and technical training for Bombardier Business Aircraft carried out principally in training centers located in Montréal, Québec, and Dallas, Texas to CAE, a long-time Bombardier training partner. This transaction provides Bombardier’s Business Aircraft customers the benefit of CAE’s training expertise, while Bombardier focuses on aircraft development and services. Concurrently with the sale, Bombardier and CAE have entered into an agreement to extend their Authorized Training Provider (ATP) relationship whereby CAE will prepay all royalties under the agreement. Combined, the total value of both transactions is $800 million, including $645 million for the sale of the training activities. Net of fees, liabilities and normal closing adjustments, we expect net proceeds of approximately $650 million. Closing of the sale transaction is expected by the second half of 2019, subject to customary closing conditions and regulatory approvals. Revenues $ 256 $ 515 (50 )% Aircraft deliveries (in units) 5 11 (6 ) Net orders (in units) 11 25 (14 ) Book-to-bill ratio(9) 2.2 2.3 (0.1 ) EBIT $ 4 $ (75 ) nmf EBIT margin 1.6 % (14.6 )% 1620 bps EBIT before special items $ (9 ) $ (74 ) 88 % EBIT margin before special items (3.5 )% (14.4 )% 1090 bps EBITDA before special items $ (6 ) $ (59 ) 90 % EBITDA margin before special items (2.3 )% (11.5 )% 920 bps Net additions to PP&E and intangible assets $ — $ 16 (100 )% Order backlog (in units)(10)(11) 122 85 37 Starting July 1, 2018, following the closing of the C Series Partnership formed by Airbus (50.01%), Bombardier (33.55%) and Investissement Québec (16.44%), Commercial Aircraft deconsolidated CSALP from its results and replaced it by its share of CSALP’s net loss. As such, during the quarter, revenues decreased by $259 million mainly as the result of the deconsolidation. EBIT for the quarter was near breakeven, a significant improvement as we deconsolidated CSALP results and recognized our share of CSALP’s net loss resulting in an equity pickup of $13 million. Further Bombardier invested $85 million in CSALP during the quarter in exchange for non-voting units of the partnership against its commitment of up to $225 million by year end. CRJ Series and Q400 deliveries for the quarter totalled 5 aircraft, while net orders totalled 11 aircraft. On November 7, 2018, the Corporation entered into a definitive agreement for the sale of the Q Series aircraft program assets, including aftermarket operations, to a wholly owned subsidiary of Longview Aviation Capital Corp., for gross proceeds of approximately $300 million. The agreement covers all assets and intellectual property and Type Certificates associated with the Dash 8 Series 100, 200 and 300 as well as the Q400 program operations at the Downsview manufacturing facility in Ontario, Canada. The transaction is expected to close by the second half of 2019, subject to customary closing conditions and regulatory approvals. Net proceeds for this transaction are expected at approximately $250 million net of fees, liabilities and normal closing adjustments. Following the closing of the Airbus partnership on the C Series aircraft program earlier this year, and the agreement to sell the Q400 program announced on November 7, 2018, our full attention is turning to the CRJ program. As we continue to actively participate in the regional aircraft market with our established, scope compliant aircraft, our focus is on reducing cost and increasing volumes while optimizing the aftermarket for the approximately 1,500 CRJ’s in service around the world today. As we look to return the CRJ to profitability, we will also explore strategic options for the program. Aerostructures and Engineering Services Revenues $ 430 $ 349 23 % EBIT $ 35 $ 33 6 % EBIT margin 8.1 % 9.5 % (140 ) bps EBIT before special items $ 36 $ 27 33 % EBIT margin before special items 8.4 % 7.7 % 70 bps EBITDA before special items $ 47 $ 38 24 % Net additions to PP&E and intangible assets $ 9 $ 4 125 % Revenues increased by 23% year over year, driven by Aerostructures’ position as a key supplier to the A220 and Global 7500 aircraft growth programs. EBIT before special items increased by 33% year over year supported by the revenue growth. The 8.4% EBIT margin before special items for the quarter reflects the continued ramp-up of the A220 and Global 7500 component production as well as the new contractual relationship with Airbus on the A220. Intersegment revenue for the quarter represented 62% of the total revenues compared to 80% for the first half of the year. This decrease reflects Revenues from CSALP becoming external sales starting on July 1, 2018. On November 8, 2018, Danny Di Perna has been appointed President Aerostructures & Engineering Services. Danny brings more than 30 years of aerospace and industrial experience with a proven track record in improving operational efficiency. Michael Ryan will assume the role of Chief Operating Officer. Revenues $ 2,140 $ 2,146 — % Order intake (in billions of dollars) $ 1.9 $ 1.8 6 % Book-to-bill ratio(12) 0.9 0.9 — EBIT(13) $ 184 $ 140 31 % EBIT margin(13) 8.6 % 6.5 % 210 bps EBIT before special items(13) $ 187 $ 192 (3 )% EBIT margin before special items(13) 8.7 % 8.9 % (20 ) bps EBITDA before special items(13) $ 212 $ 215 (1 )% EBITDA margin before special items(13) 9.9 % 10.0 % (10 ) bps Net additions to PP&E and intangible assets $ 36 $ 18 100 % Order backlog (in billions of dollars) $ 33.9 $ 35.1 (3 )% Revenues in the third quarter totalled $2.1 billion, delivering 2% organic growth offset by an unfavourable currency impact. With the continued ramp-up of major projects initiated in 2017, we are seeing sustained growth across all segments, on track to full year guidance of approximately $9.0 billion. EBIT before special items in the quarter was in line with the prior year at $187 million. For the quarter the margin was 8.7%, or 8.6% on a year-to-date basis, which continued to trend towards the greater than 8.5% margin guidance for the year. As we work through an accelerated train delivery cycle following significant working capital investments made since mid-2017, we carried at the end of the third quarter greater than anticipated working capital. The $33.9 billion backlog at the end of the quarter is driven by the 1.0 book-to-bill ratio(12) on a year-to-date basis, net of unfavourable currency impact. Bombardier, CRJ, CRJ Series, CS100, CS300, C Series, Global, Global 5500, Global 6500, Global 7500, Q400 and Q Series are trademarks of Bombardier Inc. or its subsidiaries. Simon Letendre Manager, Media Relations and Public Affairs +514 861 9481 Patrick Ghoche Bombardier Inc The Management’s Discussion and Analysis and the Interim Consolidated Financial Statements are available at ir.bombardier.com. bps: basis points nmf: information not meaningful (1) Earnings and EBIT refer to EBIT before special items. Non-GAAP financial measures. See Caution regarding non-GAAP measures at the end of this press release. (2) Non-GAAP financial measures. See Caution regarding non-GAAP measures at the end of this press release. (3) See the forward-looking statements disclaimer. (4) Currently under development. See the Global 5500, Global 6500, Global 7500 and Global 8000 aircraft disclaimer at the end of this press release. (5) Margin refers to EBIT margin before special items. Non-GAAP financial measure. See Caution regarding non-GAAP measures at the end of this press release. (6) Due to the adoption of IFRS 15, Revenue from contracts with customers. Refer to the Accounting and reporting developments section in Other in the Corporation’s MD&A of the third quarterly report for the quarter ended September 30, 2018 for details regarding restatements of comparative period figures. (7) Defined as cash and cash equivalents plus the amount available under revolving credit facilities. (8) Cash and cash equivalents as at December 31, 2017 include the cash reclassified as asset held for sale. Refer to the strategic partnership section in Commercial Aircraft, Note 11 - Cash and cash equivalents and Note 19 - Disposal of a business in the Corporation’s Consolidated financial statements for more details on the transaction as well as the accounting treatment. (9) Ratio of new orders received over aircraft deliveries, in units, excluding C Series aircraft orders and deliveries. (10) Excluding 115 and 233 firm orders of CS100 and CS300 aircraft respectively for the comparative period of 2017. Subsequent to the C Series Partnership closing, Airbus rebranded CS100 and CS300 as A220-100 and A220-300, respectively. (11) Subsequent to the end of this quarter, the Corporation cancelled two Q400 orders totalling 8 aircraft. (12) Ratio of new orders over revenues. (13) Including share of income from joint ventures and associates amounting to $22 million for the three-month period ended September 30, 2018 ($52 million for the three-month period ended September 30, 2017). CAUTION REGARDING NON-GAAP MEASURES This press release is based on reported earnings in accordance with International Financial Reporting Standards (IFRS). Reference to generally accepted accounting principles (GAAP) means IFRS, unless indicated otherwise. This press release is also based on non-GAAP financial measures including EBITDA, EBIT before special items and EBITDA before special items, adjusted net income, adjusted earnings per share and free cash flow. These non-GAAP measures are mainly derived from the consolidated financial statements but do not have standardized meanings prescribed by IFRS; therefore, others using these terms may define them differently. Management believes that providing certain non-GAAP performance measures, in addition to IFRS measures, provides users of our Financial Report with enhanced understanding of our results and related trends and increases the transparency and clarity of the core results of our business. Refer to the Non-GAAP financial measures and Liquidity and capital resources sections in Overview and each reporting segments’ Analysis of results sections in the Corporation’s MD&A for definitions of these metrics and reconciliations to the most comparable IFRS measures. Reconciliation of segment to consolidated results Three-month periods ended September 30 Nine-month periods ended September 30 restated(1) restated(1) Business Aircraft $ 1,083 $ 1,074 $ 3,500 $ 3,485 Commercial Aircraft 256 515 1,335 1,666 Aerostructures and Engineering Services 430 349 1,331 1,190 Transportation 2,140 2,146 6,754 6,136 Corporate and Elimination (266 ) (245 ) (987 ) (889 ) $ 3,643 $ 3,839 $ 11,933 $ 11,588 EBIT before special items(2) Business Aircraft $ 89 $ 90 $ 298 $ 299 Commercial Aircraft (9 ) (74 ) (148 ) (248 ) Aerostructures and Engineering Services 36 27 140 68 Transportation 187 192 583 598 Corporate and Elimination (32 ) (52 ) (130 ) (131 ) $ 271 $ 183 $ 743 $ 586 Business Aircraft $ 9 $ 3 $ 13 $ 34 Commercial Aircraft (13 ) 1 589 3 Aerostructures and Engineering Services 1 (6 ) (6 ) (6 ) Transportation 3 52 45 284 Corporate and Elimination 4 — (557 ) 45 $ 4 $ 50 $ 84 $ 360 Commercial Aircraft 4 (75 ) (737 ) (251 ) Corporate and Elimination (36 ) (52 ) 427 (176 ) Reconciliation of EBITDA before special items and EBITDA to EBIT Three-month periods ended September 30 Nine-month periods ended September 30 EBIT $ 267 $ 133 $ 659 $ 226 Amortization 62 69 188 225 Impairment charges on PP&E and intangible assets(3) — 2 11 45 EBITDA 329 204 858 496 Special items excluding impairment charges on PP&E and intangible assets(3) 4 50 76 322 EBITDA before special items $ 333 $ 254 $ 934 $ 818 (1) Due to the adoption of IFRS 15, Revenue from contracts with customers. Refer to the Accounting and reporting developments section in Other in the Corporation’s MD&A for detail regarding restatements of comparative period figures. (2) Non-GAAP financial measure. See Caution regarding non-GAAP measures above. (3) Refer to the Consolidated results of operations section in the Corporation's MD&A for details regarding special items. Reconciliation of adjusted net income to net income (loss) and computation of adjusted EPS (per share) restated(1) Net income (loss) $ 149 $ (100 ) Adjustments to EBIT related to special items(2) 4 $ 0.00 50 $ 0.02 Adjustments to net financing expense related to: Net change in provisions arising from changes in interest rates and net loss (gain) on certain financial instruments 5 0.00 7 0.00 Accretion on net retirement benefit obligations 16 0.00 21 0.01 Interest related to tax litigation(1) (4 ) 0.00 11 0.01 Tax impact of special(2) and other adjusting items (3 ) 0.00 — 0.00 Adjusted net income (loss) 167 (11 ) Net income (loss) attributable to NCI (38 ) 17 Preferred share dividends, including taxes (7 ) (7 ) Dilutive impact of CDPQ conversion option (13 ) — Adjusted net income (loss) attributable to equity holders of Bombardier Inc. $ 109 $ (1 ) Weighted-average diluted number of common shares (in thousands) 2,624,943 2,195,330 Adjusted EPS (in dollars) $ 0.04 $ 0.00 Adjustments to EBIT related to special items(2) 84 $ 0.03 360 $ 0.16 Net change in provisions arising from changes in interest rates and net loss (gain) on certain financial instruments (31 ) (0.01 ) 38 0.02 Tax impact of special(2) and other adjusting items (73 ) (0.03 ) (12 ) 0.00 Adjusted net income 289 119 Preferred share dividends, including taxes (21 ) (19 ) Dilutive impact of CDPQ conversion option (6 ) — Adjusted net income attributable to equity holders of Bombardier Inc. $ 216 $ 133 Reconciliation of adjusted EPS to diluted EPS (in dollars) Diluted EPS $ 0.04 $ (0.04 ) Impact of special(2) and other adjusting items — 0.04 Adjusted EPS $ 0.04 $ 0.00 Impact of special(2) and other adjusting items 0.01 0.21 Reconciliation of free cash flow usage to cash flows from operating activities Cash flows from operating activities $ (141 ) $ (208 ) $ (692 ) $ (706 ) Net additions to PP&E and intangible assets (229 ) (287 ) (167 ) (952 ) Free cash flow usage(3) $ (370 ) $ (495 ) $ (859 ) $ (1,658 ) This press release includes forward-looking statements, which may involve, but are not limited to: statements with respect to our objectives, guidance in respect of various financial metrics and sources of contribution thereto, targets, goals, priorities, market and strategies, financial position, market position, capabilities, competitive strengths, beliefs, prospects, plans, expectations, anticipations, estimates and intentions; general economic and business outlook, prospects and trends of an industry; expected growth in demand for products and services; product development, including projected design, characteristics, capacity or performance; expected or scheduled entry-into-service of products and services, orders, deliveries, testing, lead times, certifications and project execution in general; competitive position; the expected impact of the legislative and regulatory environment and legal proceedings on our business and operations; strength of capital profile and balance sheet, creditworthiness, available liquidities and capital resources, expected financial requirements and ongoing review of strategic and financial alternatives; the introduction of productivity enhancements and restructuring initiatives and anticipated costs, intended benefits and timing thereof; the expected continued expansion of the business aircraft aftermarket; the objectives and financial targets underlying our transformation plan and the timing and progress in execution thereof, including the anticipated business transition to cash generation; expectations and timing regarding an opportunistic redemption of CDPQ’s investment in BT Holdco; intentions regarding the CRJ program; the funding and liquidity of C Series Aircraft Limited Partnership (CSALP); the impact and expected benefits of the transaction with Airbus, on our operations, infrastructure, capabilities, development, growth and other opportunities and prospects, geographic reach, scale, assets and program value, footprint, financial condition, access to capital and overall strategy; and the impact of such transaction on our balance sheet and liquidity position. As it relates to the strategic actions and proposed sale of the Q Series Aircraft program and Business Aircraft’s flight and technical training activities discussed herein, this press release also contains forward-looking statements with respect to: the expected terms, conditions, and timing for completion thereof; the respective anticipated proceeds and use thereof, related costs and expenses, as well as the anticipated benefits of such actions and transactions; and the fact that closing of these transactions will be conditioned on certain events occurring, including the receipt of necessary regulatory approval. Forward-looking statements can generally be identified by the use of forward-looking terminology such as “may”, “will”, “shall”, “can”, “expect”, “estimate”, “intend”, “anticipate”, “plan”, “foresee”, “believe”, “continue”, “maintain” or “align”, the negative of these terms, variations of them or similar terminology. Forward-looking statements are presented for the purpose of assisting investors and others in understanding certain key elements of our current objectives, strategic priorities, expectations and plans, and in obtaining a better understanding of our business and anticipated operating environment. Readers are cautioned that such information may not be appropriate for other purposes. By their nature, forward-looking statements require management to make assumptions and are subject to important known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecast results set forth in forward-looking statements. While management considers these assumptions to be reasonable and appropriate based on information currently available, there is risk that they may not be accurate. The assumptions underlying the forward-looking statements made in this press release in relation to the transaction with Airbus include the following material assumptions: the accuracy of our analyses and business case including estimated cash flows and revenues over the expected life of the program and thereafter; aircraft prices, unit costs and deliveries gradually improving during the acceleration phase; assumptions regarding the strength and quality of Airbus’ scale, reach, sales, marketing and support networks, supply chain and operational expertise, and customer relationships; the fulfilment and performance by each party of its obligations pursuant to the transaction agreement and future commercial agreements and absence of significant inefficiencies or other issues in connection therewith; the realization of the anticipated benefits and synergies of the transaction in the timeframe anticipated; our ability to continue with our funding plan of CSALP and to fund, if required, any cash shortfalls; adequacy of cash planning and management and project funding; and the accuracy of our assessment of anticipated growth drivers and sector trends. The assumptions underlying the forward-looking statements made in this press release in relation to the strategic actions and proposed sale of the Q Series Aircraft program and Business Aircraft’s flight and technical training activities discussed herein include the following material assumptions: the satisfaction of all conditions of closing and the successful completion of such strategic actions and transactions within the anticipated timeframe, including receipt of regulatory approvals. For additional information with respect to the assumptions underlying the forward-looking statements made in this press release, including as relates to 2018 guidance, refer to the Strategic Priorities and Guidance and forward-looking statements sections in Overview and in each reportable segment of our financial report for the fiscal year ended December 31, 2017. For additional information with respect to the assumptions underlying the forward-looking statements relating to 2019 guidance, refer to the assumptions for 2019 guidance in this press release. With respect to the transaction with Airbus specifically, certain factors that could cause actual results to differ materially from those anticipated in the forward-looking statements include, but are not limited to: reliance on our analyses and business case including estimated cash flows and revenues over the expected life of the program and thereafter; the occurrence of an event, change or other development having an adverse effect on Airbus’ scale and reach, sales, marketing or support networks, supply chain, operations, or customer relationships; the failure by either party to satisfy and perform its obligations pursuant to the transaction agreement and future commercial agreements and/or significant inefficiencies or other issues arising in connection therewith; the failure to realize, in the timeframe anticipated or at all, the anticipated benefits and synergies of the transaction; risks associated with our ability to continue with our funding plan of CSALP and to fund, if required, the cash shortfalls; inadequacy of cash planning and management and project funding; and reliance on our assessment of anticipated growth drivers and sector trends. Certain other factors that could cause actual results to differ materially from those anticipated in the forward-looking statements include, but are not limited to, risks associated with general economic conditions, risks associated with our business environment (such as risks associated with “Brexit”, the financial condition of the airline industry, business aircraft customers, and the rail industry; trade policy; increased competition; political instability and force majeure events or natural disasters), operational risks (such as risks related to developing new products and services; development of new business; the certification and homologation of products and services; fixed-price and fixed-term commitments and production and project execution; pressures on cash flows and capital expenditures based on project-cycle fluctuations and seasonality; our ability to successfully implement and execute our strategy, transformation plan, productivity enhancements and restructuring initiatives; doing business with partners; product performance warranty and casualty claim losses; regulatory and legal proceedings; environmental, health and safety risks; dependence on certain customers and suppliers; human resources; reliance on information systems; reliance on and protection of intellectual property rights; and adequacy of insurance coverage), financing risks (such as risks related to liquidity and access to capital markets; retirement benefit plan risk; exposure to credit risk; substantial existing debt and interest payment requirements; certain restrictive debt covenants and minimum cash levels; financing support provided for the benefit of certain customers; and reliance on government support), market risks (such as risks related to foreign currency fluctuations; changing interest rates; decreases in residual values; increases in commodity prices; and inflation rate fluctuations). For more details, see the Risks and uncertainties section in Other in the MD&A of our financial report for the fiscal year ended December 31, 2017. With respect to the strategic actions and proposed sale of the Q Series Aircraft program and Business Aircraft’s flight and technical training activities discussed herein specifically, certain factors that could cause actual results to differ materially from those anticipated in the forward-looking statements include, but are not limited to: the failure to receive or delay in receiving regulatory approvals, or otherwise satisfy the conditions to the completion of such strategic actions and transactions or delay in completing and uncertainty regarding the length of time required to complete such strategic actions and transactions, and the funds and benefits thereof not being available to Bombardier in the time frame anticipated or at all; alternate sources of funding that would be used to replace the anticipated proceeds and savings from such strategic actions and transactions, as the case may be, may not be available when needed, or on desirable terms. Accordingly, there can be no assurance that the proposed strategic actions and/or proposed sale of the Q Series Aircraft program and Business Aircraft’s flight and technical training activities will occur or that the anticipated benefits will be realized in their entirety, in part or at all. There can also be no assurance that the intended benefits from the productivity enhancements and restructuring initiatives discussed herein will be realized in their entirety, in part or at all, or on the completion, the form, or the timing of a BT Holdco buy-back. Readers are cautioned that the foregoing list of factors that may affect future growth, results and performance is not exhaustive and undue reliance should not be placed on forward-looking statements. Other risks and uncertainties not presently known to us or that we presently believe are not material could also cause actual results or events to differ materially from those expressed or implied in our forward-looking statements. In addition, there can be no assurance that the anticipated strategic benefits and operational, competitive and cost synergies of the transaction with Airbus will be realized in their entirety, in part or at all. The forward-looking statements set forth herein reflect management’s expectations as at the date of this press release and are subject to change after such date. Unless otherwise required by applicable securities laws, we expressly disclaim any intention, and assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement. The Global 5500, Global 6500, Global 7500 and Global 8000 aircraft are currently under development, and as such are subject to changes in family strategy, branding, capacity, performance, design and/or systems. All specifications and data are approximate, may change without notice and are subject to certain operating rules, assumptions and other conditions. This press release does not constitute an offer, commitment, representation, guarantee or warranty of any kind. Callon Petroleum’s takeover of Carrizo Oil & Gas reignites the energy M&A market Shopify Earnings: Mark Your Calendar Netflix Earnings Forecasts and the Wider Streaming Space Digging into Cleveland-Cliffs before Its Q2 Earnings Square Earnings: Mark Your Calendar

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Mondo Value | There They Go Again…Again There They Go Again…Again 02 Ago There They Go Again…Again Oggi vi presentiamo un memo di Howard Marks, uno dei ” Mostri Sacri” del Value Investing a livello mondiale. E’ presidente della Oaktree Capital e poche volte all’anno scrive lunghi messaggi (memo) ai clienti della sua Società. Questi memo rappresentano un appuntamento molto atteso anche dai personaggi più influenti del mondo economico-finanziario. Nel memo che pubblichiamo oggi c’è una forte ” chiamata” sui mercati finanziari con un analisi approfondita degli elementi di attenzione. Buona lettura… FONTE: sito Oaktree Capital Memo to: Oaktree Clients From: Howard Marks Re: There They Go Again . . . Again Some of the memos I’m happiest about having written came at times when bullish trends went too far, risk aversion disappeared and bubbles inflated. The first and best example is probably “bubble.com,” which raised questions about Internet and e-commerce stocks on the first business day of 2000. As I tell it, after ten years without a single response, that one made my memo writing an overnight success. Another was “The Race to the Bottom” (February 2007), which talked about the mindless shouldering of risk that takes place when investors are eager to put money to work. Both of those memos raised doubts about investment trends that soon turned out to have been big mistakes. Those are only two of the many cautionary memos I’ve written over the years. In the last cycle, they started coming two years before “The Race to the Bottom” and included “There They Go Again” (the inspiration for this memo’s title), “Hindsight First, Please,” “Everyone Knows” and “It’s All Good.” When I wrote them, they appeared to be wrong for a while. It took time before they were shown to have been right, and just too early. The memos that have raised yellow flags in the current up-cycle, starting with “How Quickly They Forget” in 2011 and including “On Uncertain Ground,” “Ditto,” and “The Race Is On,” also clearly were early, but so far they’re not right (and in fact, when you’re early by six or more years, it’s not clear you can ever be described as having been right). Since I’ve written so many cautionary memos, you might conclude that I’m just a born worrier who eventually is made to be right by the operation of the cycle, as is inevitable given enough time. I absolutely cannot disprove that interpretation. But my response would be that it’s essential to take note when sentiment (and thus market behavior) crosses into too-bullish territory, even though we know rising trends may well roll on for some time, and thus that such warnings are often premature. I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses. Since I’m convinced “they” are at it again – engaging in willing risk-taking, funding risky deals and creating risky market conditions – it’s time for yet another cautionary memo. Too soon? I hope so; we’d rather make money for our clients in the next year or two than see the kind of bust that gives rise to bargains. (We all want there to be bargains, but no one’s eager to endure the price declines that create them.) Since we never know when risky behavior will bring on a market correction, I’m going to issue a warning today rather than wait until one is upon us. I’m in the process of writing another book, going into great depth regarding one of the most important things discussed in my book The Most Important Thing: cycles, their causes, and what to do about them. It will be out next year, but this memo will give you a preview regarding one of the most important cyclical phenomena. Before starting in, I want to apologize for the length of this memo, almost double the norm. First, the topic is wide-ranging – so much so that when I sat down to write, I found the task daunting. Second, my recent vacation gave me the luxury of time for writing. Believe it or not, I’ve cut what I could. I think what remains is essential. Today’s Investment Environment Because I don’t intend this to be a “macro memo,” incorporating a thorough review of the economic and market environment, I’ll merely reference what I think are the four most noteworthy components of current conditions: The uncertainties are unusual in terms of number, scale and insolubilityTin areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology. In the vast majority of asset classes, prospective returns are just about the lowest they’ve ever been. Asset prices are high across the board. Almost nothing can be bought below its intrinsic value, and there are few bargains. In general the best we can do is look for things that are less over-priced than others. Pro-risk behavior is commonplace, as the majority of investors embrace increased risk as the route to the returns they want or need. In January 2013, I wrote a memo entitled “Ditto.” Its thrust was that (a) history tends to repeat, (b) thus my memos often return to the same topics and (c) if I’ve handled them well in the past, rather than re-invent the wheel, I might as well borrow from what I’ve written before. Ergo, “ditto.” Few topics are more susceptible to this treatment than the process through which (a) investment fundamentals fluctuate cyclically; (b) investors overreact to the fluctuations; (c) the level of risk aversion incorporated in investor behavior fluctuates between excessive and inadequate; and thus (d) market conditions swing from depressed to elevated and treacherous. Here’s how I summed up on this topic in “There They Go Again” (May 2005): Given today’s paucity of prospective return at the low-risk end of the spectrum and the solutions being ballyhooed at the high-risk end, many investors are moving capital to riskier (or at least less traditional) investments. But (a) they’re making those riskier investments just when the prospective returns on those investments are the lowest they’ve ever been; (b) they’re accepting return increments for stepping up in risk that are as slim as they’ve ever been; and (c) they’re signing up today for things they turned down (or did less of) in the past, when the prospective returns were much higher. This may be exactly the wrong time to add to risk in pursuit of morereturn. You want to take risk when others are fleeing from it, not when they’re competing with you to do so. Do you see any differences between then and now? Is there any need to redo this description? Not for me; I think “ditto” will suffice. I’ll simply go on to borrow the conclusion from “The Race to the Bottom” (February 2007): Today’s financial market conditions are easily summed up: There’s a global glut of liquidity, minimal interest in traditional investments, little apparent concern about risk, and skimpy prospective returns everywhere. Thus, as the price for accessing returns that are potentially adequate (but lower than those promised in the past), investors are readily accepting significant risk in the form of heightened leverage, untested derivatives and weak deal structures. The current cycle isn’t unusual in its form, only its extent. There’s little mystery about the ultimate outcome, in my opinion, but at this point in the cycle it’s the optimists who look best. The Seeds for a Boom My son Andrew worked extensively with me in preparing this memo. We particularly enjoyed making a list of the elements that typically form the foundation for a bull market, boom or bubble. We concluded that some or all of the following are necessary conditions. A few will give us a bull market. All of them together will deliver a boom or bubble: A benign environment – good results lull investors into complacency, as they get used to having their positive expectations rewarded. Gains in the recent past encourage the heated pursuit of further gains in the future (rather than suggest that past gains might have borrowed from future gains). A grain of truth – the story supporting a boom isn’t created out of whole cloth; it generally coalesces around something real. The seed usually isn’t imaginary, just eventually overblown. Early success – the gains enjoyed by the “wise man in the beginning” – the first to seize upon the grain of truth – tends to attract “the fool in the end” who jumps in too late. More money than ideas – when capital is in oversupply, it is inevitable that risk aversion dries up, gullibility expands, and investment standards are relaxed. Willing suspension of disbelief – the quest for gain overcomes prudence and deference to history. Everyone concludes “this time it’s different.” No story is too good to be true. Rejection of valuation norms – all we hear is, “the asset is so great: there’s no price too high.” Buying into a fad regardless of price is the absolute hallmark of a bubble. The pursuit of the new – old timers fare worst in a boom, with the gains going disproportionately to those who are untrammeled by knowledge of the past and thus able to buy into an entirely new future. The virtuous circle – no one can see any end to the potential of the underlying truth or how high it can push the prices of related assets. It’s broadly accepted that trees can grow to the sky: “It can only go up. Nothing can stop it.” Certainly no one can picture things taking a turn for the worse. Fear of missing out – when all the above becomes widespread, optimism prevails and no one can imagine a glitch. That causes most people to conclude that the greatest potential error lies in failing to participate in the current market darling. Certainly many of the things listed above are in play today. Performance has been good – with minor exceptions, quickly rectified – since the beginning of 2009 (that’s more than eight years). There’s certainly more money around these days than high-return possibilities. “New ideas” are readily accepted, and some things are viewed as representing virtuous circles. On the other hand, some of the usual ingredients are missing. Most people (a) are conscious of the uncertainties listed above, (b) recognize that prospective returns are quite skimpy, and (c) accept that things are unlikely to go well forever. That’s all healthy. But on the third hand, most people can’t think of what might cause trouble anytime soon. But it’s precisely when people can’t see what it is that could make things turn down that risk is highest, since they tend not to price in risks they can’t see. With the negative catalyst so elusive and the return on cash at punitive levels, people worry more about being underinvested or bearing too little risk (and thus earning too low a return in good markets) than they do about losing money. This combination of elements presents today’s investors with a highly challenging environment. The result is a world in which assets have appreciated significantly, risk aversion is low, and propositions are accepted that would be questioned if investors were more wary. Most of what remains for the meat of this memo will consist of descriptions of things afoot in the markets today. They are intended – as usual with my memos – to be anecdotal and thought- provoking, not complete and scientific. Think about how many of the things listed above you see in the examples that follow. The good news is that the U.S. economy is the envy of the world, with the highest growth rate among developed nations and a slowdown unlikely in the near term. The bad news is that this status generates demand for U.S. equities that has raised their prices to lofty levels. The S&P 500 is selling at 25 times trailing-twelve-month earnings, compared to a long-term median of 15. The Shiller Cyclically Adjusted PE Ratio stands at almost 30 versus a historic median of 16. This multiple was exceeded only in 1929 and 2000 – both clearly bubbles. While the “p” in p/e ratios is high today, the “e” has probably been inflated by cost cutting, stock buybacks, and merger and acquisition activity. Thus today’s reported valuations, while high, may actually be understated relative to underlying profits. The “Buffett Yardstick” – total U.S. stock market capitalization as a percentage of GDP – is immune to company-level accounting issues (although it isn’t perfect either). It hit a new all- time high last month of around 145, as opposed to a 1970-95 norm of about 60 and a 1995- 2017 median of about 100. Finally, it can be argued that even the normal historic valuations aren’t merited, since economic growth may be slower in the coming years than it was in the post-World War II period when those norms were established. The thing that is clearest is that the low Fed-mandated short-term interest rates make high valuations seem reasonable. When yields are low on fixed income instruments, low earnings yields on equities (that is, low e/p ratios, which equate to high p/e ratios) seem justified. As Buffett said in February, “Measured against interest rates, stocks actually are on the cheap side compared to historic valuations.” But he went on to say, “. . . the risk always is that interest rates go up a lot, and that brings stocks down.” Are you happy counting on continued low interest rates for your investment security, especially at a time when the Fed has embarked upon a series of rate increases? And if interest rates do remain low for several more years, isn’t it likely to be as a result of a lack of vigor in the economy, which would likely cause earnings growth to be sluggish? The value of an option contract is largely a function of the volatility of the asset under option. For example, the owner of a “call” has the right – but not the obligation – to buy something at a fixed “strike price.” Thus he should hope the asset will be volatile: if its price rises a lot, he can buy at the strike price and sell at the new, higher price, locking in a profit. And what if it goes down a lot? No matter; he isn’t obligated to buy. Thus the expected volatility of the underlying asset is a key ingredient in determining the proper price for an option. For example, everything else being equal, the more volatile an asset is expected to be, the more the buyer of a call should be willing to pay for it (since he participates in the gains but not the losses) and the more the seller of a call should charge for it (since he is forgoing upside potential but retaining downside risk). This is reflected through option-pricing formulas such as the Black-Scholes Model. The formulas can also be used backwards. Starting with the option price, you can figure out what level of volatility the buyers and sellers are anticipating. Thus, ever since 1990, the Chicago Board Options Exchange has published the CBOE Volatility Index, or “VIX,” showing how volatile investors in options on the S&P 500 expect it to be over the next 30 days. The attention paid to the VIX has increased in recent years, and it has come to be called the “complacency index” or the “investor fear gauge.” When the VIX is low, investors are pricing in stable, tranquil markets, and when it’s high they’re anticipating major ups and downs. The bottom line is that last week’s VIX was the lowest in its 27-year history – matching a level seen only once before. The index was last this low when Bill Clinton took office in 1993, at a time when there was peace in the world, faster economic growth and a much smaller deficit. Should people really be as complacent now as they were then? What’s the significance of the VIX, anyway? Most importantly, it doesn’t say what volatility will be, only what investors think volatility will be. Thus it’s primarily an indicator of investor sentiment. In “Expert Opinion” I quoted Warren Buffett as having said, “Forecasts usually tell us more of the forecaster than of the future.” In a similar way, the VIX tells us more about people’s mood today than it does about volatility tomorrow. All we really know is that implied volatility expectations are low today. As with most things in investing, the VIX can be subject to multiple interpretations. As Business Insider wrote on July 18: While alarmists may view this [low level of VIX] as a negative — a signal that complacency has made traders vulnerable to an unforeseen shock — many investors simply see it as a byproduct of conditions ideal for stocks to continue edging higher. I would add one last thing: people extrapolate. So when volatility has been low, they tend to assume it will be low and build that assumption into the prices for options and assets. The two are not the same. Super-Stocks Bull markets are often marked by the anointment of a single group of stocks as “the greatest,” and the attractive legend surrounding this group is among the factors that support the bull move. When taken to the extreme – as it invariably is – this phenomenon satisfies some of the elements in a boom listed on page four, including: trust in a virtuous circle incapable of being interrupted; conviction that, given the companies’ fundamental merit, there’s no price too high for their stocks; and the willing suspension of disbelief that allows investors to extrapolate these positive views to infinity. In the current iteration, these attributes are being applied to a small group of tech-based companies, which are typified by “the FAANGs”: Facebook, Amazon, Apple, Netflix and Google (now renamed Alphabet). They all sport great business models and unchallenged leadership in their markets. Most importantly, they’re viewed as having captured the future and thus as sure to be winners in the years to come. True as far as it goes . . . just as it appeared to be true of the Nifty-Fifty in the 1960s, oil stocks in the ’70s, disk drive companies in the ’80s, and tech/media/telecom in the late ’90s. But in each of those cases: the environment changed in unforeseen ways, it turned out that the newness of the business model had hidden its flaws, competition arose, excellence in the concept gave rise to weaknesses in execution, and/or it was shown that even great fundamentals can become overpriced and thus give way to massive losses. The FAANGs are truly great companies, growing rapidly and trouncing the competition (where it exists). But some are doing so without much profitability, and for others profits are growing slower than revenues. Some of them doubtless will be the great companies of tomorrow. But will they all? Are they invincible, and is their success truly inevitable? The prices investors are paying for these stocks generally represent 30 or more years of the companies’ current earnings. There are clear reasons to be excited about their growth in the near term, but what about the durability of earnings over the long term, where much of the value in a high- multiple stock necessarily lies? Andrew points out that the iPhone is just ten years old, and twenty years ago the Internet wasn’t in widespread use. That raises the question of whether investors in technology can really see the future, and thus how happy they should be paying prices that incorporate optimistic assumptions regarding long-term earnings power. Of course, this may just mean the best is yet to come for these fairly young companies. Here’s a passage from one company’s 1997 letter to shareholders: We established long-term relationships with many important strategic partners, including America Online, Yahoo!, Excite, Netscape, GeoCities, AltaVista, @Home, and Prodigy. How many of these “important strategic partners” still exist in a meaningful way today (leaving aside the question of whether they’re important or strategic)? The answer is zero (unless you believe Yahoo! satisfies the criteria, in which case the answer is one). The source of the citation is Amazon’s 1997 annual report, and the bottom line is that the future is unpredictable, and nothing and no company is immune to glitches. The super-stocks that lead a bull market inevitably become priced for perfection. And in many cases the companies’ perfection turns out eventually to be either illusory or ephemeral. Some of the “can’t lose” companies of the Nifty-Fifty were ultimately crippled by massive changes in their markets, including Kodak, Polaroid, Xerox, Sears and Simplicity Pattern (do you see many people sewing their own clothes these days?). Not only did the perfection that investors had paid for evaporate, but even the successful companies’ stock prices reverted to more-normal valuation multiples, resulting in sub-par equity returns. The powerful multiple expansion that makes a small number of stocks the leaders in a bull market is often reversed in the correction that follows, saddling them with the biggest losses. But when the mood is positive and things are going well, the likelihood of such a development is easily overlooked. Finally, a rationale often arises to the effect that, thanks to market technicals, investors’ powerful buying of the leading stocks is sure to continue non-stop, meaning they can’t help but remain the best performers. In the tech bubble of the late 1990’s, for example, investors concluded that: stocks were doing so well that they would continue to attract capital, since tech companies and tech stocks were the best performers, they were sure to continue attracting a disproportionate share of the new buying, the superior performance of the tech stocks would cause more of them to be added to the stock indices, this would require index funds and closet indexers to direct a rising share of their buying to tech stocks in order to keep up with the returns on the indices, benchmark-conscious active managers would have to respond by increasing their tech stock holdings, and, thus tech stocks couldn’t fail to attract an ever-rising share of buying, and were sure to keep outperforming. You can call this a virtuous circle or a perpetual motion machine. It’s the kind of thing that fires investors’ imaginations in a bull market. But the logic that says it will work forever always collapses, sometimes just under its own weight, as was the case in 2000. Many of the most important considerations in investing are counterintuitive. One of those is the ability to understand that no market, niche or group is likely to outperform the others forever. Given human nature, “the best” will always come eventually to be overpriced, even for their stellar fundamentals. Thus even if the fundamentals hold up, the stocks’ performance from those too-high prices will become ordinary. And if they turn out not really to have been the best – or if their business falters – the combination of fundamental decline and multiple contraction can be really painful. I’m not saying the FAANGs aren’t great, or that they’ll suffer such a fate. Just that their elevated status today is a sign of the kind of investor optimism for which we must be on the lookout. Passive Investing/ETFs Fifty years ago, shortly after arriving at the University of Chicago for graduate school, I was taught that thanks to market efficiency, (a) assets are priced to provide fair risk-adjusted returns and (b) no one can consistently find the exceptions. In other words, “you can’t beat the market.” Our professors even advanced the idea of buying a little bit of each stock as a can’t-fail, low-cost way to outperform the stock-pickers. John Bogle put that suggestion into practice. Having founded Vanguard a year earlier, he launched the First Index Investment Trust in 1975, the first index fund to reach commercial scale. As a vehicle designed to emulate the S&P 500, it was later renamed the Vanguard 500 Index Fund. The concept of indexation, or passive investing, grew gradually over the next four decades, until it accounted for 20% of equity mutual fund assets in 2014. Given the generally lagging performance of active managers over the last dozen or so years, as well as the creation of ETFs, or exchange-traded funds, which make transacting simpler, the shift from active to passive investing has accelerated. Today it’s a powerful movement that has expanded to cover 37% of equity fund assets. In the last ten years, $1.4 trillion has flowed into index mutual funds and ETFs (and $1.2 trillion out of actively managed mutual funds). Like all investment fashions, passive investing is being warmly embraced for its positives: Passive portfolios have outperformed active investing over the last decade or so. With passive investing you’re guaranteed not to underperform the index. Finally, the much lower fees and expenses on passive vehicles are certain to constitute a permanent advantage relative to active management. 8 Does that mean passive investing, index funds and ETFs are a no-lose proposition? Certainly not: While passive investors protect against the risk of underperforming, they also surrender the possibility of outperforming. The recent underperformance on the part of active investors may well prove to be cyclical rather than permanent. As a product of the last several years, ETFs’ promise of liquidity has yet to be tested in a major bear market, particularly in less-liquid fields like high yield bonds. Here are a few more things worth thinking about: Remember, the wisdom of passive investing stems from the belief that the efforts of active investors cause assets to be fairly priced – that’s why there are no bargains to find. But what happens when the majority of equity investment comes to be managed passively? Then prices will be freer to diverge from “fair,” and bargains (and over-pricings) should become more commonplace. This won’t assure success for active managers, but certainly it will satisfy a necessary condition for their efforts to be effective. One of my clients, the chief investment officer of a pension fund, told me the treasurer had proposed dumping all active managers and putting the whole fund into index funds and ETFs. My response was simple: ask him how much of the fund he’s comfortable having in assets no one is analyzing. As Steven Bregman of Horizon Kinetics puts it, “basket-based mechanistic investing” is blindly moving trillions of dollars. ETFs don’t have fundamental analysts, and because they don’t question valuations, they don’t contribute to price discovery. Not only is the number of active managers’ analysts likely to decline if more money is shifted to passive investing, but people should also wonder about who’s setting the rules that govern passive funds’ portfolio construction. The low fees and expenses that make passive investments attractive mean their organizers have to emphasize scale. To earn higher fees than index funds and achieve profitable scale, ETF sponsors have been turning to “smarter,” not-exactly-passive vehicles. Thus ETFs have been organized to meet (or create) demand for funds in specialized areas such as various stock categories (value or growth), stock characteristics (low volatility or high quality), types of companies, or geographies. There are passive ETFs for people who want growth, value, high quality, low volatility and momentum. Going to the extreme, investors now can choose from funds that invest passively in companies that have gender-diverse senior management, practice “biblically responsible investing,” or focus on medical marijuana, solutions to obesity, serving millennials, and whiskey and spirits. But what does “passive” mean when a vehicle’s focus is so narrowly defined? Each deviation from the broad indices introduces definitional issues and non-passive, discretionary decisions. Passive funds that emphasize stocks reflecting specific factors are called “smart-beta funds,” but who can say the people setting their selection rules are any smarter than the active managers who are so disrespected these days? Bregman calls this “semantic investing,” meaning stocks are chosen on the basis of labels, not quantitative analysis. There are no absolute standards for which stocks represent many of the characteristics listed above. Importantly, organizers wanting their “smart” products to reach commercial scale are likely to rely heavily on the largest-capitalization, most-liquid stocks. For example, having Apple in your ETF allows it to get really big. Thus Apple is included today in ETFs emphasizing tech, growth, value, momentum, large-caps, high quality, low volatility, dividends, and leverage. Here’s what Barron’s had to say earlier this month: With cap-weighted indexes, index buyers have no discretion but to load up on stocks that are already overweight (and often pricey) and neglect those already underweight. That’s the opposite of buy low, sell high. The large positions occupied by the top recent performers – with their swollen market caps – mean that as ETFs attract capital, they have to buy large amounts of these stocks, further fueling their rise. Thus, in the current up-cycle, over-weighted, liquid, large-cap stocks have benefitted from forced buying on the part of passive vehicles, which don’t have the option to refrain from buying a stock just because its overpriced. Like the tech stocks in 2000, this seeming perpetual motion machine is unlikely to work forever. If funds ever flow out of equities and thus ETFs, what has been disproportionately bought will have to be disproportionately sold. It’s not clear where index funds and ETFs will find buyers for their over-weighted, highly appreciated holdings if they have to sell in a crunch. In this way, appreciation that was driven by passive buying is likely to eventually turn out to be rotational, not perpetual. Finally, the systemic risks to the stock market have to be considered. Bregman calls “the index universe a big, crowded momentum trade.” A handful of stocks – the FAANGs and a few more – are responsible for a rising percentage of the S&P’s gains, meaning the stock market’s health may be overstated. All the above factors raise questions about the likely effectiveness of passive vehicles – and especially smart-beta ETFs. Is Apple a safe stock or a stock that has performed well of late? Is anyone thinking about the difference? Are investors who invest in a number of passive vehicles described in different ways likely to achieve the diversification, liquidity and safety they expect? And what should we think about the willingness of investors to turn over their capital to a process in which neither individual holdings nor portfolio construction is the subject of thoughtful analysis and decision-making, and in which buying takes place regardless of price? Corporate debt instruments are good candidates for spotting bull-market behavior given that (unlike equities, for example), we can readily determine their prospective returns. We know that, as described in “The Race to the Bottom,” in overpopulated markets providers of credit compete to make loans and investments that embody low returns, weak structures and slender margins of safety. Whatever the level of fundamental risk, sometimes the reward for bearing it is demonstrably inadequate, and sometimes it is highly excessive. It’s an over-simplification, but sometimes I think we could base our strategic decisions almost exclusively on the relationship between risk in the market and investors’ willingness to bear it. It’s very helpful to know – and a lot of my new book will be about – where we stand in that swing. In that regard, I’ll remind you that “The Race to the Bottom” was prompted by a Financial Times article about U.K. banks’ willingness to compete for mortgage business by increasing the multiple of annual income they would lend. Earlier this month, ironically, I read the following in another London newspaper, the Daily Mail: In a chilling echo of the sub-prime mortgage crisis of 2007, car finance firms packaged and sold £5.5 billion of risky loan debt to investors last year – twice as much as the year before. Such eagerness to finance low-quality loans will always be a sign of elevated, over-financed, risk-oblivious credit markets. At the late-2008 trough of the financial crisis, high yield bonds and leveraged loans yielded almost 2,000 basis points more than comparable Treasurys, meaning anyone who bought and held couldn’t really lose. Then, as investors recovered their equilibrium and bought, prices rose and the yield spread contracted. Now the spread is merely average relative to history – a few hundred basis points. The net yields on these securities are still highly likely to be well in excess of those on Treasurys, but any capital appreciation would have to come from further spread contraction, and that certainly can’t be counted upon. The credit investors of today clearly aren’t gun-shy, leaving investment opportunities to languish at excessive yields and yield spreads. At best these investments are fairly priced today in relative terms and fully priced – offering low returns like everything else – in absolute terms. I’ll use an example to illustrate the acceptance being accorded low-grade credit instruments. In early May, Netflix issued €1.3 billion of Eurobonds, the lowest-cost debt it ever issued. The interest rate was 3.625%, the covenants were few, and the rating was single-B. Netflix’s GAAP earnings run about $200 million per quarter, but according to Grant’s Interest Rate Observer, in the year that ended March 31, Netflix burned through $1.8 billion of free cash flow. It’s an exciting company, but as Grant’s reminded its readers, bondholders can’t participate in gains, just losses. Given this asymmetrical proposition, any bond issue should be characterized by solidity and a meaningful promised return, not the sex appeal of its issuer. Is it prudent to lend money to a company that goes through it at such a prodigious rate? Will Amazon or Google be able to loosen Netflix’s hold on its customers? Is it wise to buy bonds based on a technology position that could be overtaken? Positive investor sentiment has taken the company’s equity value to $70 billion; what would happen to the bond price if worries about rising competition took a bite out of that one day? Should you take these risks to make less than 4% per year? In Oaktree’s view, this isn’t a solid debt investment; it’s an equity-linked digital content investment totally lacking in upside potential, and it’s not for us. The fact that deals like this can get done easily should tell you something about today’s market climate. Finally, let’s consider whether risk tolerance and carefree behavior are isolated or widespread in today’s credit market. Here are some quotes from a July 14 article by Lisa Abramowicz of Bloomberg Gadfly (emphasis added): Over the last eight years, junk-rated corporate debt has been transformed from a fringe asset to a staple for many fixed-income investors. As they’ve become more popular, these risky bonds and loans have increasingly lost a feature that made them so attractive (and lucrative) – the investor protections known as covenants written into the documents that govern the debt. These are aimed at ensuring investors can recover their money if the company fails. Last month, the $26.9 billion of junk bonds sold had the highest proportion of deals on record with weak investor protections, Moody’s Investor Service reported this week. About 60 percent of the risky U.S. corporate bonds sold had few protections written into their deal documents, Moody’s said. In the leveraged-loan market, nearly three quarters of the debt is “covenant lite” after three years of record issuance. Investors have grown so confident about the seemingly interminable corporate- debt rally that many are dismissing the likelihood of large swaths of risky companies going bankrupt. After all, these covenants usually don’t matter until there’s a problem. It’s a standard cycle: cautious investing produces good performance in a salutary environment . . . which leads to a reduction of caution . . . which leads to bad performance when the environment turns less favorable. This is part of the race to the bottom I wrote about in 2008. Emerging Market Debt The emerging markets are another place where investor opinion fluctuates wildly and visibly. “Everyone knows” the emerging markets have more growth potential than the developed world, but attitudes regarding the realizability of that potential – and thus the price one should pay for it – gyrate wildly over time. I described the phenomenon in “The Role of Confidence” (August 2013). When confidence is running high, the emerging markets are viewed as being just like developed markets, only faster- growing, meaning it’s reasonable for their securities to sell at yields and p/e ratios like those in the developed world. But when confidence declines, it becomes clear that there are risks that don’t exist in the developed world – like coups, institutionalized corruption, maxi-devaluation and debt repudiation – and thus significant valuation discounts are in order. Again, as with corporate credit, which is this? Are investors appropriately sensitive to the risks and imposing reasonable discounts, or are they ignoring the risks and happily paying up? That’s a lot of what you have to know. To answer the question, I’ll make reference to $2.75 billion of bonds that were issued by Argentina in mid-June. The maturity was 100 years – “century bonds” – and the interest rate was 8%. You might have thought this would be a hard thing to sell. After all, Argentina had defaulted on its debts eight times in its 200-year history, with no fewer than five defaults in the past century alone, most recently in 2014 amid a legal dispute with the Elliott hedge fund. . . . But investors do not seem to care: there were $9.75bn of bids. And Argentina is not the only peculiar event in bond markets this month. Take a look, for example, at Ivory Coast. In recent weeks, this West African nation underwent yet another military uprising. But this month it sold 16-year bonds with a 6.25 per cent yield – and these were also heavily oversubscribed. Places such as Senegal and Egypt have also seen hot demand for their debt. (Financial Times, June 27) To conclude on this subject, I can’t resist citing (but am too polite to name) the head of research and strategy for a likewise-unnamed broker/investment bank: “It’s just shocking that they exit default and their bond issue is a century bond,” said [Ms. X]. . . Nevertheless, she is advising her clients to buy the bonds as at least a short term trade. Let me get this straight: it’s incredible that Argentina is able to issue this thing, but it’s a good buy for a moment. It’s a sign of the times: “something may go wrong, but probably not soon.” I much prefer Warren Buffett’s view: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” For only the third time in history, emerging market debt is selling at yields below those on U.S. high yield bonds. Is Argentina, a country that defaulted five times in the last hundred years (and once in the last five), likely to get through the next hundred without a rerun? The essential bottom line in all investing is simple: is the risk premium at least adequate? Can we answer in the affirmative with regard to emerging market debt today? In today’s low-return world, it’s clear that institutional investors needing 7-8% a year aren’t likely to get it from Treasurys yielding 1-2%, high grades at 3-4%, or mainstream stocks that most people expect to return 5-6%. Heck, you can’t even get it from Ivory Coast bonds! Where is one to turn? The good news for firms like Oaktree is that the answer is felt to most likely lie in what have come to be called “alternative investments” (there was no collective term for them when my partners and I started off 30 years ago). Since essentially no public “beta” markets offer the returns institutions need, many have turned instead to so-called “alpha strategies,” where skillful, active management has the potential to augment market returns, producing what’s needed. But one of the biggest alternatives categories – hedge funds – has been largely discredited as a result of the meager average return over the last dozen years. And some of the others, like venture capital, are hard to access and too small to absorb much capital. That brings investors mainly to real estate, distressed debt and, especially, private equity. Private equity firms market double-digit return track records, and even their top-of-the-cycle 2005-07 funds now sport respectable gains. As a result, they’re attracting capital at all-time-high rates: Private equity is experiencing the best fundraising climate in years – perhaps ever. In the first half of the year, 224 North America-focused funds closed, raising $133 billion, while globally there have been 412 private equity funds closed, which raised a combined $221.4 billion, surpassing slightly the record $220.8 billion raised in 2008, according to Preqin. (Mergers & Acquisitions newsletter) Private equity funds have been raising total capital in the hundreds of billions for the last few years, and even before the latest spate of mega-funds, they already had several hundred billion of “dry powder.” Importantly, since private equity managers mostly engage in leveraged buyouts, these amounts have to be viewed in terms of the levered-up total capital they’ll produce. Thus the PE firms will probably add more than a trillion dollars to their buying power this year. Where will it be invested at a time when few assets can be bought at bargain prices? Sellers of private companies, too, tend to set asking prices for their firms based on what cash flows are worth in this low-return world. I’m not saying private equity isn’t a solution, or even that it’s not the best solution. It’s just that its record fund-raising is yet one more sign of the willingness of investors to trust in the future. Perhaps the ultimate demonstration of faith in fund managers is SoftBank’s recent raising of $93 billion for its Vision Fund for technology investments – presumably on the way to $100 billion. SoftBank is a Japanese telecom company showing an 18-year annual return of 44% on investments that have included chipmakers, ride-hailing and telecom. But I see issues with the fund: First, SoftBank’s record of investment success has relied heavily on one phenomenal investment. The $20 million Softbank invested in Alibaba in 2000 has grown in value to more than $50 billion. Skill or luck? And extrapolatable? Second, size matters. In 1999/2000, the venture capital industry got into trouble because it followed massively successful mid-1990s funds of hundreds of millions, with funds of $1-2 billion. The Vision Fund isn’t for startups, but still, can you wisely invest $100 billion in technology? Third, here’s an organization that has never managed money for third parties, starting the biggest fund in history to do just that. Is their experience transferrable? In all these regards I think the fund indicates a high level of enthusiasm and a low level of skepticism. Fourth, and perhaps more importantly for my purposes here, I want to spend some time on the fund’s structure. For each 38 cents they put into the fund’s equity, outside investors are required to put 62 cents into preferred units of the fund. On the other hand, SoftBank itself invested $28 billion in equity but nothing in preferred. That means when the fund reaches $100 billion, SoftBank will have put up only 28% of the capital but will own 50% of the equity. Adding in management fees and carried interest, its 28% of the capital may give it 60-70% of the gains. Even the private equity industry – with its willingness to take risk – has traditionally shied away from piling debt on technology companies (although less so lately). SoftBank doesn’t hesitate to lever its tech investments. The preferred units will pay a 7% annual coupon. Lending money to a tech fund at that modest rate apparently is part of the price demanded of the LPs for an opportunity to invest in the fund’s equity. I can imagine the sales pitch about how lucky the LPs are to get a chance to provide leverage for their own investment, but I doubt I’d be convinced. Finally, as the Financial Times wrote on June 11: While the preferred unit holders will eventually receive their principal back [plus 7% per year], they will only receive [an equity] return for the equity portion of their investment in the fund. All outside backers of the fund are receiving 62 per cent in preferred units and the rest in equity, allowing them to reduce their downside risk, while still generating a good return. Sounds good on the surface. But how much does this diversion of the investors’ capital into preferred units really reduce their downside risk? The FT says investors in the preferred units “will eventually receive their principal back.” Should that really be “will,” or perhaps “may” or “hopefully will”? Does a $100 million investment in the fund put only the $38 million of equity at risk, or is there risk associated with the preferred, too? I guess I don’t consider the preferred units as rock-solid as the FT suggests. Aren’t they more like the Netflix bonds: tech-linked downside with no upside? Would an arm’s-length lender give an LP money at 7% to lever his equity in this fund 1.6 times? The willingness of investors to invest in a shockingly large fund for levered tech investing with a questionable structure is a further indication of an exuberant, unquestioning market. The discussion of innovative investments brings me to Bitcoin, Ether and other digital currencies. I’d guess these things have arisen from the intersection of (a) doubts about financial security – including the value of national currencies – that grew out of the financial crisis and (b) the comfort felt by millennials regarding all things virtual. But they’re not real. Some businesses accept Bitcoin as payment. Some buyers want to own Ether because it can be used to pay for computing power on the Ethereum network. Some people are eager to speculate on digital currency for profit. Others want to put a little money into these to-date-profitable phenomena rather than run the risk of missing out. But they’re not real! People tell me these currencies are solid, because (a) they’re secure against hacking and counterfeiting and (b) the software used to generate them strictly limits the amount that can be created. But they’re not real!!!!! Nobody has been able to make sense to me of these currencies. Here are a few paragraphs on Ether from The New York Times of June 19: The sudden rise of Ethereum highlights how volatile the bewildering world of virtual currency remains, where lines of code can be spun into billions of dollars in a matter of months. . . . Ethereum was launched in the middle of 2015 by a 21-year-old college dropout, Vitalik Buterin . . . Mr. Buterin was inspired by Bitcoin, and the software he built shares some of the same basic qualities. Both are hosted and maintained by the computers of volunteers around the world, who are rewarded for their participation with new digital tokens that are released into the network every day. Because the virtual currencies are tracked and maintained by a network of computers, no government or company is in charge. The prices of both Bitcoin and Ether are established on private exchanges, where people can sell the tokens they own at the going market price. . . . Many [new currency] applications being built on Ethereum are also raising money using the Ether currency, in what are known as initial coin offerings, a play on initial public offerings. Start-ups that have followed this path have generally collected Ether from investors and exchanged them for units of their own specialized virtual currency, leaving the entrepreneurs with the Ether to convert into dollars and spend on operational expenses. These coin offerings, which have proliferated in recent months, have created a surge of demand for the Ether currency. Just last week, investors sent $150 million worth of Ether to a start-up, Bancor, that wants to make it easier to launch virtual currencies. Bottom line: you can use the imaginary currency Ether to buy other new imaginary currencies, or to invest in new companies that will create other new currencies. In “bubble.com,” I highlighted some illogical aspects of e-commerce by including some of my father’s old jokes regarding how to make money. Here’s another that seems 100% appropriate for the digital currency movement: Two guys meet in the street. Joe tells Bob about the hamster he has for sale: pedigreed and highly intelligent. Bob says he’d like to buy a hamster for his kid: “How much is it?” Joe answers, “half a million,” and Bob tells him he’s crazy. They meet again the next day. “How’d you do with that hamster?” Bob asks. “Sold it,” says Joe. “Did you get $500,000?” Bob asks. “Sure,” says Joe. “Cash?” “No,” Joe answers, “I took two $250,000 canaries.” One of my very favorite quotes concerning the market’s foibles, from John Kenneth Galbraith, says that in euphoric times, “past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.” Maybe I’m just a dinosaur, too technologically backward to appreciate the greatness of digital currency. But it is my firm view that the ability of these things to gain acceptance is just one more proof of the prevalence today of financial naiveté, willing risk-taking and wishful thinking. In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it. But this isn’t the first time. The same description can be applied to the Tulip mania that peaked in 1637, the South Sea Bubble (1720) and the Internet Bubble (1999-2000). Serious investing consists of buying things because the price is attractive relative to intrinsic value. Speculation, on the other hand, occurs when people buy something without any consideration of its underlying value or the appropriateness of its price, solely because they think others will pay more for it in the future. It isn’t unreasonable for someone to use Bitcoin to pay for something – or for a seller to accept Bitcoin in payment – based on an agreement between the parties: barter takes place all the time. But does that make it “currency”? The price of Bitcoin has more than doubled since the start of the year. Can something that does that seriously be considered a “medium of exchange” or “store of value,” rather than the subject of a speculative mania? Maybe not, but Bitcoin looks staid in comparison to Ether, which has appreciated 4,500% so far this year. The outstanding Ether is now worth 82% as much as all the Bitcoin in the world, up from 5% at the beginning of the year. The New York Times notes that together, the outstanding Bitcoin and Ether are worth more than Paypal and almost as much as Goldman Sachs. Would you rather own all of the two digital currencies or one of those companies? In other words, are these currencies’ values real? They’re likely to keep working as long as optimism is present, but their performance in bad times is far from dependable. What will happen to Bitcoin’s price and liquidity in a crisis if people decide they’d rather hold dollars (or gold)? We Agree, But . . . Andrew told me about a conversation he had recently with some fund managers, in which he went over a lot of what I’m discussing here. Given today’s conditions, their response started predictably: “We agree, but . . .” We hear a lot of that these days: We agree, but the things we’re doing offer higher returns than the rest. We agree, but cash isn’t an option when it returns nearly nothing. We agree, but we can’t take the risk of being out of the market. We agree, but there’s no alternative. Investors should choose their risk posture based on an assessment of what’s being offered in terms of absolute return, absolute risk, and thus absolute risk-adjusted return. But today – on that famous other hand – investors generally don’t have the luxury of holding out for absolute returns and safety like they enjoyed in the past. Many of the things I’ve highlighted above offer good returns and risk premiums relative to the returns on Treasurys and high grade debt. But (a) low rates may be – generally are expected to be – a temporary condition and (b) it might be wiser to gauge reward in absolute terms. The bottom line is that while the prices and prospective returns on many things are justifiable today relative to other things, you can’t eat (or spend) relative returns. Everyone’s investing on the basis of relatives these days; they see no alternative. But that reminds me of former Citigroup CEO Chuck Prince, who gained fame in the months leading up to the Global Financial Crisis for saying of the bank’s leveraged lending practices, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Today I think most investors know the good times will end someday, as Prince did, but for now they feel they, too, have no choice but to dance. And there’s one other thing we hear a lot these days: We agree things can’t go well forever – we agree the cycle is extended, prices are elevated and uncertainty is high – but we don’t see anything that’s likely to bring the bull market to a close anytime soon. In other words, there’ll be a time for caution, just not today. In that connection, Andrew reminds me about Saint Augustine, who said: “Give me chastity and continence, but not yet.” Is there something other than the punitive returns on safe assets that keeps this from being a time for caution? Observations and Implications As I said, most of the phenomena described above seem reasonable given the rest of what’s going on in today’s economic and financial world. But step back for perspective and put them together, and what do we see? Some of the highest equity valuations in history. The so-called complacency index at an all-time high. The elevation of a can’t-lose group of stocks. The movement of more than a trillion dollars into value-agnostic investing. The lowest yields in history on low-rated bonds and loans. Yields on emerging market debt that are lower still. The most fundraising in history for private equity. The biggest fund of all time raised for levered tech investing. Billions in digital currencies whose value has multiplied dramatically. I absolutely am not saying stocks are too high, the FAANGs will falter, credit investing is risky, digital currencies are sure to end up worthless, or private equity commitments won’t pay off. All I’m saying is that for all the things listed above to simultaneously be gaining in popularity and attracting so much capital, credulousness has to be high and risk aversion has to be low. It’s not that these things are doomed, just that their returns may not fully justify their risk. And, more importantly, that they show the temperature of today’s market to be elevated. Not a nonsensical bubble – just high and therefore risky. Try to think of the things that could knock today’s market off kilter, like a surprising spike in inflation, a significant slowdown in growth, central banks losing control, or the big tech stocks running into trouble. The good news is that they all seem unlikely. The bad news is that their unlikelihood causes all these concerns to be dismissed, leaving the markets susceptible should any of them actually occur. That means this is a market in which riskiness is being tolerated and perhaps ignored, and one in which most investors are happy to bear risk. Thus it’s not one in which we should do so. What else: My observations are always indicative, not predictive. The usual consequences of the conditions I describe – like an eventual increase in risk aversion – should happen, but they don’t have to happen. And they certainly don’t have to happen soon. No one knows anything about timing. Certain consequences are implied, but even if they’re going to happen, we have no way of knowing when. It feels like we’re in the eighth inning, but I have no idea how long the game will go on. I’m never sure of my market observations. As you’ll see in my new book, I believe strongly that where we are in a cycle says a lot about the market’s likely tendencies, but I never state opinions on this subject with high confidence. As a natural worrier, I tend to be early with warnings, as described on page one. ’Nuff said. Finally, while my observations are uncertain and should be taken with a grain of salt, what I am sure of is that valuations and markets are elevated, and the easy money in this cycle has been made. To me, the four components of the current environment listed on pages 2 and 3 – high uncertainty, low prospective returns, high prices and pro-risk behavior – are indisputable. The question is whether you agree. If so, I trust you’ll grant that they make for a troubling combination. Markets normally respond to elevated uncertainty with lower asset prices and compensatorily higher returns. But not today. Thus we’re living in a low-return, high-risk world. Period. For that reason, this might seem like an attractive time to refrain from investing, or at least from bearing risk. However, organizations for which investing is an essential part of the business model – like pension funds, insurance companies, endowments and sovereign wealth funds – generally don’t have the option to not invest. That’s especially true when the return on cash is as low as it is today. Further, the case for cash that can be built today from all the above could have been made years ago, and doing so would have resulted in huge penalties. Oaktree’s investment philosophy generally causes us to eschew the raising and lowering of cash. We might make an exception in extraordinary circumstances, but today doesn’t seem to warrant doing so. Instead, Oaktree will continue to follow its 2012 mantra: “move forward, but with caution” – and, given today’s conditions, with even more caution than in the recent past. If one is going to invest at times like this, investment professionalism – knowing how to bear risk intelligently, striving for return while keeping an eagle-eye on the potential adverse consequences – is the absolute sine qua non. Environments like today’s call to mind the applicability of something I was told more than 40 years ago by Sid Cottle, editor of the later editions of Graham and Dodd’s Security Analysis: “Investment is the discipline of relative selection.” I interpret that to mean we have no alternative but to choose from among the available options based on their relative merit. “There They Go Again” was written in May 2005, at the front end of a string of cautionary memos leading up to the last cyclical peak. It was the first time I explicitly raised the question – too early as usual – of how one should invest in a low-return world. I went on to list a few possibilities, none of which was sure to work, but I concluded with the one thing I was convinced of: . . . there’s no easy answer for investors faced with skimpy prospective returns and risk premiums. But there is one course of action – one classic mistake – that I most strongly feel is wrong: reaching for return. The events of 2007 and 2008 showed this observation to have been prudent and appropriate. And given today’s similarities to the last cycle, I think it’s applicable again. Here’s a great observation on the subject from Berkshire-Hathaway’s 2010 letter to shareholders: We agree with investment writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the point of a gun.” Or as Peter Bernstein put it, “The market is not an accommodating machine; it won’t give you high returns just because you need them.” The key strategic decision for anyone shaping investment strategy is whether to apply aggressiveness or defensiveness at a given point in time. In other words, should we worry more today about losing money or about missing opportunity? The answer at all times depends on what’s available in the investment environment. I have no doubt that the ascent to the apex from which the Global Financial Crisis took place was powered by the willing acceptance of risk in the low-return world of 2004-07. In other words, excessive risk tolerance and the resulting incautious behavior provided the foundation for the vast losses experienced in the move from peak to trough. And in the trough of late 2008/early ’09, I likewise have no doubt that most investors were saying, “I don’t care if I ever make another penny in the market; I just don’t want to lose any more. Get me out!” Their excessive risk aversion created the opportunity for the huge returns enjoyed in the recovery. Where are we today? As I said earlier, risk is high and prospective return is low, and the low prospective returns on safe investments are pushing people into taking risk – which they’re willing to do – at a time when the reward for doing so is low. Given my view of the environment, the only reason to be aggressive today is because defensive investing implies low prospective returns. But the question is whether pursuing high expected returns through aggressiveness can be counted on to be rewarded. If the answer is no, as I believe, then this is a time for caution. That doesn’t mean you have to be content with a low-return portfolio. If you need returns higher than those available in the beta markets at the low-risk end of the spectrum, it is reasonable to move into riskier asset classes. But for every asset class, there are high-risk and low-risk approaches. When the market is rational, low-risk investments will always appear to offer prospective returns lower than those on high-risk ones. But in tough times, the former are less likely to bring losses than the latter. In my opinion that makes them right for today. Perhaps the best way to understand investment cycles is through that great statement attributed to Mark Twain: “History doesn’t repeat, but it does rhyme.” The duration, pace, amplitude and details of each investment cycle are different from those of its predecessors, but the basic themes and essential ingredients are usually vaguely familiar. What Twain calls rhyming history I describe as “common threads.” The themes or threads that repeatedly characterize too-bullish markets are the ones listed on page 4.While they don’t all have to be present for a top, bull market or boom to form, (a) usually many are present when one does and (b) it’s hard for a full-throated bubble to come into existence without them. They truly are the raw materials for market excesses on the upside. On the other hand, the keys to avoiding the classic mistakes also recur, and I listed them in “There They Go Again”: awareness of history, belief in cycles rather than unabated, unidirectional trends, skepticism regarding the free lunch, and insistence on low purchase prices that provide lots of room for error. Adherence to these things – all parts of the canon of defensive investing – invariably will cause you to miss the most exciting part of bull markets, when trends reach irrational extremes and prices go from fair to excessive. But they’ll also make you a long-term survivor. I can’t help thinking that’s a prerequisite for investment success. The checklist for market sanity and safety is simple, and the answers will tell you what to do: Are prospective returns adequate? Are investors appropriately risk-averse? Are they applying skepticism and discipline? Are they demanding sufficient risk premiums? Are valuations reasonable relative to historic standards? Are deal structures fair to investors? Are investors declining any of the new deals? Are there limits on faith in the future? The basic proposition is simple: Investors make the most and the safest money when they do things other people don’t want to do. But when investors are unworried and glad to make risky investments (or worried but investing anyway, because the low-risk alternatives are unappealing), asset prices will be high, risk premiums will be low, and markets will be risky. That’s what happens when there’s too much money and too little fear. I’ll close with a final “ditto,” from “The Race to the Bottom” of just over ten years ago: If you refuse to fall into line in carefree markets like today’s, it’s likely that, for a while, you’ll (a) lag in terms of return and (b) look like an old fogey. But neither of those is much of a price to pay if it means keeping your head (and capital) when others eventually lose theirs. In my experience, times of laxness have always been followed eventually by corrections in which penalties are imposed. It may not happen this time, but I’ll take that risk. In the meantime, Oaktree and its people will continue to apply the standards that have served us so well over the last [thirty] years. Posted at 13:48h, 13 Ottobre Rispondi I like the valuable info you provide in your articles. I will bookmark your blog and check again here regularly. I am quite sure I’ll learn lots of new stuff right here! Good luck for the next! Posted at 10:49h, 05 Febbraio Rispondi Thank you very much and see you soon! Posted at 22:28h, 13 Luglio Rispondi Condividerò il post ccon i miei followers di Facebook

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professional_accounting

FNCE 451- Fall 2015Assignment 1Due October 1, 2015Each problem is worth 3 points for a total of 15. Please don’t hand in your Excel models, just use them. Slight differences in implementation might give different acceptable answers, that’s not the focus here. 1. With interest rates so low, some investors have considered replacing bond investments withstable dividend paying stocks. First we’ll look at a bond. a. ONT 3. 5 June/2/2043 is a bond issued by the Province of Ontario. The 3. 5% coupon ispaid semi-annually on June 2 and December 2 (i. e. $1. 75 per $100). Set up a column ofdates and cash flows in Excel and manually discount them by a rate that you can adjust. (Pretend it is June 2 right now so we don’t have to deal with accrued)b. What discount rate gets you a Present Value close to the trading price of $106? (Guessand check)c. Check your answer with the XNPV function. (Put a 0 cash flow for June 2, 2015 to hackthe formula). d. What is the present value of the final $101. 75 cash flow (that is 28 years from now)?2. Choice Properties REIT equity is a candidate for a “bond surrogate” because it pays a stabledividend supported by collecting rent on grocery stores. a. What is the current dividend (per share) of Choice Properties REIT? How often do theypay?b. Assuming the dividend never changes, set up a cash flow table for the perpetualdividend and discount the cash flows (back to June 2 again). How do you deal withinfinity here? Find a discount rate to get the present value close to the current tradingprice. Compare to the “dividend yield”: annual dividend divided by price. c. Reprogram your model to include a growth rate. Assume 3% growth (rent increases anddevelopment). What’s the discount rate to get close to the current trading price?Compare to the constant case. d. Compare these exercises to the annuity, perpetuity and growing perpetuity in thetextbook. Do the textbook formulas work?e. Interest rate risk. Suppose the Fed raises rates more than expected and all discountrates jump by 1%. What’s the percentage price loss oni. The Ontario long bondii. The constant-dividend Choice REIT (g=0%)iii. The growing Choice REIT (g=3%)3. IRR vs NPV. a. Read this paper for the main ideahttp: //papers. ssrn. com/sol3/papers. cfm?abstract_id=522722b. Verify the numerical results in Table 2. Repeat for a 10% discount rate. c. In your own words, compare the usefulness of the IRR rule and NPV rule for capitalbudgeting decisions. Explain how they are connected and outline how to give meaningto the imaginary roots of the IRR equation. 4. Replacement of equipment. I own an old car that is worth about $3,000. As long as I keep fixingit, that salvage value is constant. It costs $5,000/year to maintain and fuel the car. Elon Muskjust tweeted this: https: //twitter. com/elonmusk/status/639171519197777920The Tesla 3 will cost $35,000, but has much lower fuel and maintenance costs of only $500/year. All these figures are real dollars. Suppose the resale value of the Tesla after 7 years is $10,000. Use a 10% real discount rate. Spreadsheet: a. What is the 7-year present value of costs for my old car? (include final salvage)b. What is the 7-year present value of costs for the Tesla 3 replacement? (include initialsalvage and final resale)c. On a 7-year horizon, what is the annual lease equivalent for each car? In other words,convert the cash flows to a 7-year annuity. On a spreadsheet you can use guess-andcheck (or goal seek, or PMT function), on paper use the A(7,10%)=4. 868 annuity factor. Try all of these methods. d. Perhaps the Tesla also approaches a constant resale value. Since the Tesla generates$4,500/year of operating savings versus the old car (not including initial price), we couldestimate a terminal valuation using a “multiple” of annual savings. Use a 4X multiple,plus the old-car base salvage, to re-estimate the constant resale. What is the 7-yearannual lease equivalent now?5. After-tax yield on bonds. Most bonds right now trade at a lower market yield than their coupon. Therefore, the price is more than par (why?). Real examples of bonds with live prices herehttp: //www. ftse. com/products/FTSETMX/Home/LiveFixed(I will post a spreadsheet to help with this problem)a. Build a spreadsheet with the semi-annual coupon cash flows. Given a purchase price youcan compute the yield using an IRR (and check it with the YIELD function). UseCOUPNCD to get the first date in the cash flow table. Convention is yields are expressedas 2 times the semiannual rate. So use 2*[sqrt(1+IRR)-1]b. The new Alberta tax rates for incomes over $300k are 44% on income and 22% oncapital gains (check this). Assume your client is in that bracket and make a new columnof after tax cash flows. On the first coupon, you don’t pay tax on the accrued that youpaid. And you get a tax bonus at maturity based on the capital loss. c. Find a bond that has a negative after-tax yield! (Recall yield is IRR). Recommend analternative with similar risk, but better tax treatment.

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professional_accounting

Is child support taxable or deductible? Do I file as Head of Household now that my spouse has moved out? I paid the mortgage on the house; do I get to take the mortgage interest deduction? Can we still file jointly this year, if we are separated? Tax questions are always part of the financial discussion of any divorce process. Information about tax consequences is usually needed to evaluate options, make decisions and reach a financial settlement. Although it’s not likely that you’ll make any decision solely based on the taxes involved, understanding the tax implications can be helpful. The Collaborative process provides an opportunity for you both to use one financial neutral to answer your questions about income taxes. The financial neutral is a Certified Public Accountant (CPA) or a financial specialist with specialized training in divorce tax rules and regulations. The financial neutral can provide estimates of the tax consequences of the sale of the marital home, the sale of other assets, a change in income due to alimony, or a distribution of retirement assets. The tax impact is additional data used in the evaluation of options that could become part of your settlement agreement. The questions that follow are a sample of frequently asked questions. The answers are based on IRS tax rules and regulations. You may consider this and other tax information in developing and evaluating options for a financial settlement that takes into account your unique situation and circumstances. You can file as head of household if you are unmarried or ‘considered unmarried’ on December 31st AND you paid more than ½ the cost of keeping up a home for the year AND a ‘qualifying person’ lived with you in the home for more than ½ the year. You are ‘considered unmarried’ if you file a separate return AND you paid more than ½ the cost of keeping up your home for the year AND your spouse did not live in the home during the last six months of the year AND your home was the main home of your child AND you can claim an exemption for the child. In the Collaborative process, since couples usually have a shared custody arrangement for their children, with two or more children, both mother and father can file as Head of Household by arranging their custody schedule appropriately to follow IRS requirements. Who claims the dependency exemption for our child? Generally, the custodial parent claims the dependency exemption (however, see the next question below). By IRS regulations, if your child lives with you more than ½ of the year, then you are the custodial parent, and can claim the child as your dependent, if other age and relationship tests are satisfied. For information about other requirements (age, relationship, etc.), talk to your accountant, tax preparer or Collaborative financial neutral. Can I ‘give’ the dependency exemption for our child to my spouse or former spouse? The custodial parent can give the non-custodial parent the ability to claim the dependent exemption for a child. In order to do this, the custodial parent signs a Form 8332 to release his or her claim to the child’s exemption. The non-custodial parent must then attach a copy of the signed Form 8332 to his or her return to claim the child as a dependent. In the Collaborative process, since parents usually have a shared custody arrangement for their children, with two or more children, the parents can evaluate the option of ‘giving’ the exemption to the non-custodial parent to achieve tax savings. Child support is not taxable income to the parent who receives it. Child support is not tax deductible for the parent who pays it. We are getting divorced this year. Can we still file as married filing jointly this year? You must be married on December 31st to file a tax return as married filing jointly. I am ‘buying out’ my spouse’s ownership interest in the house. Will there be any tax due? Generally, there are no taxes due, when one spouse ‘buys out’ the other spouse for his or her ownership interest in the house. The IRS considers this transaction to be a transfer of property incident to a divorce and, therefore, no gain or loss is recognized on the transfer. My husband made several payments to me before we had an interim agreement that specifies alimony payments. Can he deduct the payments made before the agreement was done? No, in order to deduct payments to a spouse as alimony the payments must be made under a written divorce or separation agreement. Who claims the mortgage interest deduction? deduct ½ of the mortgage interest paid on Schedule A (Itemized Deductions). Your spouse must include ½ of the mortgage payment as alimony income, but can also then deduct ½ of the mortgage interest paid on Schedule A (Itemized Deductions). If you paid 100% of the mortgage payment (principal and interest) on a qualified home that is held as tenants by the entirety, then you can deduct all of the mortgage interest paid on Schedule A (Itemized Deductions). Who claims the real estate tax deduction? deduct the other ½ of the real estate taxes paid on Schedule A (Itemized Deductions). Your spouse must include ½ of the real estate taxes as alimony income, but then can deduct that same amount as a real estate tax deduction on Schedule A (Itemized Deductions). If you paid the real estate taxes and the home is held as tenants by the entirety or in joint tenancy, then you can deduct all of the real estate taxes on Schedule A (Itemized Deductions). We paid estimated taxes to the IRS. Can we split these payments? If you and your spouse made joint estimated tax payments but file separate returns, either of you can claim all of the payments made, or you can divide them in any way that you both agree. It’s a good idea to attach an explanation of how you and your spouse divided the payments to each tax return. If you claim any of the payments on your tax return, enter your spouse’s or former spouse’s social security number in the space provided on the front of Form 1040 or Form 1040A. Can I deduct the cost of the divorce? You cannot deduct all legal fees, but you may be able to deduct legal fees paid for tax advice in connection with a divorce. Tax advice is advice on federal, state, income, estate, gift, inheritance and property taxes. You may also be able to deduct legal fees paid to get or collect alimony. You should ask your attorney for a breakdown of fees paid that shows the amount charged for each service performed in order to document the legal fees paid for tax advice or paid to get alimony. You cannot deduct court costs. You may be able to deduct fees you paid to appraisers and accountants for tax advice, services related to determining your tax liability or help in getting alimony. You cannot deduct the costs of personal advice or counseling, even if they are paid, in part, to achieve a financial settlement. You cannot deduct fees you pay for your spouse, unless those payments qualify as alimony. You claim the deductible fees on Form 1040, Schedule A, as miscellaneous itemized deductions, subject to the 2%-of-adjusted-gross-income limit. You can add legal fees that you pay specifically for a property settlement to the basis of the property you receive. The information above is of a general nature only; you should always check with your own accountant or tax preparer for tax advice related to your specific situation. In the Collaborative process, your financial neutral can answer your tax questions. Resolving your financial issues may seem like a daunting task at first, but, with the help of the Collaborative team and the financial neutral, you and your spouse will reach a shared understanding of how to proceed, and be able to move forward with a sound financial plan for the future. Cynthia Zagorski is a Certified Public Accountant, Certified Financial Planner ®, and Certified Divorce Financial Analyst TM who focuses her practice on the financial issues related to divorce and separation. She has substantial experience as a collaborative financial neutral. She also works with clients and their attorneys in negotiation, litigation and mediation.

{'timestamp': '2019-04-26T01:40:50Z', 'url': 'https://www.collaborativepracticedc.com/articles/2012/02/08/tax-matters/', 'language': 'en', 'source': 'c4'}

professional_accounting

issuers of common stock include regular corporations and investment companies, such as mutual funds and real estate investment trusts. Statutory voting method a voting method that requires the shareholder to divide his or her total votes equally among the issues or directorships being decided; this is the standard voting method in most corporations. Cumulative voting method a voting method that allows the shareholder to allocate his or her aggregate votes on issues or directorships in any combination he or she chooses. Voting right the right of a common shareholder to vote to elect the members of the company's Board of Directors; and to vote on any matters that would affect the shareholder's ownership interest. Non-negotiable security a security which cannot be traded; i.e. a redeemable security. For example, common stock is negotiable and trades in the public markets; whereas mutual fund shares are redeemable with the sponsor - they do not trade. Preemptive right an entitlement that enables common stockholders to maintain proportionate ownership in a company when the company issues new shares. An existing stockholder can use the rights to subscribe to the new shares or may sell the rights to someone else. Rights offering the method and terms by which preemptive rights to subscribe to newly issued common shares are distributed to a company's existing common shareholders. Rights agent usually the transfer agent, the rights agent accepts the monies (along with the appropriate number of rights certificates) for subscriptions to new shares via a rights offering and issues the new shares to the subscribers. Stand-by underwriter an investment banker who makes a firm commitment to an issuer that is attempting to sell additional shares through a rights offering, to stand by ready to buy any of the unsubscribed shares.The underwriter will resell these shares to the public. Subscription price lower than a stock's current market price, the fixed price at which a company's existing shareholders can purchase new shares during a rights offering. transfer agent cancels old shares and issues new shares, keeping a record of current shareholders names and addresses. Convertible preferred preferred stock that the shareholder can convert into a fixed number of common shares.The conversion ratio is set when the preferred stock is issued.note:common stock can never be convertible -only preferred stock and bonds can have a conversion feature. Cumulative Preferred If the issuer omits dividend payments, they "accumulate" and are paid if the issuer can ever resume making dividend payments. All accumulated preferred dividends must be paid, of course, in order to make a common dividend distribution. Participating preferred stock receives the fixed dividend& also participates in better than expected earnings with the common shareholder.This "extra" dividend is payable to both the preferred &common stock only if the earnings for common exceed a specified amount. Forced conversion when an issuer calls in convertible preferred stock or convertible bonds that are trading in the market at a substantial premium. Over-the-counter (OTC) market a decentralized, negotiated market in which many dealers in diverse locations execute trades for customers over an electronic trading system such as NASDAQ or over telephone lines. Conversion ratio the number of common shares that an investor will receive when converting a bond or preferred stock. Performance preferred a not-widely used name for preferred stock issued by a growth company. Also, another name for participating preferred stock. At issuance, warrants typically have exercise prices well above current market price of common stock.for the warrant to have real value,the market price of the common must rise above the exercise price of the warrant. Ex date the day on which the price of the stock is reduced by the dividend amount and anyone purchasing the stock will no longer be eligible to receive the dividend.

{'timestamp': '2019-04-18T20:42:43Z', 'url': 'https://www.studystack.com/flashcard-429005', 'language': 'en', 'source': 'c4'}

professional_accounting

Home > Accountant and Auditor Whistleblower Representation The attorneys at leading whistleblower law firm Zuckerman Law routinely represent accountants and auditors in whistleblower retaliation and SEC whistleblower rewards claims. Zuckerman Law has secured SEC whistleblower awards for auditors and accountants and has also obtained relief for auditors and accountants in Sarbanes-Oxley whistleblower retaliation matters. One of the attorneys at the firm is a licensed CPA and CFE who worked at a big four audit firm and knows first-hand the difficult challenges that auditors face in reporting fraud. Zuckerman Law counsels accountants and auditors concerning the complex legal issues that arise in internal and external audits and in connection with the preparation of financial statements, including: Financial statement fraud Improper revenue recognition Concealed liabilities and expenses Improper disclosures Fraudulent management estimates Misleading non-GAAP reporting Inadequate SOX-required internal controls and fraud detection failure Noncompliance with Section 404 of SOX Management override of internal controls Ineffective fraud risk management control policies SEC Reporting violations Knowingly issuing financial statements that contain material misstatements or lack required disclosures Inappropriately reporting internal controls as effective Issuing misleading press releases Fraudulent “tone at the top” Retaliating against employees for raising concerns about wrongdoing Pressure to engage in earnings management or other fraudulent activity Independence violations and other conflicts of interest External auditor independence violations, including Section 206 of SOX requiring a one-year cooling off period before members of the audit team can begin working for the client in a key financial oversight role Audit Committee independence violations Fraudulent related party transactions Recently the Association of Certified Fraud Examiners published a profile of Matt Stock’s success working with whistleblowers to fight fraud: See our column in Forbes: One Billion Reasons Why The SEC Whistleblower-Reward Program Is Effective See our column in Going Concern: Sarbanes-Oxley 15 Years Later: Accountants Need to Speak Up Now More Than Ever Our attorney’s experience includes: Representing partners and directors at big four audit firms in whistleblower matters; Representing internal auditors under federal and state whistleblower protection laws; Representing a senior audit official at a large public company before the SEC; Representing accountants and auditors in internal investigations and SEC investigations; Investigating and filing whistleblower reward disclosures before the SEC, CFTC, DOJ and IRS. To schedule a free preliminary consultation, click here or call us at 202-262-8959. SOX Whistleblower Attorneys We have assembled a team of leading whistleblower lawyers to provide top-notch representation to whistleblowers. Let us put our unique experience and credentials to work for you: Matt Stock is a Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor. As an auditor, Stock developed expertise in financial statement analysis and internal controls testing and fraud recognition. He uses his auditing experience to help IRS, CFTC and SEC whistleblowers investigate and disclose complex financial frauds to the government and develop a roadmap for the SEC to take an enforcement action. Matt has been interviewed on CNBC, quoted extensively about whistleblower rewards in the media, and is the lead author of SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award. Dallas Hammer has extensive experience representing whistleblowers in retaliation and rewards claims and has written extensively about cybersecurity whistleblowing. He was selected by his peers to be included in The Best Lawyers in America® in the category of employment law in 2021 and 2022. Described by the National Law Journal as a “leading whistleblower attorney,” founding Principal Jason Zuckerman has established precedent under a wide range of whistleblower protection laws and obtained substantial compensation for his clients and recoveries for the government in whistleblower rewards and whistleblower retaliation cases. He served on the Department of Labor's Whistleblower Protection Advisory Committee, which makes recommendations to the Secretary of Labor to improve OSHA’s administration of federal whistleblower protection laws. Zuckerman also served as Senior Legal Advisor to the Special Counsel at the U.S. Office of Special Counsel, the federal agency charged with protecting whistleblowers in the federal government. At OSC, he oversaw investigations of whistleblower claims and obtained corrective action or relief for whistleblowers. Zuckerman was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” (2020, 2018, 2017, 2015, 2009, and 2007), selected by his peers to be included in The Best Lawyers in America® in the category of employment law (2011-2021) and in SuperLawyers in the category of labor and employment law (2012 and 2015-2021), is rated 10 out of 10 by Avvo, based largely on client reviews, and is rated AV Preeminent® by Martindale-Hubbell based on peer reviews We have published extensively on whistleblower rights and protections, and speak nationwide at seminars and continuing legal education conferences. We blog about new developments under whistleblower retaliation and rewards laws at the Whistleblower Protection Law and SEC Awards Blog, and in 2019, the National Law Review awarded Zuckerman its “Go-To Thought Leadership Award” for his analysis of developments in whistleblower law. Our attorneys have been quoted by and published articles in leading business, accounting, and legal periodicals, including The Wall Street Journal, Forbes, CNBC, MarketWatch, Vox, Accounting Today, Going Concern, Law360 – Expert Analysis, Investopedia, The National Law Review, inSecurities, Government Accountability Project, S&P Global Market Intelligence, Risk & Compliance Magazine, The D&O Diary, The Compliance and Ethics Blog, Compliance Week and other printed and electronic media. ABOUT ZUCKERMAN LAW We are a Washington, DC-based law firm that represents whistleblowers in whistleblower rewards and whistleblower retaliation matters and litigates discrimination claims on behalf of employees in the District of Columbia, Maryland, and Virginia. The firm is dedicated to zealously advocating on behalf of our clients to achieve justice and accountability. Steven February 11, 2020 I am 100 percent thrilled with the results received from Jason’s superior skills as an attorney. Jason did exactly what he promised by representing me fearlessly at every step of the process. Let me also add that Jason is a nice guy.

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professional_accounting

NEW YORK, Feb. 20, 2018 (GLOBE NEWSWIRE) -- New York Mortgage Trust, Inc. (Nasdaq:NYMT) (“NYMT,” the “Company,” “we,” “our” or “us”) today reported results for the three and twelve months ended December 31, 2017. Net income attributable to common stockholders of $24.6 million, or $0.22 per share (basic), and comprehensive income to common stockholders of $21.0 million, or $0.19 per share. Net interest income of $15.0 million and portfolio net interest margin of 239 basis points. Book value per common share of $6.00 at December 31, 2017, delivering an economic return of 2.5% for the quarter ended December 31, 2017. Issued 5.4 million shares of 8.00% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Series D Preferred Stock") resulting in total net proceeds of approximately $130.5 million after deducting underwriting fees, commissions and offering expenses. Sold distressed residential mortgage loans for aggregate proceeds of approximately $37.6 million, which resulted in a net realized gain, before income taxes, of approximately $6.2 million. Purchased CMBS securities, including a first loss PO security issued by Freddie Mac-sponsored multi-family K-Series securitizations, for an aggregate gross purchase price of $58.7 million. Purchased Agency-fixed rate RMBS for a gross purchase price of approximately $788.7 million. Declared fourth quarter dividend of $0.20 per common share that was paid on January 25, 2018. Net income attributable to common stockholders in 2017 of $76.3 million, or $0.68 per share (basic). Net interest income of $58.0 million and portfolio net interest margin of 273 basis points. Delivered economic return of 10.9% for the year ended December 31, 2017. Declared aggregate 2017 dividends of $0.80 per common share. Issued $138.0 million aggregate principal amount of convertible notes in a public offering resulting in net proceeds to the Company of approximately $127.0 million. Purchased CMBS securities, including two first loss PO securities issued by Freddie Mac-sponsored multi-family K-Series securitizations, for an aggregate gross purchase price of approximately $171.2 million. Funded in aggregate $60.3 million of preferred equity investments in owners of multi-family properties. Sold distressed residential mortgage loans for aggregate proceeds of approximately $179.7 million resulting in a net realized gain, before income taxes, of approximately $28.0 million. Steven Mumma, NYMT's Chairman and Chief Executive Officer, commented: “the Company had a good fourth quarter, generating $24.6 million in net income and delivering a 2.5% economic return. We benefited from continued credit spread tightening in our multi-family portfolio and solid execution in our distressed residential loan portfolio. The improved changes in credit spreads increased the valuation on our multi-family CMBS by $13.7 million, while our distressed residential loan strategy generated $6.2 million of realized gains on sales, before taxes, for the quarter, bringing the distressed residential loan portfolio’s contribution for the year to $28.0 million, up $11.3 million from the previous year. In October, the Company completed a $135 million offering of its Series D Preferred Stock, which we believe will be accretive to our common stockholders. We invested approximately $52.3 million of the offering proceeds in structured multi-family property investments, with the balance of the proceeds invested in our Agency RMBS strategy. The Company was able to purchase a Freddie Mac K-Series first loss PO security and certain related IO securities for approximately $36.7 million in October, even though competition for credit assets continued to be very competitive. This is the second Freddie Mac K-Series investment we completed this year, bringing our 2017 investments in these securities to $102.1 million. The Company also expanded investment in its second lien program during the quarter, adding approximately $11.3 million of new loans. As mortgage rates rise, we expect this volume to increase further. (1) Includes Agency fixed-rate RMBS, Agency ARMs and Agency IOs. (3) Includes $331.5 million of distressed residential mortgage loans, $36.9 million of distressed residential mortgage loans, at fair value and $101.9 million of Non-Agency RMBS. (4) Other includes $73.8 million of residential mortgage loans held in securitization trusts, $50.2 million of residential second mortgages, at fair value, $12.6 million of investments in unconsolidated entities and $3.5 million of mortgage loans held for sale and mortgage loans held for investment. Mortgage loans held for sale and mortgage loans held for investment are included in the Company’s accompanying consolidated balance sheets in receivables and other assets. Non-callable liabilities consist of $45.0 million in subordinated debentures and $70.3 million in residential collateralized debt obligations. (5) Includes derivative assets and restricted cash posted as margin. (6) Includes $0.5 million held in overnight deposits relating to our Agency IO investments and $9.6 million in deposits held in our distressed residential securitization trusts to be used to pay down outstanding debt. These deposits are included in the Company’s accompanying consolidated balance sheets in receivables and other assets. (7) Our Average Interest Earning Assets is calculated each quarter based on daily average amortized cost. (8) Our Weighted Average Yield on Interest Earning Assets was calculated by dividing our annualized interest income for the quarter by our Average Interest Earning Assets for the quarter. (9) Our Average Cost of Funds was calculated by dividing our annualized interest expense for the quarter by our average interest bearing liabilities, excluding our subordinated debentures and convertible notes, which generated interest expense of approximately $0.6 million and $2.6 million, respectively, for the quarter. Our Average Cost of Funds includes interest expense on our interest rate swaps and amortization of premium on our swaptions. (10) Portfolio Net Interest Margin is the difference between our Weighted Average Yield on Interest Earning Assets and our Average Cost of Funds, excluding the weighted average cost of subordinated debentures and convertible notes. The following table sets forth the actual constant prepayment rates (“CPR”) for selected asset classes, by quarter, for the quarterly periods indicated. For the quarter ended December 31, 2017, we reported net income attributable to common stockholders of $24.6 million as compared to $24.6 million in the quarter ended September 30, 2017. We generated net interest income of $15.0 million and a portfolio net interest margin of 239 basis points for the quarter ended December 31, 2017 as compared to net interest income of $13.3 million and a portfolio net interest margin of 281 basis points for the quarter ended September 30, 2017. The $1.7 million increase in net interest income in the fourth quarter was primarily driven by an increase in average interest earning assets in our Agency RMBS and multi-family portfolios funded, in substantial part, by capital raised in our Series D Preferred Stock offering in October 2017. Our net interest margin decreased 42 basis points due primarily to an increase in the portion of our interest earning assets that are invested in Agency RMBS and a decline in net margin generated by our distressed residential portfolio. An increase in net unrealized gains on multi-family loans and debt held in securitization trusts of $11.3 million primarily due to tightening of credit spreads on our multi-family CMBS acquired during the year. A decrease in realized gains on investment securities and related hedges of $4.1 million due to reduced CMBS sales. A decrease in other income of $5.4 million, which is primarily due to income recognized from redemptions/payoffs of joint venture investments and a mezzanine loan during the quarter ended September 30, 2017 that was not replicated during the fourth quarter. A decrease in realized gains on distressed residential mortgage loans of $1.7 million resulting from lower sales activity during the fourth quarter. The decrease in general and administrative expenses in the fourth quarter can be primarily attributed to a decrease in incentive fee expense on our distressed residential loan strategy due to lower sales activity during the fourth quarter. During the third quarter of 2017, one of the multi-family apartment properties that are consolidated in the Company's financial statements in accordance with GAAP was reclassified from operating real estate held in consolidated variable interest entities to real estate held for sale in consolidated variable interest entities. Accordingly, no depreciation and amortization expense was recognized in the fourth quarter, contributing to the decrease in total operating expenses of $1.4 million. (1) Outstanding shares used to calculate book value per share for the ending balance is based on outstanding shares as of December 31, 2017 of 111,909,909. On Wednesday, February 21, 2018 at 9:00 a.m., Eastern Time, New York Mortgage Trust's executive management is scheduled to host a conference call and audio webcast to discuss the Company’s financial results for the three and twelve months ended December 31, 2017. The conference call dial-in number is (877) 312-8806. The replay will be available until Wednesday, February 28, 2018 and can be accessed by dialing (855) 859-2056 and entering passcode 3385846. A live audio webcast of the conference call can be accessed via the Internet, on a listen-only basis, at the Company's website at http://www.nymtrust.com. Please allow extra time, prior to the call, to visit the site and download the necessary software to listen to the Internet broadcast. Full year 2017 financial and operating data can be viewed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which is expected to be filed with the Securities and Exchange Commission on or about March 1, 2018. A copy of the Form 10-K will be posted at the Company’s website as soon as reasonably practicable following its filing with the Securities and Exchange Commission. New York Mortgage Trust, Inc. is a Maryland corporation that has elected to be taxed as a real estate investment trust for federal income tax purposes (“REIT”). NYMT is an internally managed REIT in the business of acquiring, investing in, financing and managing mortgage-related and residential housing-related assets and targets multi-family CMBS, direct financing to owners of multi-family properties through preferred equity and mezzanine loan investments, residential mortgage loans, including second mortgages and loans sourced from distressed markets, non-Agency RMBS, Agency RMBS and other mortgage- related and residential housing- related investments. Headlands Asset Management, LLC provides investment management services to the Company with respect to its distressed residential loans. For a list of defined terms used from time to time in this press release, see “Defined Terms” below. The following defines certain of the commonly used terms in this press release: “RMBS” refers to residential mortgage-backed securities comprised of adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only, and principal only securities; “Agency RMBS” refers to RMBS representing interests in or obligations backed by pools of residential mortgage loans issued or guaranteed by a federally chartered corporation ("GSE"), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”); "Non-Agency RMBS" refers to RMBS backed by performing, re-performing and non-performing mortgage loans; “Agency ARMs” refers to Agency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS; "Agency fixed-rate RMBS" refers to Agency RMBS comprised of fixed-rate RMBS; “IOs” refers collectively to interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cash flow from a pool of mortgage loans; “Agency IOs” refers to an IO that represents the right to the interest component of cash flow from a pool of residential mortgage loans issued or guaranteed by a GSE, or an agency of the U.S. government; “POs” refers to mortgage-backed securities that represent the right to the principal component of the cash flow from a pool of mortgage loans; “ARMs” refers to adjustable-rate residential mortgage loans; “residential securitized loans” refers to prime credit quality ARMs held in securitization trusts; “distressed residential mortgage loans” or "distressed residential loans" refers to pools of performing, re-performing and to a lesser extent non-performing, fixed-rate and adjustable-rate, fully amortizing, interest-only and balloon, seasoned mortgage loans secured by first liens on one- to four-family properties; “CMBS” refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities, as well as IO or PO securities that represent the right to a specific component of the cash flow from a pool of commercial mortgage loans; “multi-family CMBS” refers to CMBS backed by commercial mortgage loans on multi-family properties; “multi-family securitized loans” refers to the commercial mortgage loans included in the Consolidated K-Series; “CDO” refers to collateralized debt obligation; “CLO” refers to collateralized loan obligation; and "Consolidated K-Series” refers to Freddie Mac-sponsored multi-family loan K-Series securitizations in which the Company owns certain securities. We determined that the Consolidated K-Series were variable interest entities and that we are the primary beneficiary of the Consolidated K-Series. As a result, we are required to consolidate the Consolidated K-Series’ underlying multi-family loans including their liabilities, income and expenses in our consolidated financial statements. We have elected the fair value option on the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations in the assets and liabilities of the Consolidated K-Series be reflected in our consolidated statements of operations. (1) Included in the Company’s accompanying consolidated balance sheets in receivables and other assets. (1) Included in the Company’s accompanying consolidated statements of operations in interest income, investment securities and other. When used in this press release, in future filings with the Securities and Exchange Commission (“SEC”) or in other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “would,” “could,” “goal,” “objective,” “will,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and, as such, may involve known and unknown risks, uncertainties and assumptions. Forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to the Company. If a change occurs, the Company’s business, financial condition, liquidity and results of operations may vary materially from those expressed in its forward-looking statements. The following factors are examples of those that could cause actual results to vary from the Company’s forward-looking statements: changes in interest rates and the market value of the Company’s securities; changes in credit spreads; changes in the long-term credit ratings of the U.S., Fannie Mae, Freddie Mac, and Ginnie Mae; market volatility; changes in the prepayment rates on the mortgage loans underlying the Company’s investment securities; increased rates of default and/or decreased recovery rates on the Company's assets; the Company’s ability to borrow to finance its assets and the terms thereof; changes in governmental laws, regulations or policies affecting the Company’s business; changes in the Company's relationship with its external manager; the Company’s ability to maintain its qualification as a REIT for federal tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including the risk factors described in the Company’s reports filed with the SEC pursuant to the Exchange Act, could cause the Company’s actual results to differ materially from those projected in any forward-looking statements it makes. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. (1) Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company is the primary beneficiary of these VIEs. As of December 31, 2017 and December 31, 2016, assets of consolidated VIEs totaled $10,041,468 and $7,330,872, respectively, and the liabilities of consolidated VIEs totaled $9,436,421 and $6,902,536, respectively.

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professional_accounting

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Registration Statement for Securities to Be Issued in Business Combination Transactions (s-4/a) October 13 2021 - 05:01PM As filed with the Securities and Exchange Commission on October 13, 2021 Registration Statement No. 333-258681 Amendment No . 2 THE SECURITIES ACT OF 1933 Delaware 6770 86-1888095 (Primary Standard Industrial Classification Code Number) Identification Number) (Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices) Attention: Peter Haskopoulos Chief Financial Officer, Chief Accounting Officer and Secretary (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: E. Ramey Layne Vinson & Elkins L.L.P. 1001 Fannin Street Douglas Campbell Solid Power, Inc. 486 S. Pierce Avenue Mark B. Baudler Wilson Sonsini Goodrich & Rosati P.C. One Market Plaza, Spear Tower, Suite 3300 Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective and on completion of the business combination described in the enclosed proxy statement/prospectus. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ☐ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐ If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction: Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐ Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☐ Title of Each Class of Securities to be Registered Registered(1)(2) Offering Price per Share Offering Price(3) Amount of Registration Fee(4)(5) 134,777,882 N/A $1,351,148,267.05 $125,251.44 Based on the maximum number of shares of Class A common stock, par value $0.0001 per share (“Class A Common Stock”), of the registrant estimated to be issued or issuable upon exchange and exercise of all Solid Power Options and Solid Power Warrants (each defined below) in connection with the merger described herein (the “Merger”), assuming an exchange ratio of 3.1917 shares of Class A Common Stock for each share of the common stock of Solid Power, Inc. (“Solid Power”) expected to be outstanding at the closing of the Merger. The estimated exchange ratio calculated herein is based upon Solid Power’s capitalization as of September 30, 2021. The number of shares of Class A Common Stock issued or issuable in the Merger will be adjusted to account for changes in Solid Power’s capitalization prior to the closing of the Merger. Pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”), there are also being registered such additional shares of Class A Common Stock that may be issued because of events such as recapitalizations, stock dividends, stock splits, and reverse stock splits, and similar transactions. Pursuant to Rules 457(c) and 457(f)(1) promulgated under the Securities Act, and solely for the purpose of calculating the registration fee, the proposed maximum aggregate offering price is an amount equal to $1,351,148,267.05, calculated as the product of (i) 134,777,882 shares of Class A Common Stock, the estimated maximum number of shares of Class A Common Stock that may be issued or be issuable in the Merger, and (ii) $10.025, the average of the high and low trading prices of the Class A Common Stock on October 12, 2021. Calculated pursuant to Rule 457 under the Securities Act by calculating the product of (i) the proposed maximum aggregate offering price and (ii) 0.0000927. Previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the U.S. Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. The information in this preliminary proxy statement/prospectus is not complete and may be changed. The securities described herein may not be sold until the registration statement filed with the U.S. Securities and Exchange Commission is declared effective. This preliminary proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PRELIMINARY PROXY STATEMENT/PROSPECTUS—SUBJECT TO COMPLETION, DATED OCTOBER 13, 2021 Dear Stockholders of Decarbonization Plus Acquisition Corporation III: You are cordially invited to attend the special meeting (the “special meeting”) of stockholders of Decarbonization Plus Acquisition Corporation III (“DCRC,” “we,” “our,” “us” or the “Company”), which will be held at , Eastern time, on , 2021, via live webcast at the following address: https://www.cstproxy.com/decarbonizationplusacquisitioniii/2021. At the special meeting, DCRC stockholders will be asked to consider and vote upon the following proposals: The Business Combination Proposal—To consider and vote upon a proposal to (a) approve and adopt the Business Combination Agreement and Plan of Reorganization, dated as of June 15, 2021 (as amended by the First Amendment to the Business Combination Agreement dated October 12, 2021, the “Business Combination Agreement”), among DCRC, DCRC Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of DCRC (“Merger Sub”), and Solid Power, Inc., a Colorado corporation (“Solid Power”), pursuant to which Merger Sub will merge with and into Solid Power, with Solid Power surviving the merger as a wholly owned subsidiary of DCRC and (b) approve such merger and the other transactions contemplated by the Business Combination Agreement (the “business combination” and such proposal, the “Business Combination Proposal”) (Proposal No. 1). A copy of the Business Combination Agreement is attached to this proxy statement/prospectus as Annex A. The Charter Proposals—To consider and vote upon each of the following proposals to amend DCRC’s amended and restated certificate of incorporation (the “Charter”) (collectively, the “Charter Proposals”): The Authorized Share Charter Proposal—To increase the number of authorized shares of DCRC’s capital stock, par value $0.0001 per share, from 271,000,000 shares, consisting of (a) 270,000,000 shares of common stock, including 250,000,000 shares of Class A common stock (the “Class A Common Stock”) and 20,000,000 shares of Class B common stock (the “Class B Common Stock”), and (b) 1,000,000 shares of preferred stock, to 2,200,000,000 shares, consisting of (i) 2,000,000,000 shares of common stock, par value $0.0001, and (ii) 200,000,000 shares of preferred stock (the “Authorized Share Charter Proposal”) (Proposal No. 2); and The Additional Charter Proposal—To (i) eliminate provisions in the Charter relating to DCRC’s initial business combination that will no longer be applicable to DCRC following the closing of the business combination (the “Closing”); (ii) change the post-combination company’s name to “Solid Power, Inc.”; (iii) change the minimum stockholder vote required to amend, repeal or modify certain specified provisions of our proposed second amended and restated certificate of incorporation (the “Proposed Second A&R Charter”) or any provision inconsistent with any provision of New Solid Power’s amended and restated bylaws; (iv) provide for the removal of a director only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the stock outstanding and entitled to vote thereon; (v) remove the right of holders of Class B Common Stock to act by written consent; and (vi) remove the designation of certain courts as the exclusive forum for certain types of stockholder claims (the “Additional Charter Proposal”) (Proposal No. 3). The full text of the Proposed Second A&R Charter reflecting each of the proposed amendments pursuant to the Charter Proposals is attached to this proxy statement/prospectus as Annex B. The Nasdaq Proposal—To consider and vote upon a proposal to approve, for purposes of complying with applicable listing rules of the Nasdaq Capital Market (“Nasdaq”), (a) the issuance (or reservation for issuance in respect of certain options, restricted stock, and warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power Restricted Stock and Solid Power Warrants) of 134,777,882 shares of Class A Common Stock and (b) the issuance and sale of 16,500,000 shares of Class A Common Stock in the private offering of securities to certain investors (the “Nasdaq Proposal”) (Proposal No. 4). The 2021 Plan Proposal—To consider and vote upon a proposal to approve and adopt the Solid Power, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) and material terms thereunder (the “2021 Plan Proposal”) (Proposal No. 5). A copy of the 2021 Plan is attached to this proxy statement/prospectus as Annex C. The ESPP Proposal—To consider and vote upon a proposal to approve and adopt the Solid Power, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”) and material terms thereunder (the “ESPP Proposal”) (Proposal No. 6). A copy of the ESPP is attached to this proxy statement/prospectus as Annex D. The Director Election Proposal—To consider and vote upon a proposal to elect directors to serve until the 2022 annual meeting of stockholders, directors to serve until the 2023 annual meeting of stockholders and directors to serve until the 2024 annual meeting of stockholders, and until their respective successors are duly elected and qualified, subject to such directors’ earlier death, resignation, retirement, disqualification or removal (the “Director Election Proposal”) (Proposal No. 7). The Adjournment Proposal—To consider and vote upon a proposal to approve the adjournment of the special meeting to a later date or dates, if necessary or appropriate, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal, the Charter Proposals, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal or the Director Election Proposal (the “Adjournment Proposal” and, together with the Business Combination Proposal, the Charter Proposals, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal and the Director Election Proposal, the “Proposals”) (Proposal No. 8). The special meeting will be completely virtual. There will be no physical meeting location and the special meeting will only be conducted via live webcast at the following address: https://www.cstproxy.com/decarbonizationplusacquisitioniii/2021. The board of directors of DCRC (the “DCRC Board”) recommends that DCRC stockholders vote “FOR” each Proposal (or in the case of the Director Election Proposal, “FOR ALL NOMINEES”) being submitted to a vote of the stockholders at the special meeting. When you consider the recommendation of the DCRC Board in favor of each of the Proposals, you should keep in mind that certain of DCRC’s directors and officers have interests in the business combination that may conflict with your interests as a stockholder. Please see the section entitled “Proposal No. 1—The Business Combination Proposal—Interests of Certain Persons in the Business Combination.” Each of the Proposals is more fully described in this proxy statement/prospectus, which each DCRC stockholder is encouraged to review carefully. DCRC’s Class A Common Stock and public warrants, which are exercisable for shares of Class A Common Stock under certain circumstances, are currently listed on Nasdaq under the symbols “DCRC” and “DCRCW,” respectively. In addition, certain of our shares of Class A Common Stock and warrants currently trade as units consisting of one share of Class A Common Stock and one-third of one warrant, and are listed on Nasdaq under the symbol “DCRCU.” The units will automatically separate into the component securities upon consummation of the business combination and, as a result, will no longer trade as a separate security. In connection with the Closing, we intend to change our name from “Decarbonization Plus Acquisition Corporation III” to “Solid Power, Inc.,” and we intend to apply to continue the listing of our Class A Common Stock and warrants on Nasdaq under the symbols “SLDP” and “SLDPW,” respectively. Pursuant to our Charter, we are providing the holders of shares of Class A Common Stock originally sold as part of the units issued in our initial public offering (the “IPO” and such holders, the “public stockholders”) with the opportunity to redeem, upon the Closing, shares of Class A Common Stock then held by them for cash equal to their pro rata share of the aggregate amount on deposit (as of two business days prior to the Closing) in the trust account (the “Trust Account”) that holds the proceeds (including interest not previously released to DCRC to pay its franchise and income taxes) from the IPO and a concurrent private placement of warrants to Decarbonization Plus Acquisition Sponsor III LLC, a Delaware limited liability company (our “Sponsor”), and certain of our independent directors. For illustrative purposes, based on the fair value of cash and marketable securities held in the Trust Account as of June 30, 2021 of approximately $350.0 million, the estimated per share redemption price would have been approximately $10.00. Public stockholders may elect to redeem their shares whether or not they are holders as of the record date and whether or not they vote for the Business Combination Proposal. Notwithstanding the foregoing redemption rights, a public stockholder, together with any of his, her or its affiliates or any other person with whom he, she or it is acting in concert or as a “group” (as defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended), will be restricted from redeeming in the aggregate his, her or its shares or, if part of such a group, the group’s shares, in excess of 20% of the outstanding shares of Class A Common Stock sold in the IPO. Holders of DCRC’s outstanding warrants sold in the IPO, which are exercisable for shares of Class A Common Stock under certain circumstances, do not have redemption rights in connection with the business combination. Our Sponsor, officers and directors have agreed to waive their redemption rights in connection with the consummation of the business combination with respect to any shares of Class A Common Stock they may hold, and our shares of Class B Common Stock will be excluded from the pro rata calculation used to determine the per share redemption price. Currently, our Sponsor and directors own approximately 20% of our outstanding Class A Common Stock and Class B Common Stock, including all of the shares of Class B Common Stock. Our Sponsor, officers and directors have agreed to vote any shares of Class A Common Stock and Class B Common Stock owned by them in favor of the business combination. DCRC is providing this proxy statement/prospectus and accompanying proxy card to its stockholders in connection with the solicitation of proxies to be voted at the special meeting and any adjournments or postponements of the special meeting. Your vote is very important. Whether or not you plan to attend the special meeting virtually, please submit your proxy card without delay. We encourage you to read this proxy statement/prospectus carefully. In particular, you should review the matters discussed under the section entitled “Risk Factors” beginning on page 39 of this proxy statement/prospectus. Approval of each of the Business Combination Proposal, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal and the Adjournment Proposal requires the affirmative vote (online or by proxy) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock entitled to vote and actually cast thereon at the special meeting, voting as a single class. Approval of the Authorized Share Charter Proposal requires the affirmative vote (online or by proxy) of (i) the holders of a majority of the shares of Class A Common Stock and Class B Common Stock entitled to vote thereon at the special meeting, voting as a single class, and (ii) the holders of a majority of the shares of Class A Common Stock entitled to vote thereon at the special meeting, voting as a single class. Approval of the Additional Charter Proposal requires the affirmative vote (online or by proxy) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock entitled to vote thereon at the special meeting, voting as a single class. Approval of the Director Election Proposal requires the affirmative vote (online or by proxy) of a plurality of the votes cast by holders of our Class A Common Stock and Class B Common Stock at the special meeting and entitled to vote thereon, voting as a single class. If you sign, date and return your proxy card without indicating how you wish to vote, your proxy will be voted “FOR” each of Proposal Nos. 1, 2, 3, 4, 5, 6 and 8 and “FOR ALL NOMINEES” for Proposal No. 7. If you fail to return your proxy card or fail to submit your proxy by telephone or over the Internet, or fail to instruct your bank, broker or other nominee how to vote, and do not virtually attend the special meeting, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting and, if a quorum is present, will have no effect on the Business Combination Proposal, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal, the Director Election Proposal or the Adjournment Proposal, but will have the same effect as a vote “AGAINST” the Charter Proposals. If you are a stockholder of record and you virtually attend the special meeting and wish to vote, you may withdraw your proxy and vote online. TO EXERCISE YOUR REDEMPTION RIGHTS, YOU MUST ELECT TO HAVE DCRC REDEEM YOUR SHARES FOR A PRO RATA PORTION OF THE FUNDS HELD IN THE TRUST ACCOUNT AND TENDER YOUR SHARES TO DCRC’S TRANSFER AGENT AT LEAST TWO BUSINESS DAYS PRIOR TO THE VOTE AT THE SPECIAL MEETING. YOU MAY TENDER YOUR SHARES BY EITHER DELIVERING YOUR SHARE CERTIFICATE TO THE TRANSFER AGENT OR BY DELIVERING YOUR SHARES ELECTRONICALLY USING THE DEPOSITORY TRUST COMPANY’S DWAC (DEPOSIT WITHDRAWAL AT CUSTODIAN) SYSTEM. IF THE BUSINESS COMBINATION IS NOT COMPLETED, THEN THESE SHARES WILL NOT BE REDEEMED FOR CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BANK OR BROKER TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR REDEMPTION RIGHTS. Thank you for your consideration of these matters. Chief Executive Officer and Director Whether or not you plan to attend the special meeting of DCRC stockholders online, please submit your proxy by completing, signing, dating and mailing the enclosed proxy card in the pre-addressed postage paid envelope or by using the telephone or Internet procedures provided to you by your broker or bank. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares or, if you wish to attend the special meeting of DCRC stockholders and vote online, you must obtain a proxy from your broker or bank. Neither the Securities and Exchange Commission nor any state securities commission has passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense. This proxy statement/prospectus is dated , 2021 and is first being mailed to DCRC stockholders on or about , 2021. Menlo Park, California 94025 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF DECARBONIZATION PLUS ACQUISITION CORPORATION III To Be Held On , 2021 To the Stockholders of Decarbonization Plus Acquisition Corporation III: NOTICE IS HEREBY GIVEN that the special meeting (the “special meeting”) of stockholders of Decarbonization Plus Acquisition Corporation III (“DCRC,” “we,” “our,” “us” or the “Company”) will be held at , Eastern time, on , 2021, via live webcast at the following address: https://www.cstproxy.com/decarbonizationplusacquisitioniii/2021. At the special meeting, DCRC stockholders will be asked to consider and vote upon the following proposals: The Business Combination Proposal—To consider and vote upon a proposal to (a) approve and adopt the Business Combination Agreement and Plan of Reorganization, dated as of June 15, 2021 (as amended by the First Amendment to the Business Combination Agreement dated October 12, 2021, the “Business Combination Agreement”), among DCRC, DCRC Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of DCRC (“Merger Sub”), and Solid Power, Inc., a Colorado corporation (“Solid Power”), pursuant to which Merger Sub will merge with and into Solid Power, with Solid Power surviving the merger as a wholly owned subsidiary of DCRC and (b) approve such merger and the other transactions contemplated by the Business Combination Agreement (the “business combination” and such proposal, the “Business Combination Proposal”) (Proposal No. 1). A copy of the Business Combination Agreement is attached to the accompanying proxy statement/prospectus as Annex A. The Authorized Share Charter Proposal—To increase the number of authorized shares of DCRC’s capital stock, par value $0.0001 per share, from 271,000,000 shares, consisting of (a) 270,000,000 shares of common stock, including 250,000,000 shares of Class A common stock (the “Class A Common Stock”) and 20,000,000 shares of Class B common stock (the “Class B Common Stock”), and (b) 1,000,000 shares of preferred stock, to 2,200,000,000 shares, consisting of (i) 2,000,000,000 shares of common stock, par value $0.0001 per share, and (ii) 200,000,000 shares of preferred stock (the “Authorized Share Charter Proposal”) (Proposal No. 2); and The full text of our proposed second amended and restated certificate of incorporation (the “Proposed Second A&R Charter”) reflecting each of the proposed amendments pursuant to the Charter Proposals is attached to the accompanying proxy statement/prospectus as Annex B. The Nasdaq Proposal—To consider and vote upon a proposal to approve, for purposes of complying with applicable listing rules of the Nasdaq Capital Market, (a) the issuance (or reservation for issuance in respect of certain options, restricted stock, and warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power restricted stock, and Solid Power Warrants) of 134,777,882 shares of Class A Common Stock and (b) the issuance and sale of 16,500,000 shares of Class A Common Stock in the private offering of securities to certain investors (the “Nasdaq Proposal”) (Proposal No. 4). The 2021 Plan Proposal—To consider and vote upon a proposal to approve and adopt the Solid Power, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) and material terms thereunder (the “2021 Plan Proposal”). (Proposal No. 5). A copy of the 2021 Plan is attached to the accompanying proxy statement/prospectus as Annex C. The Director Election Proposal—To consider and vote upon a proposal to elect directors to serve until the 2022 annual meeting of stockholders, directors to serve until the 2023 annual meeting of stockholders and directors to serve until the 2024 annual meeting of stockholders, and until their respective successors are duly elected and qualified, subject to such directors’ earlier death, resignation, retirement, disqualification or removal (the “Director Election Proposal”) (Proposal No. 7). Only holders of record of DCRC’s Class A Common Stock and Class B Common Stock at the close of business on , 2021 are entitled to notice of the special meeting and to vote at the special meeting and any adjournments or postponements thereof. A complete list of DCRC’s stockholders of record entitled to vote at the special meeting will be available at the special meeting and for ten days before the special meeting at DCRC’s principal executive offices for inspection by stockholders during ordinary business hours for any purpose germane to the special meeting. Pursuant to our Charter, we are providing the holders of shares of Class A Common Stock originally sold as part of the units issued in our initial public offering (the “IPO” and such holders, the “public stockholders”) with the opportunity to redeem, upon the Closing, shares of Class A Common Stock then held by them for cash equal to their pro rata share of the aggregate amount on deposit (as of two business days prior to the Closing) in the trust account (the “Trust Account”) that holds the proceeds (including interest not previously released to DCRC to pay its franchise and income taxes) from the IPO and a concurrent private placement of warrants to Decarbonization Plus Acquisition Sponsor III LLC, a Delaware limited liability company (our “Sponsor”), and certain of our independent directors. For illustrative purposes, based on the fair value of cash and marketable securities held in the Trust Account as of June 30, 2021 of approximately $350.0 million, the estimated per share redemption price would have been approximately $10.00. Public stockholders may elect to redeem their shares whether or not they are holders as of the record date and whether or not they vote for the Business Combination Proposal. Notwithstanding the foregoing redemption rights, a public stockholder, together with any of his, her or its affiliates or any other person with whom he, she or it is acting in concert or as a “group” (as defined under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended), will be restricted from redeeming in the aggregate his, her or its shares or, if part of such a group, the group’s shares, in excess of 20% of the outstanding shares of Class A Common Stock sold in the IPO. Holders of DCRC’s outstanding warrants sold in the IPO, which are exercisable for shares of Class A Common Stock under certain circumstances, do not have redemption rights in connection with the business combination. Our Sponsor, officers and directors have agreed to waive their redemption rights in connection with the consummation of the business combination with respect to any shares of Class A Common Stock they may hold, and our shares of Class B Common Stock will be excluded from the pro rata calculation used to determine the per share redemption price. Currently, our Sponsor and directors own approximately 20% of our outstanding Class A Common Stock and Class B Common Stock, including all of the shares of Class B Common Stock. Our Sponsor, officers and directors have agreed to vote any shares of Class A Common Stock and Class B Common Stock owned by them in favor of the business combination. We may not consummate the business combination unless the Business Combination Proposal, the Charter Proposals and the Nasdaq Proposal are approved at the special meeting. The Charter Proposals, the 2021 Plan Proposal, the ESPP Proposal and the Director Election Proposal are conditioned on the approval of the Business Combination Proposal and the Nasdaq Proposal. The Adjournment Proposal is not conditioned on the approval of any other Proposal set forth in the accompanying proxy statement/prospectus. Your attention is directed to the proxy statement/prospectus accompanying this notice (including the annexes thereto) for a more complete description of the proposed business combination and related transactions and each of our Proposals. We encourage you to read the accompanying proxy statement/prospectus carefully. If you have any questions or need assistance voting your shares, please call our proxy solicitor, Morrow Sodali LLC, at (800) 662-5200 (banks and brokers call collect at (203) 658-9400). By Order of the Board of Directors ABOUT THIS PROXY STATEMENT/PROSPECTUS CERTAIN DEFINED TERMS SUMMARY TERM SHEET QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR DCRC STOCKHOLDERS SUMMARY OF THE PROXY STATEMENT/PROSPECTUS UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION COMPARATIVE SHARE INFORMATION SPECIAL MEETING OF DCRC STOCKHOLDERS PROPOSAL NO. 1—THE BUSINESS COMBINATION PROPOSAL PROPOSAL NO. 2—THE AUTHORIZED SHARE CHARTER PROPOSAL PROPOSAL NO. 3—THE ADDITIONAL CHARTER PROPOSAL PROPOSAL NO. 4—THE NASDAQ PROPOSAL PROPOSAL NO. 5—THE 2021 PLAN PROPOSAL PROPOSAL NO. 6—THE ESPP PROPOSAL PROPOSAL NO. 7—THE DIRECTOR ELECTION PROPOSAL PROPOSAL NO. 8—THE ADJOURNMENT PROPOSAL MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SOLID POWER INFORMATION ABOUT SOLID POWER MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF DCRC INFORMATION ABOUT DCRC MANAGEMENT AFTER THE BUSINESS COMBINATION DESCRIPTION OF SECURITIES BENEFICIAL OWNERSHIP OF SECURITIES CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS PRICE RANGE AND DIVIDENDS OF SECURITIES INDEPENDENT REGISTERED ACCOUNTING FIRM HOUSEHOLDING INFORMATION TRANSFER AGENT AND REGISTRAR SUBMISSION OF STOCKHOLDER PROPOSALS FUTURE STOCKHOLDER PROPOSALS WHERE YOU CAN FIND ADDITIONAL INFORMATION ANNEX A: BUSINESS COMBINATION AGREEMENT AND PLAN OF REORGANIZATION ANNEX A-1: FIRST AMENDMENT TO THE BUSINESS COMBINATION AGREEMENT A-1-1 ANNEX B: SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION ANNEX C: SOLID POWER, INC. 2021 EQUITY INCENTIVE PLAN ANNEX D: SOLID POWER, INC. 2021 EMPLOYEE STOCK PURCHASE PLAN This document, which forms part of a registration statement on Form S-4 filed with the U.S. Securities and Exchange Commission (“SEC”) by DCRC (File No. 333-258681) (the “Registration Statement”), constitutes a prospectus of DCRC under Section 5 of the Securities Act with respect to the shares of Class A Common Stock to be issued if the business combination described below is consummated. This document also constitutes a notice of meeting and a proxy statement under Section 14(a) of the Exchange Act with respect to the special meeting of DCRC stockholders at which DCRC stockholders will be asked to consider and vote upon a proposal to approve the business combination by the approval and adoption of the Business Combination Agreement, among other matters. This proxy statement/prospectus incorporates important business and financial information about DCRC that is not included in or delivered with the document. This information is available without charge to you upon written or oral request. To make this request, you should contact our proxy solicitor at: Morrow Sodali LLC (banks and brokers call collect at (203) 658-9400) Email: [email protected] To obtain timely delivery of requested materials, you must request the information no later than five business days prior to the date of the special meeting. You may also obtain additional information about us from documents filed with the SEC by following the instruction in the section entitled “Where You Can Find Additional Information.” Unless the context otherwise requires, references in this proxy statement/prospectus to: “ASC 815” are to Accounting Standards Codification 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Equity;” “business combination” are to the transactions contemplated by the Business Combination Agreement; “Business Combination Agreement” are to that certain Business Combination Agreement and Plan of Reorganization, dated as of June 15, 2021, by and among DCRC, Merger Sub and Solid Power, as amended by the First Amendment to the Business Combination Agreement dated October 12, 2021; “Charter” are to DCRC’s Amended and Restated Certificate of Incorporation; “Class A Common Stock” are to (a) prior to giving effect to the business combination, DCRC’s Class A Common Stock, par value $0.0001 per share, and (b) after giving effect to the business combination, the Class A Common Stock re-designated as “common stock, par value $0.0001 per share”; “Class B Common Stock” are to DCRC’s Class B Common Stock, par value $0.0001 per share; “Closing” are to the closing of the business combination; “Closing Date” are to the date on which the Closing occurs; “Code” are to Internal Revenue Code of 1986, as amended; “Conversion Reaction Cell” are to Solid Power’s conversion reaction cathode cells. “DCRC,” “we,” “our,” “us” or the “Company” are to Decarbonization Plus Acquisition Corporation III, a Delaware corporation; “DCRC Board” are to the board of directors of DCRC; “Effective Time” are to the effective time of the Merger; “Exchange Act” are to the Securities Exchange Act of 1934, as amended; “Exchange Ratio” are to the quotient obtained by dividing (i) the Solid Power Merger Shares by (ii) the Solid Power Outstanding Shares; “EV” are to electric vehicle; “eVTOL” are to electric vertical takeoff and landing aircraft; “FCPA” are to the Foreign Corrupt Practices Act; “Ford” are to Ford Motor Company, a Delaware corporation; “Founder Shares” are to the outstanding shares of our Class B Common Stock; “GAAP” are to U.S. generally accepted accounting principles; “Historical Rollover Stockholders” are to the holders of shares of Class A Common Stock that will be issued in exchange for all outstanding shares of Solid Power Common Stock in the business combination (which, for the avoidance of doubt, includes holders of Solid Power Preferred Stock, each share of which will be converted to Solid Power Common Stock immediately before consummation of the business combination); “JDAs” are to joint development agreements; “Initial Business Combination” are to our initial merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses; “initial stockholders” are to the holders of our Founder Shares, which includes our Sponsor and our independent directors; “Initial Public Offering” or “IPO” are to DCRC’s initial public offering of units, which closed on March 26, 2021; “IRS” are to the Internal Revenue Service; “Li2S” are to lithium-containing precursor material; “Lithium Metal EV Cell” are to Solid Power’s lithium metal anode battery cells; “management” or our “management team” are to our officers and directors; “Merger” are to the merger of Merger Sub with and into Solid Power, with Solid Power surviving the merger as a wholly owned subsidiary of DCRC; “Merger Sub” are to DCRC Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of DCRC; “Merger Sub Common Stock” are to Merger Sub’s common stock, par value $0.0001 per share; “Nasdaq” are to the Nasdaq Capital Market; “New Solid Power” are to (a) prior to giving effect to the business combination, DCRC, and (b) after giving effect to the business combination, Solid Power, Inc., the new name of DCRC after giving effect to the business combination; “New Solid Power Board” are to the board of directors of New Solid Power. “New PIPE Investors” are to investors in the PIPE Financing; “NMC” are to lithium nickel manganese cobalt oxide; “NOLs” are to net operating loss carryforwards; “OEM” are to original equipment manufacturers; “PIPE Financing” are to the private offering of securities of New Solid Power to certain investors in connection with the business combination; “PIPE Funds” are to the proceeds from the PIPE Financing; “PIPE Shares” are to the shares of Class A Common Stock that are issued in the PIPE Financing; “PPP” are to the 2020 Payroll Protection Plan. “Preferred Stock” are to (a) prior to giving effect to the business combination, DCRC’s Preferred Stock, par value $0.0001 per share, and (b) after giving effect to the business combination, New Solid Power’s Preferred Stock, par value $0.0001 per share; “private placement warrants” are to the warrants issued to our Sponsor and certain of our independent directors in a private placement simultaneously with the closing of our IPO; “Proposed Bylaws” are to the proposed amended and restated bylaws of New Solid Power, which will be effective immediately prior to the completion of the business combination; “Proposed Second A&R Charter” are to the proposed second amended and restated certificate of incorporation of New Solid Power, which will be effective immediately prior to the completion of the business combination; “public shares” are to shares of DCRC’s Class A Common Stock sold as part of the units in the IPO (whether they were purchased in the IPO or thereafter in the open market); “public stockholders” are to the holders of DCRC’s public shares; “public warrants” are to the warrants sold as part of the units in the IPO (whether they were purchased in the IPO or thereafter in the open market); “Riverstone” are to Riverstone Investment Group LLC, a Delaware limited liability company, and its affiliates; “Sarbanes-Oxley Act” are to the Sarbanes-Oxley Act of 2020; “SEC” are to the U.S. Securities and Exchange Commission; “Series B Financing” are to Solid Power’s issuance and sale of an aggregate (i) 8,777,812 shares of Solid Power Series B Preferred Stock and (ii) 1,755,557 warrants to purchase Solid Power Common Stock, in exchange for all of Solid Power’s $13.4 million aggregate principal amount of convertible promissory notes and $135.6 million in cash, which issuance and sale concluded May 12, 2021. “Securities Act” are to the Securities Act of 1933, as amended; “Silicon EV Cell” are to Solid Power’s high-content silicon anode battery cells; “Solid Power” are to Solid Power, Inc., a Colorado corporation; “Solid Power Charter” are to Solid Power’s Fourth Amended and Restated Articles of Incorporation dated April 30, 2021, as the same may have been amended, supplemented or modified from time to time; “Solid Power Common Stock” are to Solid Power’s common stock, par value $0.0001 per share; “Solid Power Merger Shares” are 123,900,000; “Solid Power Options” are to all options to purchase shares of Solid Power Common Stock, whether or not exercisable and whether or not vested, outstanding immediately prior to the Effective Time under the Solid Power Stock Plan or otherwise; “Solid Power Outstanding Shares” are to the sum of (without duplication) (i) total number of shares of Solid Power Common Stock issued and outstanding immediately prior to the Effective Time, expressed on a fully-diluted and as-converted to Solid Power Common Stock basis and including, for the avoidance of doubt, the number of shares of Solid Power Common Stock issuable upon conversion of the Solid Power Preferred Stock pursuant to the Business Combination Agreement, plus (ii) the number of shares of Solid Power Common Stock that are issuable upon the net exercise of Solid Power Options that are vested, unexpired, issued and outstanding as of immediately prior to the Effective Time, assuming that the fair market value of one share of Solid Power Common Stock issuable pursuant to a Solid Power Option equals (x) the Exchange Ratio multiplied by (y) $10.00, plus (iii) the number of shares of Solid Power Common Stock issuable upon the net exercise of Solid Power Warrants that are unexpired, issued and outstanding as of immediately prior to the Effective Time, assuming that the fair market value of one share of Solid Power Common Stock issuable pursuant to a Solid Power Warrant equals the (x) Exchange Ratio multiplied by (y) $10.00, provided that, the Solid Power Outstanding Shares excludes any unvested Solid Power Options, certain promised and unissued Solid Power Options and the number of shares of Solid Power Common Stock subject to the awards of Solid Power Restricted Stock; “Solid Power Preferred Stock” are to the Solid Power Series A-1 Preferred Stock and the Solid Power Series B Preferred Stock, each share of which will be converted to Solid Power Common Stock immediately prior to the consummation of the business combination; “Solid Power Restricted Stock” are to unvested restricted shares of Solid Power Common Stock outstanding immediately prior to the Effective Time under the Solid Power Stock Plan or otherwise; “Solid Power Series A-1 Preferred Stock” are to Solid Power’s preferred stock, par value $0.0001 per share, designated as Series A-1 Preferred Stock in the Solid Power Charter; “Solid Power Series B Preferred Stock” are to Solid Power’s preferred stock, par value $0.0001 per share, designated as Series B Preferred Stock in the Solid Power Charter, which were issued in the Series B Financing; “Solid Power Stock” are to Solid Power Common Stock and Solid Power Preferred Stock; “Solid Power Stock Plan” are to the Solid Power, Inc. 2014 Equity Incentive Plan, as amended on April 7, 2015, February 1, 2017, and February 20, 2019 as such may have been further amended, supplemented or modified from time to time; “Solid Power Warrants” are to warrants to purchase shares of Solid Power Common Stock and/or Solid Power Preferred Stock; “special meeting” are to the special meeting of stockholders of DCRC that is the subject of this proxy statement/prospectus and any adjournments or postponements thereof; “Sponsor” are to Decarbonization Plus Acquisition Sponsor III LLC, a Delaware limited liability company, and an affiliate of Riverstone; “Surviving Corporation” are to (a) prior to giving effect to the business combination, Solid Power, and (b) after giving effect to the business combination, Solid Power Operating, Inc., the new name of Solid Power after giving effect to the business combination; “Trust Account” are to the trust account that holds the proceeds (including interest not previously released to DCRC to pay its franchise and income taxes) from the IPO and the concurrent private placement of private placement warrants; “units” are to the units sold in the IPO, each of which consists of one share of Class A Common Stock and one-third of one public warrant; and “voting common stock” are to DCRC’s Class A Common Stock and Class B Common Stock. Unless otherwise specified, the voting and economic interests of DCRC stockholders set forth in this proxy statement/prospectus assume the following: no public stockholders elect to have their public shares redeemed; 16,500,000 shares of Class A Common Stock are issued in the PIPE Financing; at Closing, 102,788,777 shares of Class A Common Stock are issued to Historical Rollover Stockholders in the business combination, and the Solid Power Options, Solid Power Restricted Stock, and Solid Power Warrants convert into options, restricted stock and warrants in respect of 31,989,105 shares of Class A Common Stock; none of DCRC’s initial stockholders, the Historical Rollover Stockholders, or the New PIPE Investors purchase shares of Class A Common Stock in the open market; our Sponsor has not made any working capital loans to DCRC; that there are no other issuances of equity interests of DCRC or Solid Power prior to or in connection with the Closing; and that there are no exercises of Solid Power Options or Solid Power Warrants prior to or in connection with the Closing. Based on the assumptions set forth above, the Exchange Ratio would be calculated as the quotient obtained by dividing (i) 123,900,000 (the number of Solid Power Merger Shares), by (ii) approximately 38,819,196 (the number of Solid Power Outstanding Shares) shares of Solid Power Common Stock outstanding immediately prior to the Effective Time, expressed on a fully-diluted and as converted to Solid Power Common Stock basis, and would accordingly be 3.1917. Further, unless otherwise specified, the voting and economic interests of DCRC stockholders set forth in this proxy statement/prospectus do not take into account the private placement warrants and public warrants, which will remain outstanding following the business combination and may be exercised at a later date. In accordance with our Charter, shares of Class B Common Stock will automatically convert into shares of Class A Common Stock on a one-for-one basis upon consummation of the business combination, resulting in the issuance of 8,750,000 shares of Class A Common Stock in the aggregate. Certain sections in this proxy statement/prospectus refer to a maximum redemption scenario. Unless otherwise specified, that scenario assumes for illustrative purposes that 21,500,000 shares of Class A Common Stock are redeemed in connection with the Closing, resulting in an aggregate payment of approximately $215.0 million from the Trust Account. For more information, see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.” This Summary Term Sheet, together with the sections entitled “Questions and Answers About the Proposals for DCRC Stockholders” and “Summary of the Proxy Statement/Prospectus,” summarizes certain information contained in this proxy statement/prospectus, but does not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus, including the attached annexes, for a more complete understanding of the matters to be considered at the special meeting. DCRC is a blank check company incorporated as a Delaware corporation for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. For more information about DCRC, see the section entitled “Information About DCRC.” There are currently 35,000,000 shares of DCRC’s Class A Common Stock and 8,750,000 shares of DCRC’s Class B Common Stock issued and outstanding. In addition, there are currently 18,333,334 warrants of DCRC outstanding, consisting of 11,666,667 public warrants and 6,666,667 private placement warrants. Each whole warrant entitles the holder to purchase one whole share of Class A Common Stock for $11.50 per share. The warrants will become exercisable on the later of 30 days after the completion of an Initial Business Combination or 12 months from the closing of our Initial Public Offering and will expire five years after the completion of an Initial Business Combination or earlier upon redemption or liquidation. Once the warrants become exercisable, DCRC may redeem warrants in certain circumstances. See the section entitled “Description of Securities—Warrants.” Solid Power, a Colorado corporation, is developing all-solid-state battery cell technology that replaces the liquid or gel polymer electrolyte used in conventional lithium-ion battery cells with a sulfide-based solid electrolyte, and is focused solely on the development and commercialization of all-solid-state battery cells and solid electrolyte materials, primarily for the fast-growing battery-powered electric vehicle market. For more information about Solid Power, see the sections entitled “Information About Solid Power” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Solid Power.” On June 15, 2021, we and our wholly owned subsidiary, Merger Sub, entered into the Business Combination Agreement with Solid Power. The parties subsequently amended the Business Combination Agreement on October 12, 2021. A copy of the Business Combination Agreement is attached to this proxy statement/prospectus as Annex A, and a copy of the First Amendment to the Business Combination Agreement is attached to this proxy statement/prospectus as Annex A-1. Pursuant to the Business Combination Agreement, and subject to the terms and conditions contained therein, Merger Sub will merge with and into Solid Power, with Solid Power surviving the merger as a wholly owned subsidiary of New Solid Power. For more information about the Business Combination Agreement and the business combination, see the section entitled “Proposal No. 1—The Business Combination Proposal.” At the Closing, 102,788,777 shares of Class A Common Stock will be issued to the Historical Rollover Stockholders in the business combination in exchange for all outstanding shares of Solid Power Common Stock. It is also anticipated that we will reserve for issuance up to 31,989,105 shares of Class A Common Stock in respect of New Solid Power options. Restricted stock and warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power Restricted Stock and Solid Power Warrants, and each share of Class A Common Stock will be re-designated as “common stock, par value $0.0001.” For more information about the Business Combination Agreement and the business combination, see the section entitled “Proposal No. 1—The Business Combination Proposal.” The Closing is subject to the satisfaction (or waiver) of a number of conditions set forth in the Business Combination Agreement, including, among others, receipt of the requisite stockholder approval of the Business Combination Agreement and the business combination as contemplated by this proxy statement/prospectus. For more information about the closing conditions to the business combination, see the section entitled “Proposal No. 1—The Business Combination Proposal—The Business Combination Agreement—Conditions to Closing of the Business Combination Agreement.” The Business Combination Agreement may be terminated at any time prior to the consummation of the business combination upon mutual written consent of DCRC and Solid Power, or for other reasons in specified circumstances. For more information about the termination rights under the Business Combination Agreement, see the section entitled “Proposal No. 1—The Business Combination Proposal—The Business Combination Agreement—Termination.” The proposed business combination involves numerous risks. For more information about these risks, please see the section entitled “Risk Factors.” Pursuant to the PIPE Financing, we have agreed to issue and sell to certain investors, and those investors have agreed to buy from us, in connection with the Closing, an aggregate of 16,500,000 shares of Class A Common Stock at a purchase price of $10.00 per share for an aggregate commitment of $165,000,000. Such Class A Common Stock would be valued at approximately $ , based on the closing price of our Class A Common Stock of $ per share on , 2021. Under our Charter, in connection with the business combination, our public stockholders may elect to have their shares redeemed for cash at the applicable redemption price per share calculated in accordance with our Charter. As of June 30, 2021, this would have amounted to approximately $10.00 per share. If a holder exercises its redemption rights, then such holder will be exchanging its public shares for cash and will no longer own shares of DCRC following the completion of the business combination and will not participate in the future growth of New Solid Power, if any. Such a holder will be entitled to receive cash for its public shares only if it properly demands redemption and delivers its shares (either physically or electronically) to our transfer agent at least two business days prior to the special meeting. For more information regarding these procedures, see the section entitled “Special Meeting of DCRC Stockholders—Redemption Rights.” We anticipate that, upon the Closing, the ownership of New Solid Power will be as follows: the Historical Rollover Stockholders (which, for the avoidance of doubt, includes holders of Solid Power Preferred Stock, each share of which will be converted to Solid Power Common Stock immediately before consummation of the business combination) will own 102,788,777 shares of our Class A Common Stock, which will constitute 63.0% of our outstanding Class A Common Stock; the public stockholders will own 35,000,000 shares of our Class A Common Stock, which will constitute 21.5% of our outstanding Class A Common Stock; the New PIPE Investors will own 16,500,000 shares of our Class A Common Stock, which will constitute 10.1% of our outstanding Class A Common Stock; and the initial stockholders will own 8,750,000 shares of our Class A Common Stock, which will constitute 5.4% of our outstanding Class A Common Stock. The number of shares and the interests set forth above (a) assume (i) that no public stockholders elect to have their public shares redeemed, (ii) that there are no other issuances of equity interests of DCRC or Solid Power and (iii) that there are no exercises of Solid Power Options or Solid Power Warrants and (b) do not take into account DCRC warrants that will remain outstanding following the business combination and may be exercised at a later date. As a result of the business combination, the economic and voting interests of our public stockholders will decrease. If we assume the maximum redemptions scenario described under the section entitled “Unaudited Pro Forma Condensed Combined Financial Information—Basis of Pro Forma Presentation,” i.e., 21,500,000 shares of Class A Common Stock are redeemed, and the assumptions set forth in the foregoing clauses (a)(ii)–(iii) and (b) remain true, the ownership of New Solid Power upon the Closing will be as follows: the public stockholders will own 13,500,000 shares of our Class A Common Stock, which will constitute 9.5% of our outstanding Class A Common Stock; The ownership percentages with respect to New Solid Power set forth above do not take into account warrants to purchase Class A Common Stock that will remain outstanding immediately following the business combination, but do include the Founder Shares, which will convert into Class A Common Stock upon an Initial Business Combination. If the facts are different than these assumptions, the percentage ownership retained by DCRC’s existing stockholders in New Solid Power following the business combination will be different. For example, if we assume that all outstanding 11,666,667 public warrants and 6,666,667 private placement warrants were exercisable and exercised following completion of the business combination and further assume that no public stockholders elect to have their public shares redeemed, then the ownership of New Solid Power would be as follows: the New PIPE Investors will own 16,500,000 shares of our Class A Common Stock, which will constitute 9.1% of our outstanding Class A Common Stock; and the initial stockholders will own 15,416,667 shares of our Class A Common Stock, which will constitute 8.5% of our outstanding Class A Common Stock. The public warrants and private placement warrants will become exercisable on the later of 30 days after the completion of an Initial Business Combination or 12 months from the closing of our Initial Public Offering and will expire five years after the completion of an Initial Business Combination or earlier upon their redemption or liquidation. Please see the sections entitled “Summary of the Proxy Statement/Prospectus—Ownership of New Solid Power After the Closing” and “Unaudited Pro Forma Condensed Combined Financial Information” for further information. The DCRC Board considered various factors in determining whether to approve the Business Combination Agreement and the business combination. For more information about the DCRC Board’s decision-making process, see the section entitled “Proposal No. 1—The Business Combination Proposal—DCRC Board’s Reasons for the Approval of the Business Combination.” In addition to voting on the proposal to approve and adopt the Business Combination Agreement and the business combination (the “Business Combination Proposal”) at the special meeting, DCRC’s stockholders will also be asked to vote on the approval of: an amendment to DCRC’s Charter to increase the number of authorized shares of DCRC’s capital stock, par value $0.0001 per share, from 271,000,000 shares, consisting of (a) 270,000,000 shares of common stock, including 250,000,000 shares of Class A Common Stock and 20,000,000 shares of Class B Common Stock, and (b) 1,000,000 shares of Preferred Stock, to 2,200,000,000 shares, consisting of (i) 2,000,000,000 shares of common stock, par value $0.0001 per share, and (ii) 200,000,000 shares of Preferred Stock (the “Authorized Share Charter Proposal”); amendments to DCRC’s Charter to (i) eliminate provisions in the Charter relating to DCRC’s Initial Business Combination that will no longer be applicable to DCRC following the Closing; (ii) change the post-combination company’s name to “Solid Power, Inc.”; (iii) change the minimum stockholder vote required to amend, repeal or modify certain specified provisions of the Proposed Second A&R Charter or any provision inconsistent with any provision of New Solid Power’s amended and restated bylaws; (iv) provide for the removal of a director only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the stock outstanding and entitled to vote thereon; (v) remove the right of holders of Class B Common Stock to act by written consent; and (vi) remove the designation of certain courts as the exclusive forum for certain types of stockholder claims (the “Additional Charter Proposal” and, together with the Authorized Share Charter Proposal, the “Charter Proposals”); for purposes of complying with applicable listing rules of Nasdaq, (a) the issuance (or reservation for issuance in respect of New Solid Power options, New Solid Power restricted stock and New Solid Power warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power Restricted Stock and Solid Power Warrants) of 134,777,882 shares of Class A Common Stock and (b) the issuance and sale of 16,500,000 shares of Class A Common Stock in the PIPE Financing (the “Nasdaq Proposal”); the Solid Power, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) and material terms thereunder (the “2021 Plan Proposal”); the Solid Power, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”) and material terms thereunder (the “ESPP”); the election of directors to serve until the 2022 annual meeting of stockholders, directors to serve until the 2023 annual meeting of stockholders and directors to serve until the 2024 annual meeting of stockholders, and until their respective successors are duly elected and qualified, subject to such directors’ earlier death, resignation, retirement, disqualification or removal (the “Director Election Proposal”); and the adjournment of the special meeting to a later date or dates, if necessary or appropriate, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal, the Charter Proposals, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal or the Director Election Proposal (the “Adjournment Proposal” and, together with the Business Combination Proposal, the Charter Proposals, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal and the Director Election Proposal, the “Proposals”). For more information, see the sections entitled “Proposal No. 2—The Authorized Share Charter Proposal,” “Proposal No. 3—The Additional Charter Proposal,” “Proposal No. 4—The Nasdaq Proposal,” “Proposal No. 5—The 2021 Plan Proposal,” “Proposal No. 6—The ESPP Proposal,” “Proposal No. 7—The Director Election Proposal” and “Proposal No. 8—The Adjournment Proposal.” The following questions and answers briefly address some commonly asked questions about the Proposals to be presented at the special meeting of stockholders of DCRC, including the proposed business combination. The following questions and answers do not include all the information that is important to DCRC stockholders. We urge DCRC stockholders to carefully read this entire proxy statement/prospectus, including the annexes and other documents referred to herein. Why am I receiving this proxy statement/prospectus? DCRC stockholders are being asked to consider and vote upon, among other things, a proposal to (a) approve and adopt the Business Combination Agreement, pursuant to which Merger Sub will merge with and into Solid Power, with Solid Power surviving the merger as a wholly owned subsidiary of DCRC, (b) approve such merger and the other transactions contemplated by the Business Combination Agreement and (c) approve, for purposes of complying with applicable listing rules of Nasdaq, (i) the issuance to the Historical Rollover Stockholders (or reservation for issuance in respect of New Solid Power options, New Solid Power restricted stock and New Solid Power warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power Restricted Stock and Solid Power Warrants) of 134,777,882 shares of Class A Common Stock and (ii) the issuance and sale of 16,500,000 shares of Class A Common Stock in the PIPE Financing. A copy of the Business Combination Agreement is attached to this proxy statement/prospectus as Annex A, and a copy of the First Amendment to the Business Combination Agreement is attached to this proxy statement/prospectus as Annex A-1. This proxy statement/prospectus and its annexes contain important information about the proposed business combination and the other matters to be acted upon at the special meeting. You should read this proxy statement/prospectus and its annexes carefully and in their entirety. Your vote is important. You are encouraged to submit your proxy as soon as possible after carefully reviewing this proxy statement/prospectus and its annexes. What is being voted on at the special meeting? DCRC stockholders will vote on the following proposals at the special meeting. The Business Combination Proposal—To consider and vote upon a proposal to approve and adopt the Business Combination Agreement and the transactions contemplated thereby (Proposal No. 1). The Charter Proposals—To consider and vote upon each of the following proposals to amend the Charter: The Authorized Share Charter Proposal—To increase the number of authorized shares of DCRC’s capital stock, par value $0.0001 per share, from 271,000,000 shares, consisting of (a) 270,000,000 shares of common stock, including 250,000,000 shares of Class A Common Stock and 20,000,000 shares of Class B Common Stock, and (b) 1,000,000 shares of Preferred Stock, to 2,200,000,000 shares, consisting of (i) 2,000,000,000 shares of common stock, par value $0.0001 per share, and (ii) 200,000,000 shares of Preferred Stock (the “Authorized Share Charter Proposal”) (Proposal No. 2); and The Additional Charter Proposal—To (i) eliminate provisions in the Charter relating to DCRC’s Initial Business Combination that will no longer be applicable to DCRC following the Closing; (ii) change the post-combination company’s name to “Solid Power, Inc.”; (iii) change the minimum stockholder vote required to amend, repeal or modify certain specified provisions of our proposed second amended and Proposed Second A&R Charter or any provision inconsistent with any provision of the New Solid Power’s amended and restated bylaws; (iv) provide for the removal of a director only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the stock outstanding and entitled to vote thereon; (v) remove the right of holders of Class B Common Stock to act by written consent; and (vi) remove the designation of certain courts as the exclusive forum for certain types of stockholder claims (Proposal No. 3). The full text of our proposed second amended and restated certificate of incorporation (the “Proposed Second A&R Charter”) reflecting each of the proposed amendments pursuant to the Charter Proposals is attached to this proxy statement/prospectus as Annex B. The Nasdaq Proposal—To consider and vote upon a proposal to approve, for purposes of complying with applicable listing rules of Nasdaq, (a) the issuance to the Historical Rollover Stockholders (or reservation for issuance in respect of New Solid Power options, New Solid Power restricted stock and New Solid Power warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power Restricted Stock and Solid Power Warrants) of 134,777,882 shares of Class A Common Stock and (b) the issuance and sale of 16,500,000 shares of Class A Common Stock in the PIPE Financing (Proposal No. 4). The 2021 Plan Proposal—To consider and vote upon a proposal to approve and adopt the 2021 Plan and material terms thereunder (Proposal No. 5). A copy of the 2021 Plan is attached to this proxy statement/prospectus as Annex C. The ESPP Proposal—To consider and vote upon a proposal to approve and adopt the ESPP and material terms thereunder (Proposal No. 6). A copy of the ESPP is attached to this proxy statement/prospectus as Annex D. The Director Election Proposal—To consider and vote upon a proposal to elect directors to serve until the 2022 annual meeting of stockholders, directors to serve until the 2023 annual meeting of stockholders and directors to serve until the 2024 annual meeting of stockholders, and until their respective successors are duly elected and qualified, subject to such directors’ earlier death, resignation, retirement, disqualification or removal (Proposal No. 7). The Adjournment Proposal—To consider and vote upon a proposal to approve the adjournment of the special meeting to a later date or dates, if necessary or appropriate, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal, the Charter Proposals, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal or the Director Election Proposal (Proposal No. 8). Are the Proposals conditioned on one another? We may not consummate the business combination unless the Business Combination Proposal, the Charter Proposals and the Nasdaq Proposal are approved at the special meeting. The Charter Proposals, the 2021 Plan Proposal, the ESPP Proposal and the Director Election Proposal are conditioned on the approval of the Business Combination Proposal and the Nasdaq Proposal. The Adjournment Proposal is not conditioned on the approval of any other Proposal set forth in this proxy statement/prospectus. What will happen in the business combination? Pursuant to the Business Combination Agreement, and subject to the terms and conditions contained therein, Merger Sub will merge with and into Solid Power, with Solid Power surviving the merger. After giving effect to the merger, Solid Power will become a wholly owned subsidiary of New Solid Power. At the Closing, 102,788,777 shares of Class A Common Stock will be issued to the Historical Rollover Stockholders in the business combination in exchange for all outstanding shares of Solid Power Common Stock (and 31,989,105 shares of Class A Common Stock will be reserved for issuance in respect of New Solid Power options, New Solid Power restricted stock and New Solid Power warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power Restricted Stock and Solid Power Warrants), and each share of Class A Common Stock will be re-designated as “common stock, par value $0.0001.” For more information about the Business Combination Agreement and the business combination, see the section entitled “Proposal No. 1—The Business Combination Proposal.” How were the transaction structure and consideration for the business combination determined? Following the closing of the IPO, DCRC representatives commenced a robust search for businesses or assets to acquire for the purpose of consummating DCRC’s Initial Business Combination. On March 29, 2021, Robert Tichio, a member of the DCRC Board, and John Staudinger, a Managing Director of Riverstone Holdings, LLC, an affiliate of our Sponsor, participated in a video conference with representatives of Stifel, Nicolaus & Company, Incorporated (“Stifel”) and Solid Power regarding a possible transaction between DCRC and Solid Power. Solid Power had engaged Stifel on February 20, 2020 to serve as its financial advisor in connection with Solid Power’s Series B Financing. This engagement was revised on March 19, 2021 to include Stifel’s engagement as strategic advisor in connection with consideration and pursuit of a potential SPAC business combination. DCRC management was first made aware of the Solid Power process by Stifel, and by representatives of Riverstone, who were familiar with Solid Power through their network. Riverstone had previously engaged in discussions with Solid Power and conducted a due diligence review of Solid Power’s business and certain technical topics. Riverstone was subject to a nondisclosure agreement, dated as of December 14, 2020 (the “NDA”), with respect to Solid Power. The NDA applied to affiliates of Riverstone and did not contain a standstill provision. After further discussions, negotiations and the performance of extensive due diligence, on April 13, 2021, DCRC and Solid Power executed a non-binding letter of intent. Please see the section entitled “Proposal No. 1—The Business Combination Proposal—Background of the Business Combination” for additional information. What conditions must be satisfied to complete the business combination? There are several closing conditions in the Business Combination Agreement, including the approval by our stockholders of the Business Combination Proposal. For a summary of the conditions that must be satisfied or waived prior to completion of the business combination, see the section entitled “Proposal No. 1—The Business Combination Proposal—The Business Combination Agreement—Conditions to Closing of the Business Combination.” How will we be managed and governed following the business combination? Immediately after the Closing, the DCRC Board will be divided into three separate classes, designated as follows: Class I comprised of Douglas Campbell, Erik Anderson and Robert M. Tichio; Class II comprised of Steven H. Goldberg, and ; and Class III comprised of David Jansen, Rainer Feurer and John Stephens. It is anticipated that will be designated Chair of the Board upon the Closing. Please see the section entitled “Management After the Business Combination.” Will DCRC obtain new financing in connection with the business combination? The New PIPE Investors have committed to purchase from DCRC 16,500,000 shares of Class A Common Stock, for an aggregate purchase price of approximately $165,000,000 in the PIPE Financing. What equity stake will our current stockholders and the holders of our Founder Shares hold in New Solid Power following the consummation of the business combination? the initial stockholders will own 8,750,000 shares of our Class A Common Stock, which would be valued at approximately $ , based on the closing price of our Class A Common Stock of $ per share on , 2021, the record date of the special meeting and will constitute 5.4% of our outstanding Class A Common Stock. the initial stockholders will own 15,416,667 shares of our Class A Common Stock, which would be valued at approximately $ , based on the closing price of our Class A Common Stock of $ per share on , 2021, the record date of the special meeting and will constitute 8.5% of our outstanding Class A Common Stock. Why is DCRC proposing the amendments to the Charter set forth in the Charter Proposals? DCRC is proposing amendments to the Charter to approve certain items required to effectuate the business combination and other matters the DCRC Board believes are appropriate for the operation of New Solid Power, including providing for, among other things, (a) an increase in the number of authorized shares of DCRC’s capital stock, par value $0.0001 per share, from 271,000,000 shares, consisting of (i) 270,000,000 shares of common stock, including 250,000,000 shares of Class A Common Stock and 20,000,000 shares of Class B Common Stock, and (ii) 1,000,000 shares of Preferred Stock, to 2,200,000,000 shares, consisting of (A) 2,000,000,000 shares of common stock, par value $0.0001 per share, and (B) 200,000,000 shares of Preferred Stock, and (b) to (i) eliminate of certain provisions relating to an Initial Business Combination that will no longer be applicable to DCRC following the Closing, (ii) change the post-combination company’s name to “Solid Power, Inc.”; (iii) change the minimum stockholder vote required to amend, repeal or modify certain specified provisions of the Proposed Second A&R Charter or any provision inconsistent with any provision of New Solid Power’s amended and restated bylaws; (iv) provide for the removal of a director only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the stock outstanding and entitled to vote thereon; (v) remove the right of holders of Class B Common Stock to act by written consent; and (vi) remove the designation of certain courts as the exclusive forum for certain types of stockholder claims. Under the Charter and Delaware law, stockholder approval is required in order to effect the Charter Proposals. See the sections entitled “Proposal No. 2—The Authorized Share Charter Proposal,” and “Proposal No. 3—The Additional Charter Proposal” for additional information. Why is DCRC proposing the Nasdaq Proposal? DCRC is proposing the Nasdaq Proposal in order to comply with Nasdaq listing standards, which require stockholder approval of certain transactions that result in the issuance of 20% or more of a company’s outstanding voting power or shares of common stock outstanding before the issuance of stock or securities. In connection with the business combination and PIPE Financing, we may issue to the Historical Rollover Stockholders and the New PIPE Investors, and reserve for issuance in respect of New Solid Power options, New Solid Power restricted stock and New Solid Power warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power Restricted Stock and Solid Power Warrants, up to 134,777,882 shares of Class A Common Stock. Because we may issue 20% or more of our outstanding voting power and outstanding common stock in connection with the business combination, we are required to obtain stockholder approval of such issuances pursuant to Nasdaq listing standards. See the section entitled “Proposal No. 4—The Nasdaq Proposal” for additional information. Did the DCRC Board obtain a third-party valuation or fairness opinion in determining whether or not to proceed with the business combination? No. The DCRC Board did not obtain a third-party valuation or fairness opinion in connection with its determination to approve the business combination. DCRC’s officers and directors have substantial experience in evaluating the operating and financial merits of companies from a wide range of industries and concluded that their experience and backgrounds, together with the experience and sector expertise of DCRC’s advisors, enabled them to make the necessary analyses and determinations regarding the business combination. In addition, DCRC’s officers, directors and advisors have substantial experience with mergers and acquisitions. Accordingly, investors will be relying solely on the judgment of the DCRC Board in valuing Solid Power and assuming the risk that the DCRC Board may not have properly valued the business. What are some of the positive and negative factors that the DCRC Board considered when determining to enter into the Business Combination Agreement and its rationale for approving the transaction? The factors considered by the DCRC Board include, but were not limited to, the following: Competitive and Innovative Design. The DCRC Board considered Solid Power’s innovative and competitive all-solid-state battery design and the potential applications of the batteries across multiple industries. Value to Equity Investors. The DCRC Board considered Solid Power’s value to investors, determining that Solid Power is the industry leader for all-solid-state battery development and manufacturing. Revenue Potential. The DCRC Board considered that Solid Power entered into non-exclusive JDAs with certain of its early investors, including Ford and BMW of North America LLC, to collaborate on the research and development of its all-solid-state battery cell. The terms of the JDAs generally require Solid Power to continue its research and development of all-solid-state battery cells and component materials such that Solid Power’s products are capable of being deployed in electric vehicles within the next few years as well as other research and development milestones. Manufacturing Capabilities. The DCRC Board considered Solid Power’s demonstrated ability to manufacture electric vehicle-relevant battery cells in dimensions suitable for automotive applications using scalable manufacturing processes and Solid Power’s intention to license such manufacturing know-how to third party commercialization partners. Due Diligence. The DCRC Board considered the results of DCRC’s due diligence investigation of Solid Power conducted by DCRC’s management team and its financial and legal advisors. Terms of the Business Combination Agreement. The DCRC Board reviewed the financial and other terms of the Business Combination Agreement and determined that they were the product of arm’s-length negotiations among the parties. Independent Director Role. DCRC’s independent directors took an active role in guiding DCRC management as DCRC evaluated and negotiated the proposed terms of the business combination. Following an active and detailed evaluation, the DCRC Board’s independent directors unanimously approved, as members of the DCRC Board, the Business Combination Agreement and the business combination. Stockholder Approval. The DCRC Board considered the fact that, in connection with the business combination, DCRC stockholders have the option to (i) remain stockholders of the combined company, (ii) sell their shares on the open market or (iii) redeem their shares for the per share amount held in the Trust Account pursuant to the terms of our Charter. Other Alternatives. The DCRC Board believed, after a thorough review of other business combination opportunities reasonably available to DCRC, that the business combination represented the best potential business combination for DCRC and the most attractive opportunity for DCRC based upon the process utilized to evaluate and assess other potential business combination targets. The DCRC Board believes that such process has not presented a better alternative. In addition, the DCRC Board determined that the business combination satisfies the investment criteria that the DCRC Board identified in connection with the IPO. For more information, see the section entitled “Proposal No. 1—The Business Combination Proposal—Background of the Business Combination.” In the course of its deliberations, the DCRC Board also considered a variety of uncertainties, risks and other potentially negative factors relevant to the business combination, including the following: Developmental Stage Company Risk. The risk that Solid Power is an early-stage company, with a history of financial losses and that expects to incur significant expenses and continuing losses for the foreseeable future. As Solid Power scales from limited production of batteries to, ultimately, significant licensing of all-solid-state battery cells or sales of the sulfide-based solid electrolytes, it is difficult, if not impossible, to forecast Solid Power’s future results, and Solid Power has limited insight into trends that may emerge and affect Solid Power’s business. Business Plan Risk. The risk that Solid Power may be unable to execute on its business model, which would have a material adverse effect on Solid Power’s operating results and business, would harm Solid Power’s reputation and could result in substantial liabilities that exceed its resources. Customer Risk. The risk that Solid Power may not be able to obtain binding licensing agreements or sales orders for its products. Financing Risk. The risk that Solid Power may be unable to achieve sufficient sales or otherwise raise the necessary capital to implement its business plan and strategy. If Solid Power needs to raise additional funds, the risk that these funds may not be available on terms favorable to Solid Power or Solid Power’s stockholders, or at all when needed. Competitive Risk. The risk that Solid Power faces significant competition and that its competitors may develop competing technologies more efficient or effective than Solid Power’s. Supplier Risk. The risk that Solid Power may not be able to attain the supplies, such as lithium sulfide, NMC and manufacturing tools for its all-solid-state battery cells. If Solid Power is unable to enter into commercial agreements with its current suppliers or its replacement suppliers on favorable terms, or if these suppliers experience difficulties meeting Solid Power’s requirements, the development and commercial progression of its all-solid-state battery cells and related technologies may be delayed. Intellectual Property Risk. The risk that Solid Power may not have adequate intellectual property rights to carry out its business, may need to defend itself against patent, copyright, trademark, trade secret or other intellectual property infringement or misappropriation claims, and may need to enforce its intellectual property rights from unauthorized use by third parties. Regulatory Risk. The risks that are associated with Solid Power operating in the highly-regulated battery cell industry. Failure to comply with regulations or laws could subject Solid Power to significant regulatory risk, including the risk of litigation, regulatory actions and compliance issues that could subject Solid Power to significant fines, penalties, judgments, remediation costs, negative publicity and requirements resulting in increased expenses. Public Company Risk. The risks that are associated with being a publicly traded company that is in its early, developmental stage. Benefits May Not Be Achieved Risk. The risk that the potential benefits of the business combination may not be fully achieved or may not be achieved within the expected timeframe. Redemption Risk. The risk that a significant number of DCRC stockholders elect to redeem their shares prior to the consummation of the business combination and pursuant to DCRC’s existing Charter, which would potentially make the business combination more difficult to complete or reduce the amount of cash available to the combined company to execute its business plan following the Closing. Stockholder Vote Risk. The risk that DCRC’s stockholders may fail to provide the votes necessary to effect the business combination. Litigation Risk. The risk of the possibility of litigation challenging the business combination or that an adverse judgment granting permanent injunctive relief could indefinitely enjoin consummation of the business combination. Closing Risk. The risk that the Closing might not occur in a timely manner or that the Closing might not occur at all, despite DCRC’s efforts. Closing Conditions Risk. The risk that completion of the business combination is conditioned on the satisfaction of certain closing conditions that are not within DCRC’s control. Minority Position. The risk that DCRC’s stockholders will hold a minority position in the combined company. No Third-Party Valuation Risk. The risk that DCRC did not obtain a third-party valuation or fairness opinion in connection with the business combination. Fees, Expenses and Time Risk. The risk of incurring significant fees and expenses associated with completing the business combination and the substantial time and effort of management required to complete the business combination. Other Risks. Various other risk factors associated with Solid Power’s business, as described in the section entitled “Risk Factors.” In addition to considering the factors described above, the DCRC Board also considered that the officers and directors of DCRC may have interests in the business combination as individuals that are in addition to, and that may be different from, the interests of DCRC’s stockholders. DCRC’s independent directors reviewed and considered these interests during the negotiation of the business combination and in evaluating and unanimously approving, as members of the DCRC Board, the Business Combination Agreement and the business combination. For more information, see the section entitled “Proposal No. 1—The Business Combination Proposal—Interests of Certain Persons in the Business Combination.” The DCRC Board concluded that the potential benefits that it expects DCRC and its stockholders to achieve as a result of the business combination outweigh the potentially negative factors associated with the business combination. Accordingly, the DCRC Board, based on its consideration of the specific factors listed above, unanimously (a) determined that the business combination and the other transactions contemplated by the Business Combination Agreement are fair to, and in the best interests of, DCRC’s stockholders, (b) approved, adopted and declared advisable the Business Combination Agreement and the transactions contemplated thereby and (c) recommended that the stockholders of DCRC approve each of the Proposals. The above discussion of the material factors considered by the DCRC Board is not intended to be exhaustive but does set forth the principal factors considered by the DCRC Board. What happens if I sell my shares of Class A Common Stock before the special meeting? The record date for the special meeting is earlier than the date that the business combination is expected to be completed. If you transfer your shares of Class A Common Stock after the record date, but before the special meeting, unless the transferee obtains from you a proxy to vote those shares, you will retain your right to vote at the special meeting. However, you will not be able to seek redemption of your shares of Class A Common Stock because you will no longer be able to deliver them for cancellation upon consummation of the business combination in accordance with the provisions described in this proxy statement/prospectus. If you transfer your shares of Class A Common Stock prior to the record date, you will have no right to vote those shares at the special meeting or seek redemption of those shares. How has the announcement of the business combination affected the trading price of DCRC’s units, Class A Common Stock and warrants? On June 14, 2021, the last trading date before the public announcement of the business combination, DCRC’s public units, Class A Common Stock and public warrants closed at $13.47, $12.09 and $3.65, respectively. On , 2021 the trading date immediately prior to the date of this proxy statement/prospectus, DCRC’s public units, Class A Common Stock and warrants closed at $ , $ and $ , respectively. Following the business combination, will DCRC’s securities continue to trade on a stock exchange? Yes. We anticipate that, following the business combination, our common stock and public warrants will continue trading on Nasdaq under the new symbols “SLDP” and “SLDPW,” respectively. Our units will automatically separate into the component securities upon consummation of the business combination and, as a result, will no longer trade as separate securities following the business combination. What vote is required to approve the Proposals presented at the special meeting? Approval of each of the Business Combination Proposal, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal and the Adjournment Proposal requires the affirmative vote (online or by proxy) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock entitled to vote and actually cast thereon, voting as a single class. Approval of the Authorized Share Charter Proposal requires the affirmative vote (online or by proxy) of (i) the holders of a majority of the shares of Class A Common Stock and Class B Common Stock entitled to vote thereon at the special meeting, voting as a single class, and (ii) the holders of a majority of the shares of Class A Common Stock entitled to vote thereon at the special meeting, voting as a single class. Approval of the Additional Charter Proposal requires the affirmative vote (online or by proxy) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock entitled to vote thereon at the special meeting, voting as a single class. Approval of the Director Election Proposal requires the affirmative vote (online or by proxy) of a plurality of the votes cast by holders of our Class A Common Stock and Class B Common Stock at the special meeting and entitled to vote thereon, voting as a single class. This means that the director nominees will be elected if they receive more affirmative votes than any other nominee for the same position. Stockholders may not cumulate their votes with respect to the election of directors. Assuming a valid quorum is established, abstentions will have no effect on the Director Election Proposal. May DCRC’s Sponsor, directors, officers, advisors or any of their respective affiliates purchase public shares in connection with the business combination? In connection with the stockholder vote to approve the proposed business combination, our Sponsor, directors, officers, advisors and any of their respective affiliates may privately negotiate to purchase public shares from stockholders who would have otherwise elected to have their shares redeemed in conjunction with a proxy solicitation pursuant to the proxy rules for a per share pro rata portion of the Trust Account. Our Sponsor, directors, officers, advisors and any of their respective affiliates will not make any such purchases when they are in possession of any material non-public information not disclosed to the seller of such public shares or during a restricted period under Regulation M under the Exchange Act. Such a purchase could include a contractual acknowledgement that such stockholder, although still the record holder of such public shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights, and could include a contractual provision that directs such stockholder to vote such shares in a manner directed by the purchaser. In the event that our Sponsor, directors, officers, advisors or any of their respective affiliates purchase public shares in privately negotiated transactions from public stockholders who have already elected to exercise their redemption rights, such selling stockholders would be required to revoke their prior elections to redeem their shares. Any such privately negotiated purchases may be effected at purchase prices that are in excess of the per share pro rata portion of the Trust Account. How many votes do I have at the special meeting? Our stockholders are entitled to one vote at the special meeting for each share of Class A Common Stock or Class B Common Stock held of record as of , 2021, the record date for the special meeting. As of the close of business on the record date, there were 35,000,000 outstanding shares of Class A Common Stock, which are held by our public stockholders, and 8,750,000 outstanding shares of Class B Common Stock, which are held by our initial stockholders. What constitutes a quorum at the special meeting? Holders of a majority in voting power of Class A Common Stock and Class B Common Stock issued and outstanding and entitled to vote at the special meeting, virtually present or represented by proxy, constitute a quorum. In the absence of a quorum, the chairman of the meeting has the power to adjourn the special meeting. As of the record date for the special meeting, 21,875,001 shares of Class A Common Stock and Class B Common Stock, in the aggregate, would be required to achieve a quorum. Abstentions will count as present for the purposes of establishing a quorum with respect to each Proposal. How will DCRC’s Sponsor, directors and officers vote? Our Sponsor, directors and officers have agreed to vote any shares of Class A Common Stock and Class B Common Stock owned by them in favor of the business combination. Currently, our initial stockholders own approximately 20% of our issued and outstanding shares of Class A Common Stock and Class B Common Stock, in the aggregate. What interests do the current officers and directors have in the business combination? In considering the recommendation of the DCRC Board to vote in favor of the business combination, stockholders should be aware that, aside from their interests as stockholders, our Sponsor and certain of our directors and officers have interests in the business combination that are different from, or in addition to, those of other stockholders generally. Our directors were aware of and considered these interests, among other matters, in evaluating the business combination, and in recommending to stockholders that they approve the business combination. Stockholders should take these interests into account in deciding whether to approve the business combination. These interests include, among other things: the fact that our Sponsor and independent directors hold an aggregate of 6,666,667 private placement warrants that would expire worthless if a business combination is not consummated, which if unrestricted and freely tradable would be valued at approximately $15,066,667, based on the closing price of our public warrants of $2.26 per warrant on October 12, 2021, the most recent practicable date, resulting in a theoretical gain of $5,066,667; the fact that our Sponsor may convert any working capital loans that it may make to us into up to an additional 1,000,000 private placement warrants, at the price of $1.50 per warrant; the fact that our Sponsor, officers and directors have agreed not to redeem any of the shares of our common stock held by them in connection with a stockholder vote to approve the business combination; the fact that our initial stockholders paid an aggregate of $25,000 for the Founder Shares and that such securities will have a significantly higher value at the time of the business combination, which if unrestricted and freely tradable would be valued at approximately $87,412,500, based on the closing price of our Class A Common Stock of $9.99 per share on October 12, 2021, the most recent practicable date, resulting in a theoretical gain of $87,387,500; the fact that certain of DCRC’s officers and directors collectively own, directly or indirectly, a material interest in our Sponsor; the fact that affiliates of our Sponsor own an aggregate of 1,660,417 shares of Solid Power Series A-1 Preferred Stock, which at the Exchange Ratio, would be exchanged for 5,299,552 shares of our Class A Common Stock at the Closing; the anticipated appointment of each of Erik Anderson, a member of the DCRC Board and DCRC’s Chief Executive Officer, and Robert Tichio, a member of the DCRC Board, as a director on the New Solid Power Board in connection with the closing of the business combination; if the Trust Account is liquidated, including in the event we are unable to complete an Initial Business Combination within the required time period, our Sponsor has agreed to indemnify us to ensure that the proceeds in the Trust Account are not reduced below $10.00 per public share, or such lesser amount per public share as is in the Trust Account on the liquidation date, by the claims of (a) any third party (other than our independent public accountants) for services rendered or products sold to us or (b) a prospective target business with which we have entered into an acquisition agreement, but only if such a third party or target business has not executed a waiver of all rights to seek access to the Trust Account; the fact that our independent directors own an aggregate of 360,000 Founder Shares, which if unrestricted and freely tradeable would be valued at approximately $3,596,400, based on the closing price of our Class A Common Stock of $9.99 per share on October 12, 2021, the most recent practicable date; the fact that our Sponsor will benefit from the completion of a business combination and may be incentivized to complete an acquisition of a less favorable target company or on terms less favorable to stockholders rather than liquidate; the fact that our Sponsor and its affiliates can earn a positive rate of return on their investment, even if other DCRC stockholders experience a negative rate of return in the post-business combination company; the fact that our Sponsor, officers and directors will be reimbursed for out-of-pocket expenses incurred in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations; and the fact that our Sponsor, officers and directors will lose their entire investment in us if an Initial Business Combination is not completed. At the Closing, we anticipate that our Sponsor will own 6,367,353 private placement warrants and 8,390,000 shares of New Solid Power common stock (which will be issued upon conversion of the Founder Shares upon the Closing). In addition, our Sponsor may make available to us working capital loans for up to $1,500,000 to enable us to finance transaction costs in connection with our Initial Business Combination. As of the date of this proxy statement/prospectus, there were no amounts outstanding under any working capital loans. Further, as of the date of this proxy statement/prospectus, there has been no reimbursement to our Sponsor, officers or directors for any out-of-pocket expenses incurred in connection with activities on our behalf, and no such amounts have been incurred as of the date of this proxy statement/prospectus. However, as of the date of this proxy statement/prospectus, an affiliate of our Sponsor has incurred approximately $4.1 million of expenses on DCRC’s behalf, of which approximately $3.0 million has been repaid by DCRC to the affiliate of our Sponsor. The balance will be repaid by DCRC at the Closing. Investors in our Sponsor, each of which contributed capital to our Sponsor in exchange for Founder Shares and private placement warrants, include entities affiliated with certain of our non-independent directors and officers. Specifically, Pierre Lapeyre, Jr., David Leuschen, Robert Tichio and Peter Haskopoulos are each affiliated with Decarbonization Plus Acquisition Sponsor Manager III, LLC (“Sponsor Manager”), and Erik Anderson is affiliated with WRG DCRC Investors, LLC (“WRG”), through which such DCRC directors and officers have an indirect economic interest in the private placement warrants and shares of New Solid Power common stock anticipated to be held by our Sponsor as of the completion of the business combination. Our independent directors paid $1,028 in aggregate consideration for the 360,000 Founder Shares transferred to our independent directors by our Sponsor at the closing of our IPO. In addition, our independent directors purchased 299,314 private placement warrants at a price of $1.50 per warrant at the closing of our IPO. The table set forth below summarizes the interests of Sponsor Manager, WRG and our independent directors in the private placement warrants and Founder Shares along with (i) the total investment made in our Sponsor (or purchase price paid for the private placement warrants, in the case of our independent directors) by Sponsor Manager, WRG and our independent directors in exchange for their interests in the private placement warrants and Founder Shares and (ii) the value of such interests based on the closing price of the public warrants and Class A Common Stock as of October 12, 2021, all of which would be lost if an Initial Business Combination is not completed by us within the required time period: Name of Holder Position Total Purchase Price / Capital Contributions Number of Warrants Value of Warrants as of October 12, 2021 Number of Shares Value of Shares as of October 12, 2021 Decarbonization Plus Acquisition Sponsor Manager III, LLC1 N/A $ 7,923,040 5,268,801 $ 11,907,490 6,943,741 $ 69,367,972 WRG DCRC Investors, LLC2 N/A $ 1,150,710 765,219 $ 1,729,394 1,008,759 $ 10,077,502 James AC McDermott Director $ 300,000 199,543 $ 450,967 240,000 $ 2,397,600 Jennifer Aaker Director $ 50,000 33,257 $ 75,161 40,000 $ 399,600 Jane Kearns Jeffrey Tepper DCRC directors Pierre Lapeyre, Jr., David Leuschen and Robert Tichio and Chief Financial Officer, Chief Accounting Officer and Secretary Peter Haskopoulos each have an indirect economic interest in our Sponsor through Sponsor Manager. DCRC Chief Executive Officer Erik Anderson has an indirect economic interest in our Sponsor through WRG. In addition, our amended and restated certificate of incorporation provides that we renounce our interest in any corporate opportunity offered to any director or officer unless such opportunity is expressly offered to such person solely in his or her capacity as a director or officer of our company and such opportunity is one we are legally and contractually permitted to undertake and would otherwise be reasonable for us to pursue. We do not believe, however, that this waiver of the corporate opportunities doctrine has materially affected our search for an acquisition target or will materially affect our ability to complete our business combination. What happens if I vote against the Business Combination Proposal? Under our Charter, if the Business Combination Proposal is not approved and we do not otherwise consummate an alternative business combination by March 26, 2023, we will be required to dissolve and liquidate the Trust Account by returning the then-remaining funds in such account to our public stockholders. Do I have redemption rights? If you are a holder of public shares, you may elect to have your public shares redeemed for cash at the applicable redemption price per share equal to the quotient obtained by dividing (a) the aggregate amount on deposit in the Trust Account as of two business days prior to the consummation of the business combination, including interest not previously released to us to pay our franchise and income taxes, by (b) the total number of then outstanding shares of Class A Common Stock included as part of the units sold in the IPO; provided that we will not redeem any public shares to the extent that such redemption would result in DCRC having net tangible assets (as determined in accordance with Rule 3a51-1(g)(1) under the Exchange Act) of less than $5,000,001 unless our Class A Common Stock otherwise does not constitute “penny stock” as such term is defined in Rule 3a51-1 under the Exchange Act. Because we anticipate that the Class A Common Stock will be listed on Nasdaq at the Closing, and such listing would mean that the Class A Common Stock would not constitute “penny stock” as such term is defined in Rule 3a51-1 under the Exchange Act, we do not anticipate the $5,000,001 net tangible asset threshold being applicable. A public stockholder, together with any of his, her or its affiliates or any other person with whom it is acting in concert or as a “group” (as defined under Section 13(d)(3) of the Exchange Act), will be restricted from redeeming in the aggregate his, her or its shares or, if part of such a group, the group’s shares, in excess of 20% of the public shares (the “20% threshold”). Unlike some other blank check companies, other than the net tangible asset requirement and the 20% threshold described above, we have no specified maximum redemption threshold and there is no other limit on the number of public shares that you can redeem. Holders of our outstanding public warrants do not have redemption rights in connection with the business combination. Our Sponsor, officers and directors have agreed to waive their redemption rights with respect to any shares of our common stock they may hold in connection with the consummation of the business combination. For illustrative purposes, based on the fair value of cash and marketable securities held in the Trust Account as of June 30, 2021 of approximately $350.0 million, the estimated per share redemption price would have been approximately $10.00. Additionally, shares properly tendered for redemption will only be redeemed if the business combination is consummated; otherwise holders of such shares will only be entitled to a pro rata portion of the Trust Account (including interest but net of franchise and income taxes payable) (a) in connection with a stockholder vote to approve an amendment to our Charter that would affect the substance or timing of our obligation to redeem 100% of our public shares if we have not consummated an Initial Business Combination by March 26, 2023, or with respect to any other provision relating to the rights of holders of Class A Common Stock or pre-Initial Business Combination activity, (b) in connection with the liquidation of the Trust Account or (c) if we subsequently complete a different business combination on or before March 26, 2023. Will how I vote affect my ability to exercise redemption rights? No. You may exercise your redemption rights whether you vote your shares of Class A Common Stock for or against or abstain from voting on the Business Combination Proposal or any other proposal described in this proxy statement/prospectus. As a result, the business combination can be approved by stockholders who will redeem their shares and no longer remain stockholders. How do I exercise my redemption rights? In order to exercise your redemption rights, you must (a) if you hold your shares of Class A Common Stock through units, elect to separate your units into the underlying public shares and public warrants prior to exercising your redemption rights with respect to the public shares, and (b) prior to 5:00 p.m., Eastern time, on , 2021 (two business days before the special meeting), tender your shares physically or electronically and submit a request in writing that we redeem your public shares for cash to Continental Stock Transfer & Trust Company, our transfer agent, at the following address: 1 State Street, 30th Floor New York, New York 10004-1561 Attention: Mark Zimkind Email: [email protected] A public stockholder, together with any of his, her or its affiliates or any other person with whom it is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act), will be restricted from seeking redemption rights with respect to his, her or its shares or, if part of such a group, the group’s shares, in excess of the 20% threshold. Accordingly, all public shares in excess of the 20% threshold beneficially owned by a public stockholder or group will not be redeemed for cash. Stockholders seeking to exercise their redemption rights and opting to deliver physical certificates should allot sufficient time to obtain physical certificates from the transfer agent and time to effect delivery. It is our understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, we do not have any control over this process and it may take longer than two weeks. Stockholders who hold their shares in street name will have to coordinate with their bank, broker or other nominee to have the shares certificated or delivered electronically. Holders of our outstanding units must separate the underlying public shares and public warrants prior to exercising redemption rights with respect to the public shares. If you hold units registered in your own name, you must deliver the certificate for such units or deliver such units electronically to Continental Stock Transfer & Trust Company with written instructions to separate such units into public shares and public warrants. This must be completed far enough in advance to permit the mailing of the public share certificates or electronic delivery of the public shares back to you so that you may then exercise your redemption rights with respect to the public shares following the separation of such public shares from the units. If a broker, dealer, commercial bank, trust company or other nominee holds your units, you must instruct such nominee to separate your units. Your nominee must send written instructions by facsimile to Continental Stock Transfer & Trust Company. Such written instructions must include the number of units to be split and the nominee holding such units. Your nominee must also initiate electronically, using The Depository Trust Company’s (“DTC”) DWAC (deposit withdrawal at custodian) system, a withdrawal of the relevant units and a deposit of the corresponding number of public shares and public warrants. This must be completed far enough in advance to permit your nominee to exercise your redemption rights with respect to the public shares following the separation of such public shares from the units. While this is typically done electronically on the same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your public shares to be separated in a timely manner, you will likely not be able to exercise your redemption rights. Any demand for redemption, once made, may be withdrawn at any time until the deadline for exercising redemption requests and thereafter, with our consent, until the vote is taken with respect to the business combination. If you delivered your shares for redemption to the transfer agent and decide within the required timeframe not to exercise your redemption rights, you may request that the transfer agent return the shares (physically or electronically). You may make such request by contacting our transfer agent at the email address or address listed under the question “Who can help answer my questions?” below. What are the material U.S. federal income tax consequences to the DCRC shareholders as a result of the Merger? DCRC stockholders will retain their shares of Class A Common Stock, which will be re-designated as “common stock, par value $0.0001,” will not receive any merger consideration and will not receive any additional shares of Class A Common Stock in the Merger. As a result, there will be no material U.S. federal income tax consequences to the current DCRC stockholders as a result of the Merger, regardless of whether the Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code. Furthermore, although the Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and DCRC and Solid Power intend to report the Merger consistent with such qualification, such treatment is not a condition to DCRC or Solid Power’s obligation to complete the Merger. What are the material U.S. federal income tax consequences of the Merger to Solid Power stockholders? The parties intend for the Merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes. Provided that the Merger qualifies as a reorganization, no gain or loss will generally be recognized by a U.S. Holder of Solid Power Stock for U.S. federal income tax purposes on the exchange of its shares of Solid Power Stock for Class A Common Stock in the Merger. For a more complete discussion of the material U.S. federal income tax consequences of the Merger, please carefully review the information set forth in the section titled “Material U.S. Federal Income Tax Considerations of the Business Combination—Tax Treatment of U.S. Holders of Solid Power Stock” of this proxy statement/prospectus. The tax consequences of the Merger to any particular stockholder will depend on that stockholder’s particular facts and circumstances. Accordingly, Solid Power stockholders are urged to consult with, and rely solely upon, their own tax advisors as to the specific tax consequences of the Merger, including the effects of U.S. federal, state or local, or non-U.S. tax laws. What are the U.S. federal income tax consequences of exercising my redemption rights? The receipt of cash by a holder of Class A Common Stock in redemption of such stock will be a taxable event for U.S. federal income tax purposes in the case of a U.S. Holder (as defined below) and could be a taxable event for U.S. federal income tax purposes in the case of a Non-U.S. Holder (as defined below). Please see the discussion below under the caption “Proposal No. 1—The Business Combination Proposal—Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders” or “Proposal No. 1—The Business Combination Proposal—Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of Non-U.S. Holders,” as applicable, for additional information. All holders considering the exercise of their redemption rights should consult with, and rely solely upon, their own tax advisors with respect to the U.S. federal income tax consequences of exercising such redemption rights. If I am a warrantholder, can I exercise redemption rights with respect to my warrants? No. The holders of our warrants have no redemption rights with respect to our warrants. How do the public warrants differ from the private placement warrants, and what are the related risks for any public warrant holders post business combination? The private placement warrants (including the shares of Class A Common Stock issuable upon exercise of the private placement warrants) are not transferable, assignable or salable until 30 days after the completion of our Initial Business Combination (except, among other limited exceptions, to our officers and directors and other persons or entities affiliated with our Sponsor), and they will not be redeemable by us (except as described under “Description of Securities—Warrants—Redemption of Warrants for Cash When the Price Per share of Class A Common Stock Equals or Exceeds $10.00”) so long as they are held by the initial purchasers of the private placement warrants or their permitted transferees. The initial purchasers, or their permitted transferees, have the option to exercise the private placement warrants on a cashless basis. Otherwise, the private placement warrants have terms and provisions that are identical to those of the public warrants, including as to exercise price, exercisability and exercise period. If the private placement warrants are held by holders other than the initial purchasers or their permitted transferees, the private placement warrants will be redeemable by us in all redemption scenarios and exercisable by the holders on the same basis as the public warrants. Following the business combination, we may redeem public warrants prior to their exercise at a time that is disadvantageous to the public warrant holders, thereby making such warrants worthless. More specifically: We have the ability to redeem outstanding public warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last sales price of the Class A Common Stock has been at least $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within the 30 trading-day period ending on the third business day prior to the date on which we give notice of such redemption and provided certain other conditions are met. We also have the ability to redeem outstanding public warrants at any time after they become exercisable and prior to their expiration, at a price of $0.10 per warrant if, among other things, the last sale price of the Class A Common Stock equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) on the trading day prior to the date on which notice of the redemption is given. Historical trading prices for the Class A Common Stock have exceeded the $10.00 per share threshold at which the public warrants would become redeemable. In such a case, the holders will be able to exercise their warrants prior to redemption for a number of shares of Class A Common Stock determined by reference to a make-whole table. Please see “Description of Securities—Warrants—Redemption of Warrants for Cash When the Price Per share of Class A Common Stock Equals or Exceeds $10.00.” The value received upon exercise of the public warrants (1) may be less than the value the holders would have received if they had exercised their public warrants at a later time where the underlying share price is higher and (2) may not compensate the holders for the value of the public warrants, including because the number of shares received is capped at 0.361 shares of Class A Common Stock per whole warrant (subject to adjustment) irrespective of the remaining life of the public warrants. In each case, we may only call the public warrants for redemption upon a minimum of 30 days’ prior written notice of redemption to each public warrant holder. Redemption of the outstanding public warrants could force holders of the public warrants (i) to exercise public warrants and pay the exercise price therefor at a time when it may be disadvantageous for such holders to do so, (ii) to sell public warrants at the then-current market price when they might otherwise wish to hold their public warrants or (iii) to accept the nominal redemption price which, at the time the outstanding public warrants are called for redemption, is likely to be substantially less than the market value of the public warrants. Do I have appraisal rights if I object to the proposed business combination? No. There are no appraisal rights available to holders of Class A Common Stock or Class B Common Stock in connection with the business combination. What happens to the funds deposited in the Trust Account after consummation of the business combination? If the Business Combination Proposal is approved, we intend to use a portion of the funds held in the Trust Account to pay (a) a portion of our aggregate costs, fees and expenses in connection with the consummation of the business combination, (b) tax obligations and deferred underwriting discounts and commissions from the IPO and (c) for any redemptions of public shares. The remaining balance in the Trust Account, together with PIPE Proceeds, will be used for general corporate purposes of New Solid Power. See the section entitled “Proposal No. 1—The Business Combination Proposal” for additional information. What happens if the business combination is not consummated or is terminated? There are certain circumstances under which the Business Combination Agreement may be terminated. See the section entitled “Proposal No. 1—The Business Combination Proposal—The Business Combination Agreement—Termination” for additional information regarding the parties’ specific termination rights. In accordance with our Charter, if an Initial Business Combination is not consummated by March 26, 2023, we will (a) cease all operations except for the purpose of winding up, (b) as promptly as reasonably possible but not more than ten business days thereafter subject to lawfully available funds therefor, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account including interest earned on the funds held in the trust account and not previously released to us to pay our franchise and income taxes (less up to $100,000 of such net interest to pay dissolution expenses and net of taxes payable), divided by the number of then-outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (c) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and the DCRC Board, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. We expect that the amount of any distribution our public stockholders will be entitled to receive upon our dissolution will be approximately the same as the amount they would have received if they had redeemed their shares in connection with the business combination, subject in each case to our obligations under the General Corporation Law of the State of Delaware (“DGCL”) to provide for claims of creditors and other requirements of applicable law. Holders of our Founder Shares are not entitled to liquidating distributions with respect to those shares. In the event of liquidation, there will be no distribution with respect to our outstanding warrants. Accordingly, in such an event, the warrants will expire worthless. When is the business combination expected to be consummated? It is currently anticipated that the business combination will be consummated promptly following the special meeting of our stockholders to be held on , 2021, provided that all the requisite stockholder approvals are obtained and other conditions to the consummation of the business combination have been satisfied or waived. For a description of the conditions for the completion of the business combination, see the section entitled “Proposal No. 1—The Business Combination Proposal—The Business Combination Agreement—Conditions to Closing of the Business Combination.” What do I need to do now? You are urged to read carefully and consider the information contained in this proxy statement/prospectus, including the section entitled “Risk Factors” and the annexes attached to this proxy statement/prospectus, and to consider how the business combination will affect you as a stockholder. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy card or, if you hold your shares through a brokerage firm, bank or other nominee, on the voting instruction form provided by the broker, bank or nominee. If you were a holder of record of Class A Common Stock or Class B Common Stock on , 2021, the record date for the special meeting of our stockholders, you may vote with respect to the proposals online at the special meeting or by completing, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or other nominee, you should follow the instructions provided by your broker, bank or nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or, if you wish to virtually attend the special meeting and vote online, obtain a proxy from your broker, bank or nominee. What will happen if I abstain from voting or fail to vote at the special meeting? At the special meeting, we will count a properly executed proxy marked “ABSTAIN” with respect to a particular proposal as present for purposes of determining whether a quorum is present. For purposes of approval, failure to vote or an abstention will have no effect on the Business Combination Proposal, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal, the Director Election Proposal or the Adjournment Proposal, but will have the same effect as a vote AGAINST the Charter Proposals. What will happen if I sign and submit my proxy card without indicating how I wish to vote? Signed and dated proxies received by us without an indication of how the stockholder intends to vote on a proposal will be voted “FOR” each Proposal (or in the case of the Director Election Proposal, “FOR ALL NOMINEES”) being submitted to a vote of the stockholders at the special meeting. If I am not going to attend the special meeting online, should I submit my proxy card instead? Yes. Whether you plan to attend the special meeting or not, please read the enclosed proxy statement/prospectus carefully, and vote your shares by completing, signing, dating and returning the enclosed proxy card in the postage-paid envelope provided. If my shares are held in “street name,” will my broker, bank or nominee automatically vote my shares for me? No. Under the rules of various national and regional securities exchanges, your broker, bank or nominee cannot vote your shares with respect to non-discretionary matters unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee. We believe the Proposals presented to our stockholders will be considered non-discretionary and therefore your broker, bank or nominee cannot vote your shares without your instruction. Your bank, broker or other nominee can vote your shares only if you provide instructions on how to vote. You should instruct your broker to vote your shares in accordance with directions you provide. May I change my vote after I have submitted my executed proxy card? Yes. You may change your vote by sending a later-dated, signed proxy card to us at the address listed below so that it is received by us prior to the special meeting or by attending the special meeting online and voting there. You also may revoke your proxy by sending a notice of revocation to us, which must be received prior to the special meeting. What should I do if I receive more than one set of voting materials? You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast your vote with respect to all of your shares. Who can help answer my questions? If you have questions about the proposals or if you need additional copies of the proxy statement/prospectus or the enclosed proxy card you should contact: Peter Haskopoulos, Chief Financial Officer, Chief Accounting Officer and Secretary c/o Decarbonization Plus Acquisition Corporation III Email: [email protected] You may also contact our proxy solicitor at: To obtain timely delivery, our stockholders must request the materials no later than five business days prior to the special meeting. You may also obtain additional information about us from documents filed with the SEC by following the instructions in the section entitled “Where You Can Find Additional Information.” If you intend to seek redemption of your public shares, you will need to send a letter demanding redemption and deliver your shares (either physically or electronically) to our transfer agent at least two business days prior to the special meeting in accordance with the procedures detailed under the question “How do I exercise my redemption rights?” If you have questions regarding the certification of your position or delivery of your shares, please contact: Who will solicit and pay the cost of soliciting proxies? The DCRC Board is soliciting your proxy to vote your shares of Class A Common Stock and Class B Common Stock on all matters scheduled to come before the special meeting. We will pay the cost of soliciting proxies for the special meeting. We have engaged Morrow Sodali LLC to assist in the solicitation of proxies for the special meeting. We have agreed to pay Morrow Sodali LLC a fee of $32,500, plus disbursements. We will reimburse Morrow Sodali LLC for reasonable out-of-pocket expenses and will indemnify Morrow Sodali LLC and its affiliates against certain claims, liabilities, losses, damages and expenses. We will also reimburse banks, brokers and other custodians, nominees and fiduciaries representing beneficial owners of shares of Class A Common Stock and Class B Common Stock for their expenses in forwarding soliciting materials to beneficial owners of Class A Common Stock and Class B Common Stock and in obtaining voting instructions from those owners. Our directors and officers may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies. This summary highlights selected information from this proxy statement/prospectus and does not contain all of the information that is important to you. To better understand the business combination and the proposals to be considered at the special meeting, you should read this entire proxy statement/prospectus carefully, including the annexes. See also the section entitled “Where You Can Find Additional Information.” Parties to the Business Combination DCRC is a Delaware corporation formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving DCRC and one or more businesses. Upon the Closing, we intend to change our name from “Decarbonization Plus Acquisition Corporation III” to “Solid Power, Inc.” Our Class A Common Stock, public warrants, and units, consisting of one share of Class A Common Stock and one-third of one warrant, are traded on Nasdaq under the ticker symbols “DCRC,” “DCRCW” and “DCRCU,” respectively. We intend to apply to continue the listing of our Class A Common Stock and warrants on Nasdaq under the symbols “SLDP” and “SLDPW,” respectively, upon the Closing. Upon the Closing, each share of Class A Common Stock will be re-designated as “common stock, par value $0.0001.” The units will automatically separate into the component securities upon consummation of the business combination and, as a result, will no longer trade as a separate security. The mailing address of our principal executive office is 2744 Sand Hill Road, Suite 100, Menlo Park, California 94025, and our telephone number is (212) 993-0076. Solid Power is developing all-solid-state battery cell technology that replaces the liquid or gel polymer electrolyte used in conventional lithium-ion battery cells with a sulfide-based solid electrolyte, and is focused solely on the development and commercialization of all-solid-state battery cells and solid electrolyte materials, primarily for the fast-growing battery-powered electric vehicle market. The world has started its transition to battery-powered electric vehicles. Current liquid electrolyte-based lithium-ion battery technology allowed electric vehicles to secure roughly 2% of new vehicle sales in 2020. BloombergNEF predicts by the mid-2030s approximately 50% of all new auto sales will be fully electric. This corresponds to an estimated $305 billion total addressable market based on projected new auto sales in 2035, assuming a 70 kWh pack size and a cost of $85/kWh. In recent years, liquid electrolyte-based lithium-ion technology made considerable strides to increase stored energy while lowering costs; however, current technology is approaching its practical limits. To reach mass adoption where a majority of new passenger vehicles are electrified, battery cell technology must take a big step forward. We are developing our All-Solid-State Platform to address these needs. We believe our All-Solid-State Platform will be able to meet the performance and cost demands from both consumers and automotive OEMs and outperform the best performing liquid electrolyte-based lithium-ion technologies of today and tomorrow. We are developing our all-solid-state battery cell technology with the goal to improve, among other things: safety of electric vehicle batteries through the removal of flammable and volatile liquids and gels from the battery cells; energy density, a measure of the energy stored by the battery cell relative to its volume, by enabling higher capacity electrodes that are otherwise not considered viable in a traditional lithium-ion battery cell; calendar life – how long a battery cell can last before seeing significant degradation, especially at elevated temperature – as compared to current-generation lithium-ion; and cost, through simplifying the manufacturing process and removal or reduction of battery pack cooling systems and pack-level safety features typically seen in traditional lithium-ion battery packs. We have demonstrated that our all-solid-state battery cell technology can be manufactured in a high-throughput manner using existing lithium-ion battery cell manufacturing techniques and equipment. We believe that our technology could power longer range, lower cost, and safer electric vehicles, resulting in broader electric vehicle market adoption. The mailing address of Solid Power’s principal executive office is 486 S. Pierce Avenue, Suite E, Louisville, Colorado 80027, and its telephone number is (303) 219-0720. For more information about Solid Power, see the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Solid Power” and “Information About Solid Power.” The Business Combination On June 15, 2021, we entered into the Business Combination Agreement with Merger Sub and Solid Power. Pursuant to the Business Combination Agreement, and subject to the terms and conditions contained therein, Merger Sub will merge with and into Solid Power, with Solid Power surviving the merger. After giving effect to the merger, Solid Power will become a wholly owned subsidiary of New Solid Power. Solid Power will cause each share of Solid Power Preferred Stock that is issued and outstanding immediately prior to the Effective Time to be automatically converted, effective immediately prior to the Effective Time, into a number of shares of Solid Power Common Stock, at the then effective conversion rate as calculated pursuant to the Solid Power Charter (the “Conversion”). After the Conversion, such converted shares of Solid Power Preferred Stock will no longer be outstanding and will cease to exist. At the Effective Time, by virtue of the Merger and without any action on the part of DCRC, Merger Sub, Solid Power or the holders of any of Solid Power’s securities: each share of Solid Power Common Stock issued and outstanding immediately prior to the Effective Time (including shares of Solid Power Common Stock resulting from the Conversion, but excluding Solid Power Restricted Stock and excluding any Dissenting Shares (as defined in the Business Combination Agreement)) will be canceled and converted into the right to receive the number of shares of Class A Common Stock equal to the Exchange Ratio; all shares of Solid Power Common Stock held in treasury of Solid Power will be canceled without any conversion thereof and no payment or distribution will be made with respect to such Solid Power Common Stock; each share of Merger Sub Common Stock issued and outstanding immediately prior to the Effective Time will be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock, par value $0.0001 per share, of the Surviving Corporation; each Solid Power Warrant (a) to the extent terminated, expired or exercised immediately prior to the Effective Time, either voluntarily prior to the Effective Time or in accordance with its terms in connection with the Transactions, will no longer be deemed outstanding and any shares of Company Common Stock issuable in connection therewith shall be treated as described above and (b) to the extent outstanding and unexercised immediately prior to the Effective Time will automatically be converted into a warrant (each such resulting warrant, an “Assumed Warrant”) to acquire a number of shares of Class A Common Stock equal to (i) the number of shares of Solid Power Common Stock subject to the applicable Solid Power Warrant multiplied by (ii) the Exchange Ratio, rounding the resulting number down to the nearest whole number of shares of Class A Common Stock, at an adjusted price equal to (x) the per share exercise price for the shares of Solid Power Common Stock subject to the applicable Solid Power Warrant, as in effect immediately prior to the Effective Time, divided by (y) the Exchange Ratio, rounding the resulting exercise price up to the nearest whole cent; each Solid Power Option, whether or not exercisable and whether or not vested, outstanding immediately prior to the Effective Time will be converted into an option to purchase a number of shares of Class A Common Stock (such option, an “Exchanged Option”) equal to the product (rounded down to the nearest whole number) of (x) the number of shares of Solid Power Common Stock subject to such Solid Power Option immediately prior to the Effective Time and (y) the Exchange Ratio, at an exercise price per share (rounded up to the nearest whole cent) equal to (A) the exercise price per share of such Solid Power Option immediately prior to the Effective Time divided by (B) the Exchange Ratio; provided, however, that the exercise price and number of shares of Class A Common Stock shall be determined in a manner consistent with the requirements of Section 409A of the Code; provided, further, that in the case of any Exchanged Option to which Section 422 of the Code applies, the exercise price and the number of shares of Class A Common Stock purchasable pursuant to such option shall be determined in accordance with the foregoing, subject to such adjustments as are necessary in order to satisfy the requirements of Section 424(a) of the Code; and each award of Solid Power Restricted Stock that is outstanding immediately prior to the Effective Time will be released and extinguished in exchange for an award covering a number of restricted shares of Class A Common Stock (such award of restricted stock, “Exchanged Restricted Stock”) equal to the product (rounded down to the nearest whole number) of (x) the number of shares of Solid Power Common Stock subject to such award of Solid Power Restricted Stock immediately prior to the Effective Time and (y) the Exchange Ratio. Pursuant to the terms of the Charter, each share of Class B Common Stock outstanding prior to the Effective Time will convert into one share of Class A Common Stock at the Closing. All of the shares of Class B Common Stock converted into shares of Class A Common Stock will no longer be outstanding and will cease to exist, and each holder of such Class B Common Stock will thereafter cease to have any rights with respect to such securities. For more information about the Business Combination Agreement and the business combination and other transactions contemplated thereby, see the section entitled “Proposal No. 1—The Business Combination Proposal.” Conditions to the Closing The obligations of Solid Power, DCRC and Merger Sub to consummate the business combination, including the Merger, are subject to the satisfaction or waiver of certain conditions, including, but not limited to (a) the written consent of the requisite stockholders of Solid Power in favor of the approval and adoption of the Business Combination Agreement and the Merger and all other transactions contemplated by the Business Combination Agreement (the “Written Consent”) having been delivered to DCRC, (b) approval and adoption of certain of the Proposals by DCRC’s stockholders, (c) the absence of any law or order that makes the business combination illegal or otherwise prohibits consummation of the business combination, (d) expiration or termination under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) (the waiting period under the HSR Act expired on August 9, 2021), (e) listing of the Class A Common Stock on Nasdaq or another exchange mutually agreed to by the parties, as of the Closing Date, (f) the Registration Statement having been declared effective under the Securities Act and no stop orders or suspension proceedings having been initiated or threatened by the SEC, (g) DCRC having at least $5,000,001 of net tangible assets following the exercise of redemption rights in accordance with the Charter and after giving effect to the PIPE Financing or the Class A Common Stock not constituting “penny stock” as such term is defined in the Exchange Act, and (h) DCRC shall have provided an opportunity to DCRC’s stockholders to have their Class A Common Stock redeemed according to the Charter, the Investment Management Trust Agreement, dated as of March 23, 2021, between DCRC and Continental Stock Transfer & Trust Company (the “Trust Agreement”) and this proxy statement/prospectus. The obligations of Solid Power to consummate the business combination, including the Merger, are also subject to the satisfaction or waiver of certain additional conditions, including, but not limited to, (a) the representations and warranties of DCRC and Merger Sub being true and correct to the standards applicable to such representations and warranties, (b) each of the covenants of DCRC and Merger Sub having been performed or complied in all material respects, (c) the absence of a DCRC Material Adverse Effect (as defined in the Business Combination Agreement), (d) DCRC having made all necessary and appropriate arrangements to have all of the funds held in the Trust Account disbursed to DCRC immediately prior to the Effective Time, and all such funds released from the Trust Account being available for immediate use to DCRC in respect of all or a portion of the payment obligations set forth in the Business Combination Agreement and the payment of DCRC’s fees and expenses incurred in connection with the Business Combination Agreement and the business combination and (e) as of the Closing, after consummation of the PIPE Financing and after distribution of the funds in the Trust Account pursuant to the Business Combination Agreement, DCRC having unrestricted cash on hand equal to or in excess of $300,000,000 (without, for the avoidance of doubt, taking into account any transaction fees, costs and expenses paid or required to be paid in connection with the business combination and the PIPE Financing). Regulatory Matters Neither DCRC nor Solid Power is aware of any material regulatory approvals or actions that are required for completion of the business combination other than as required under the HSR Act. The parties have filed a premerger notification under the HSR Act. It is presently contemplated that if any additional regulatory approvals or actions are required, those approvals or actions will be sought. There can be no assurance, however, that any such additional approvals or actions will be obtained. In connection with the execution of the Business Combination Agreement, on June 15, 2021, DCRC, Solid Power, and certain stockholders of Solid Power entered into a Stockholder Support Agreement (the “Stockholder Support Agreement”) pursuant to which, among other things, such stockholders agreed to vote all of their shares of Solid Power Common Stock and Solid Power Preferred Stock in favor of the approval and adoption of the business combination, including agreeing to execute the Written Consent within five business days of the Registration Statement becoming effective. Additionally, such stockholders have agreed, among other things, not to, prior to the Effective Time, (a) transfer any of their shares of Solid Power Common Stock and Solid Power Preferred Stock (or enter into any arrangement with respect thereto), subject to certain customary exceptions, or (b) enter into any voting arrangement that is inconsistent with the Stockholder Support Agreement. Such stockholders also agreed not to transfer any of their shares of Class A Common Stock received in the Merger, or upon exercise of Assumed Warrants, Exchanged Options or Exchanged Restricted Stock received in the Merger, for a period of the shorter of (i) six months following the Closing and (ii) the termination, expiration or waiver of the lock-up period covering the Sponsor’s Class A Common Stock, subject to certain customary exceptions. Such restrictions on transfer will be set forth in the bylaws DCRC will adopt immediately prior to the Closing, which will apply to all investors of Solid Power that receive securities of DCRC in connection with the Merger; provided, however, that Solid Power agreed in the Stockholder Support Agreement that any waiver or termination of such lock-up period with respect to the Class A Common Stock held by BMW Holding B.V. (“BMW Holding”), Ford, Volta Energy Storage Fund I, LP, Volta SPV SPW, LLC, Volta SPW Co-Investment, LP or any of their respective affiliates (the “Covered Group”) shall be deemed to be a proportional waiver or termination of the lock-up period with respect to the Class A Common Stock owned by the other members of the Covered Group. For more information about the Stockholder Support Agreement, see the section entitled “Proposal No. 1—The Business Combination Proposal—Related Documents—Stockholder Support Agreement.” In connection with the execution of the Business Combination Agreement, on June 15, 2021, the Sponsor and certain directors of DCRC entered into a letter agreement with Solid Power and DCRC (the “Sponsor Letter”), pursuant to which, among other things, the Sponsor and such directors agreed to (i) waive the anti-dilution rights set forth in the Charter with respect to the Founder Shares held by them, (ii) comply with the lock-up provisions in the Letter Agreement, dated March 23, 2021, by and among DCRC, the Sponsor and DCRC’s directors and officers, (iii) vote all the shares of Class A Common Stock and Founder Shares held by them in favor of the adoption and approval of the Business Combination Agreement and the business combination and (iv) not redeem any shares of DCRC Class A Common Stock owned by them in connection with such stockholder approval. For more information about the Sponsor Letter, see the section entitled “Proposal No. 1—The Business Combination Proposal—Related Documents—Sponsor Letter.” A&R Registration Rights Agreement In connection with the Closing, that certain Registration Rights Agreement dated March 23, 2021 (the “IPO Registration Rights Agreement”) will be amended and restated and DCRC, certain persons and entities holding securities of DCRC prior to the Closing (the “Initial Holders”) and certain persons and entities receiving Class A Common Stock pursuant to the Merger (the “New Holders” and together with the Initial Holders, the “Reg Rights Holders”) will enter into that amended and restated IPO Registration Rights Agreement attached as an exhibit to the Business Combination Agreement (the “A&R Registration Rights Agreement”). Pursuant to the A&R Registration Rights Agreement, DCRC will agree that, within 30 days after the Closing, DCRC will file with the SEC (at DCRC’s sole cost and expense) a registration statement registering the resale of certain securities held by or issuable to the Reg Rights Holders (the “Resale Registration Statement”), and DCRC will use its reasonable best efforts to have the Resale Registration Statement declared effective as promptly as reasonably practicable after the filing thereof. In certain circumstances, the Reg Rights Holders can demand DCRC’s assistance with underwritten offerings and block trades, and the Reg Rights Holders will be entitled to certain piggyback registration rights. The A&R Registration Rights Agreement does not provide for the payment of any cash penalties by DCRC if it fails to satisfy any of its obligations under the A&R Registration Rights Agreement. For more information about the A&R Registration Rights Agreement, see the section entitled “Proposal No. 1—The Business Combination Proposal—Related Documents—A&R Registration Rights Agreement.” Proposed Second Amended and Restated Charter Pursuant to the terms of the Business Combination Agreement, at the Closing, we will amend and restate, effective as of the Effective Time, our Charter to, among other things, (a) increase the number of authorized shares of DCRC’s capital stock, par value $0.0001 per share, from 271,000,000 shares, consisting of (i) 270,000,000 shares of common stock, including 250,000,000 shares of Class A Common Stock and 20,000,000 shares of Class B Common Stock, and (ii) 1,000,000 shares of Preferred Stock, to 2,200,000,000 shares, consisting of (A) 2,000,000,000 shares of common stock, par value $0.0001 per share, and (B) 200,000,000 shares of Preferred Stock; (b) eliminate certain provisions in the Charter relating to an Initial Business Combination that will no longer be applicable to us following the Closing; (c) change the post-combination company’s name to “Solid Power, Inc.”; (d) change the minimum stockholder vote required to amend, repeal or modify certain specified provisions of the Proposed Second A&R Charter or any provision inconsistent with any provision of New Solid Power’s amended and restated bylaws; (e) provide for the removal of a director only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the stock outstanding and entitled to vote thereon; (f) remove the right of holders of Class B Common Stock to act by written consent; and (g) remove the designation of certain courts as the exclusive forum for certain types of stockholder claims. For more information about the amendments to our Charter, see the sections entitled “Proposal No. 2—The Authorized Share Charter Proposal” and “Proposal No. 3—The Additional Charter Proposal.” PIPE Financing In connection with the execution of the Business Combination Agreement, on June 15, 2021, DCRC and Solid Power entered into separate subscription agreements (collectively, the “Subscription Agreements”) with the New PIPE Investors, pursuant to which the New PIPE Investors agreed to purchase, and DCRC agreed to sell to the New PIPE Investors, an aggregate of 16,500,000 PIPE Shares for a purchase price of $10.00 per share and an aggregate purchase price of $165,000,000, in the PIPE Financing. The closing of the sale of the PIPE Shares pursuant to the Subscription Agreements is contingent upon, among other customary closing conditions, the concurrent consummation of the business combination. The purpose of the PIPE Financing is to raise additional capital for use by the combined company following the Closing. Pursuant to the Subscription Agreements, DCRC agreed that, within 30 calendar days after the Closing Date, DCRC will file with the SEC (at DCRC’s sole cost and expense) a registration statement registering the resale of the PIPE Shares (the “PIPE Resale Registration Statement”), and DCRC will use its commercially reasonable efforts to have the PIPE Resale Registration Statement declared effective as soon as practicable after the filing thereof. For more information about the Subscription Agreements, see the section entitled “Proposal No. 1—The Business Combination Proposal—Related Documents—PIPE Financing.” Interests of Certain Persons in the Business Combination In considering the recommendation of the DCRC Board to vote in favor of the business combination, stockholders should be aware that, aside from their interests as stockholders, our Sponsor and certain of our directors and officers have interests in the business combination that are different from, or in addition to, those of other stockholders generally. Our directors were aware of and considered these interests, among other matters, in evaluating the business combination, and in recommending to stockholders that they approve the business combination. Stockholders should take these interests into account in deciding whether to approve the business combination. These interests include, among other things: if the Trust Account is liquidated, including in the event we are unable to complete an Initial Business Combination within the required time period, our Sponsor has agreed to indemnify us to ensure that the proceeds in the Trust Account are not reduced below $10.00 per public share, or such lesser amount per public share as is in the Trust Account on the liquidation date, by the claims of (a) any third party (other than our independent public accountants) for services rendered or products sold to us or (b) a prospective target business with which we have entered into an acquisition agreement, but only if such a third party or target business has not executed a waiver of all rights to seek access to the Trust Account; Investors in our Sponsor, each of which contributed capital to our Sponsor in exchange for Founder Shares and private placement warrants, include entities affiliated with certain of our non-independent directors and officers. Specifically, Pierre Lapeyre, Jr., David Leuschen, Robert Tichio and Peter Haskopoulos are each affiliated with Sponsor Manager, and Erik Anderson is affiliated with WRG, through which such DCRC directors and officers have an indirect economic interest in the private placement warrants and shares of New Solid Power common stock anticipated to be held by our Sponsor as of the completion of the business combination. Position Total Contributions Number of Private of October 12, 2021 Number Shares as of October 12, Reasons for the Approval of the Business Combination After careful consideration, the DCRC Board recommends that our stockholders vote “FOR” the approval of the Business Combination Proposal. For a more complete description of our reasons for the approval of the business combination and the recommendation of the DCRC Board, see the section entitled “Proposal No. 1—The Business Combination Proposal—DCRC Board’s Reasons for the Approval of the Business Combination.” Redemption Rights Under our Charter, holders of our Class A Common Stock may elect to have their shares redeemed for cash at the applicable redemption price per share equal to the quotient obtained by dividing (a) the aggregate amount on deposit in the Trust Account as of two business days prior to the consummation of the business combination, including interest not previously released to us to pay our franchise and income taxes, by (b) the total number of shares of Class A Common Stock issued in the IPO. As of June 30, 2021, this would have amounted to approximately $10.00 per share. Under our Charter, in connection with an Initial Business Combination, a public stockholder, together with any affiliate or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13(d)(3) of the Exchange Act), is restricted from seeking redemption rights with respect to more than 20% of the public shares. Our Charter provides we will not redeem our Class A Common Stock in an amount that would cause our net tangible assets to be less than $5,000,001 (so that we are not subject to the SEC’s “penny stock” rules) or any greater net tangible asset or cash requirement which may be contained in the agreement relating to our Initial Business Combination. However, our Charter will be amended and restated immediately prior to the business combination, such that such limitation will no longer apply, and we anticipate our Class A Common Stock will be listed on Nasdaq, which provides a separate exception from being subject to the “penny stock” rules. If a holder exercises its redemption rights, then such holder will be exchanging its shares of Class A Common Stock for cash and will no longer own shares of Class A Common Stock and will not participate in our future growth, if any. Such a holder will be entitled to receive cash for its public shares only if it properly demands redemption and delivers its shares (either physically or electronically) to our transfer agent in accordance with the procedures described herein. See the section entitled “Special Meeting of DCRC Stockholders—Redemption Rights” for the procedures to be followed if you wish to redeem your shares for cash. Ownership of New Solid Power After the Closing The following diagram illustrates the pre-business combination organizational structure of DCRC: The following diagram illustrates the pre-business combination organizational structure of Solid Power: Represents percentage ownership on a fully diluted basis. The following diagram illustrates the structure of New Solid Power immediately following the consummation of the business combination. The interests set forth below (a) assume (i) that no public stockholders elect to have their public shares redeemed, (ii) that there are no other issuances of equity interests of DCRC or Solid Power and (iii) that there are no exercises of Solid Power Options or Solid Power Warrants and (b) do not take into account DCRC warrants that will remain outstanding following the business combination and may be exercised at a later date. As a result of the business combination, the economic and voting interests of our public stockholders will decrease. If these assumptions are not correct, then the percent of ownership set forth in the diagram below would change. Please see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” for further information. Board of Directors of New Solid Power Following the Business Combination Assuming the Director Election Proposal is approved at the special meeting, we expect the New Solid Power board of directors (the “New Solid Power Board”) to be comprised of Erik Anderson, Steven Goldberg, Robert Tichio, Rainer Feurer, Douglas Campbell, David Jansen, John Stephens, and . Accounting Treatment The business combination is intended to be accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, DCRC will be treated as the “acquired” company for financial reporting purposes. Accordingly, the business combination will be treated as the equivalent of Solid Power issuing stock for the net assets of DCRC, accompanied by a reverse recapitalization. The net assets of DCRC will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the business combination will be those of Solid Power. Appraisal Rights Appraisal rights are not available to holders of shares of Class A Common Stock and Class B Common Stock in connection with the business combination. Other Proposals In addition to the proposal to approve and adopt the Business Combination Agreement and the business combination, our stockholders will be asked to vote on proposals to amend and restate our Charter to, among other things, (a) increase the number of authorized shares of DCRC’s capital stock, par value $0.0001 per share, from 271,000,000 shares, consisting of (i) 270,000,000 shares of common stock, including 250,000,000 shares of Class A Common Stock and 20,000,000 shares of Class B Common Stock, and (ii) 1,000,000 shares of Preferred Stock, to 2,200,000,000 shares, consisting of (A) 2,000,000,000 shares of common stock, par value $0.0001 per share, and (B) 200,000,000 shares of Preferred Stock; (b) eliminate certain provisions in the Charter relating to an Initial Business Combination that will no longer be applicable to us following the Closing; (c) change the post-combination company’s name to “Solid Power, Inc.”; (d) change the minimum stockholder vote required to amend, repeal or modify certain specified provisions of the Proposed Second A&R Charter or any provision inconsistent with any provision of New Solid Power’s amended and restated bylaws; (e) provide for the removal of a director only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the stock outstanding and entitled to vote thereon; (f) remove the right of holders of Class B Common Stock to act by written consent; and (g) remove the designation of certain courts as the exclusive forum for certain types of stockholder claims. A copy of our Proposed Second A&R Charter reflecting the proposed amendments pursuant to the Authorized Share Charter Proposal and the Additional Charter Proposal is attached to this proxy statement/prospectus as Annex B. For more information about the Authorized Share Charter Proposal and the Additional Charter Proposal, see the sections entitled “Proposal No. 2—The Authorized Share Charter Proposal” and “Proposal No. 3—The Additional Charter Proposal.” In addition, our stockholders will be asked to vote on (a) a proposal to approve, for purposes of complying with applicable Nasdaq listing rules, (i) the issuance to the Historical Rollover Stockholders (or reservation for issuance in respect of New Solid Power options, New Solid Power restricted stock and New Solid Power warrants issued in exchange for outstanding pre-merger Solid Power Options, Solid Power Restricted Stock and Solid Power Warrants) of 134,777,882 shares of Class A Common Stock and (ii) the issuance and sale of 16,500,000 shares of Class A Common Stock in the PIPE Financing, (b) a proposal to approve and adopt the 2021 Plan, (c) a proposal to approve and adopt the ESPP, (d) a proposal to elect directors to serve until the 2022 annual meeting of stockholders, directors to serve until the 2023 annual meeting of stockholders and directors to serve until the 2024 annual meeting of stockholders, and until their respective successors are duly elected and qualified, subject to such directors’ earlier death, resignation, retirement, disqualification or removal and (e) a proposal to approve the adjournment of the special meeting to a later date or dates, if necessary or appropriate, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Business Combination Proposal, the Charter Proposals, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal or the Director Election Proposal. See the sections entitled “Proposal No. 4—The Nasdaq Proposal,” “Proposal No. 5—The 2021 Plan Proposal,” “Proposal No. 6—The ESPP Proposal,” “Proposal No. 7—The Director Election Proposal” and “Proposal No. 8—The Adjournment Proposal” for more information. Date, Time and Place of Special Meeting The special meeting will be held at , Eastern time, on , 2021, via live webcast at the following address: https://www.cstproxy.com/decarbonizationplusacquisitioniii/2021, or such other date, time and place to which such meeting may be adjourned or postponed, to consider and vote upon the proposals. Voting Power; Record Date You will be entitled to vote or direct votes to be cast at the special meeting if you owned shares of Class A Common Stock or Class B Common Stock at the close of business on , 2021, which is the record date for the special meeting. You are entitled to one vote for each share of Class A Common Stock or Class B Common Stock that you owned as of the close of business on the record date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. On the record date, there were 43,750,000 shares of Class A Common Stock and Class B Common Stock outstanding in the aggregate, of which 35,000,000 were public shares and 8,750,000 were Founder Shares held by the initial stockholders. Proxy Solicitation Proxies may be solicited by mail. We have engaged Morrow Sodali LLC to assist in the solicitation of proxies. If a stockholder grants a proxy, it may still vote its shares online if it revokes its proxy before the special meeting. A stockholder may also change its vote by submitting a later-dated proxy as described in the section entitled “Special Meeting of DCRC Stockholders—Revoking Your Proxy.” Quorum and Required Vote for Proposals for the Special Meeting A quorum of our stockholders is necessary to hold a valid meeting. A quorum will be present at the special meeting if holders of a majority of the outstanding shares of our Class A Common Stock and Class B Common Stock entitled to vote thereat attend virtually or are represented by proxy at the special meeting. Abstentions will count as present for the purposes of establishing a quorum. The approval of the Business Combination Proposal, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal and the Adjournment Proposal requires the affirmative vote (online or by proxy) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock entitled to vote and actually cast thereon online at the special meeting, voting as a single class. Approval of the Authorized Share Charter Proposal requires the affirmative vote (online or by proxy) of (i) the holders of a majority of the shares of Class A Common Stock and Class B Common Stock entitled to vote thereon at the special meeting, voting as a single class, and (ii) the holders of a majority of the shares of Class A Common Stock entitled to vote thereon at the special meeting, voting as a single class. Approval of the Additional Charter Proposal requires the affirmative vote (online or by proxy) of the holders of a majority of the outstanding shares of Class A Common Stock and Class B Common Stock entitled to vote thereon at the special meeting, voting as a single class. Accordingly, a stockholder’s failure to vote by proxy or to vote online at the special meeting will not be counted towards the number of shares of Class A Common Stock and Class B Common Stock required to validly establish a quorum, and if a valid quorum is otherwise established, it will have no effect on the outcome of any vote on the Business Combination Proposal, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal or the Adjournment Proposal, but will have the same effect as a vote AGAINST the Charter Proposals. Approval of the election of each director nominee pursuant to the Director Election Proposal requires the affirmative vote (online or by proxy) of a plurality of the votes cast by holders of our Class A Common Stock and Class B Common Stock entitled to vote and actually cast thereon at the special meeting. This means that the director nominees will be elected if they receive more affirmative votes than any other nominee for the same position. Stockholders may not cumulate their votes with respect to the election of directors. Assuming a valid quorum is established, abstentions will have no effect on the Director Election Proposal. The Closing is conditioned on the approval of the Business Combination Proposal, the Charter Proposals, the Nasdaq Proposal, the Director Election Proposal, the 2021 Plan Proposal and the ESPP Proposal at the special meeting. The Charter Proposals, the Director Election Proposal, the 2021 Plan Proposal and the ESPP Proposal are conditioned on the approval of the Business Combination Proposal and the Nasdaq Proposal. The Adjournment Proposal is not conditioned on the approval of any other proposal set forth in this proxy statement/prospectus. Recommendation to DCRC Stockholders The DCRC Board believes that each of the Business Combination Proposal, the Authorized Share Charter Proposal, the Additional Charter Proposal, the Nasdaq Proposal, the 2021 Plan Proposal, the ESPP Proposal, the Director Election Proposal and the Adjournment Proposal is in the best interests of DCRC and our stockholders and recommends that our stockholders vote “FOR” each Proposal (or in the case of the Director Election Proposal, “FOR ALL NOMINEES”) being submitted to a vote of the stockholders at the special meeting. When you consider the recommendation of the DCRC Board in favor of approval of these Proposals, you should keep in mind that, aside from their interests as stockholders, our Sponsor and certain of our directors and officers have interests in the business combination that are different from, or in addition to, your interests as a stockholder. Please see the section entitled “Proposal No. 1—The Business Combination Proposal—Interests of Certain Persons in the Business Combination.” In evaluating the proposals set forth in this proxy statement/prospectus, you should carefully read this proxy statement/prospectus, including the annexes, and especially consider the factors discussed in the section entitled “Risk Factors.” Some of the risks related to Solid Power’s business and industry and the business combination are summarized below. Risks Related to Solid Power Risks Related to Development and Commercialization It will be challenging to develop all-solid-state battery cells capable of production at volume and with acceptable performance, yields and costs. The pace of development in materials science is often not predictable. Delays or failures in accomplishing particular development objectives may postpone or prevent Solid Power from generating revenues from the licensing of our battery cell technology or sales of its sulfide-based solid electrolytes. If Solid Power’s all-solid-state battery cells fail to perform as expected, its ability to develop, market, and license its technology could be harmed. Solid Power may not succeed in developing all-solid-state battery cells for commercialization under its JDAs within the time parameters specified therein. If Solid Power does not meet the milestones in the JDAs, its partners may terminate them without liability to Solid Power. Termination of a JDA by a partner, particularly a key partner like Ford or BMW of North America LLC, could impair Solid Power’s reputation and prospects materially. Solid Power depends on its ability to manage its relationships with existing partners, and to develop new relationships over time. Solid Power may not succeed in managing these business relationships, which could slow its development progress and impair its business prospects. Solid Power has not reached any agreement with its partners on economic terms for the supply of its all-solid-state battery cell technology or sale of sulfide-based solid electrolytes. As a result, Solid Power’s projections of revenue and other financial results are uncertain. The non-exclusive nature of Solid Power’s JDAs exposes it to the risk that its partners may elect to pursue other electric vehicle technologies, which likely would impair its revenue generating ability. The terms of each JDA permit Solid Power’s partners to share in the intellectual property developed through the research and development efforts required under its particular agreements with them. Solid Power’s ability to share developments gained through the course of performance of a particular JDA with its other partners may be limited in certain circumstances. In certain circumstances, Solid Power’s partners may be able to exploit certain of the intellectual property developed under their respective JDAs in ways that are detrimental to it. Solid Power has only conducted preliminary safety testing on its prototype all-solid-state battery cells. Solid Power’s all-solid-state battery cells will require additional and extensive safety testing prior to being installed in electric vehicles. Substantial increases in the prices for Solid Power’s raw materials and components, some of which are obtained from a limited number of sources where demand may exceed supply, could materially and adversely affect its business. Risks Related to Industry and Market Trends If solid-state battery cell technology does not become widely accepted, Solid Power may not be successful in generating revenues from the manufacturing and sale of its sulfide-based solid electrolytes. The battery cell market continues to evolve and is highly competitive, and Solid Power may not be successful in competing in this market or establishing and maintaining confidence in its long-term business prospects among current and future partners and customers. Solid Power’s future growth and success are dependent upon consumers’ willingness to adopt electric vehicles. Solid Power may not be able to accurately estimate the future supply and demand for its all-solid-state battery cells and/or its sulfide-based solid electrolytes, which could result in a variety of inefficiencies in Solid Power’s business and hinder its ability to generate revenue. If Solid Power fails to accurately predict our manufacturing requirements, it could incur additional costs or experience delays. Risks Related to Limited Operating History Solid Power’s business model has yet to be tested and any failure to commercialize its strategic plans would have an adverse effect on its operating results and business, harm its reputation and could result in substantial liabilities that exceed its resources. Solid Power is an early stage company with a history of financial losses and expects to incur significant expenses and continuing losses for the foreseeable future. Solid Power may require additional capital to support business growth, and this capital might not be available on commercially reasonable terms or at all. Solid Power’s management does not have experience in operating a public company. Solid Power may not succeed in establishing, maintaining and strengthening its brand, which would materially and adversely affect customer acceptance of its technologies and its business, revenues and prospects. Risks Related to Intellectual Property Solid Power relies heavily on owned and exclusively-licensed intellectual property, which includes patent rights, trade secrets, copyright, trademarks, and know-how. If Solid Power is unable to protect and maintain access to these intellectual property rights, its business and competitive position would be harmed. Solid Power’s patent applications may not result in issued patents, which would result in the disclosures in those applications being available to the public. Also, Solid Power’s patent rights may be contested, circumvented, invalidated or limited in scope, any of which could have a material adverse effect on its ability to prevent others from interfering with commercialization of its products. Risks Related to Finance and Accounting Solid Power’s expectations and targets regarding the times when it will achieve various technical, pre-production and production-level performance objectives depend in large part upon assumptions, estimates, measurements, testing, analyses and data developed and performed by Solid Power, which if incorrect or flawed, could have a material adverse effect on its actual operating results and performance. Incorrect estimates or assumptions by management in connection with the preparation of Solid Power’s financial statements could adversely affect its reported assets, liabilities, income, revenue or expenses. The unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on Solid Power’s business, prospects, financial condition and operating results. Our auditors identified a material weakness in our internal control over financial reporting as of December 31, 2020. If we are unable to develop and maintain an effective system of internal controls and procedures required by Section 404(a) of the Sarbanes-Oxley Act, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our stock price, business and operating results. Risks Related to Legal and Regulatory Compliance Solid Power is subject to regulations regarding the storage and handling of various products. It may become subject to product liability claims, which could harm its financial condition and liquidity if it is not able to successfully defend or insure against such claims. Solid Power is subject to substantial regulation, and unfavorable changes to, or failure by it to comply with, these regulations could substantially harm its business and operating results. Solid Power is subject to various existing and future environmental health and safety laws, which may result in increased compliance costs or additional operating costs and restrictions. Failure to comply with such laws and regulations may result in substantial fines or other limitations that could adversely impact Solid Power’s financial results or operations. Risks Related to DCRC and the Business Combination DCRC’s Sponsor, certain members of the DCRC Board and DCRC’s officers have interests in the business combination that are different from or are in addition to other stockholders in recommending that stockholders vote in favor of approval of the Business Combination Proposal. The DCRC Board did not obtain a third-party valuation or fairness opinion in determining whether or not to proceed with the business combination. This proxy statement/prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. All statements, other than statements of present or historical fact included in this proxy statement/prospectus, regarding the proposed business combination, DCRC’s ability to consummate the business combination, the benefits of the transaction, the post-combination company’s future financial performance following the business combination and the post-combination company’s strategy, expansion plans, future operations, future operating results, estimated revenues, losses, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “continue,” “project” or the negative of such terms or other similar expressions. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Except as otherwise required by applicable law, DCRC disclaims any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this proxy statement/prospectus. DCRC cautions you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond the control of DCRC. In addition, DCRC cautions you that the forward-looking statements regarding DCRC and the post-combination company, which are contained in this proxy statement/prospectus, are subject to the following factors: the occurrence of any event, change or other circumstances that could delay the business combination or give rise to the termination of the Business Combination Agreement and the other agreements related to the business combination (including catastrophic events, acts of terrorism, the outbreak of war, the novel coronavirus pandemic (“COVID-19”) and/or any other pandemic and other public health events), as well as management’s response to any of the foregoing; the outcome of any legal proceedings that may be instituted against DCRC, Solid Power, their affiliates or their respective directors and officers following announcement of the business combination; the inability to complete the business combination due to the failure to obtain approval of the stockholders of DCRC, regulatory approvals, or satisfy the other conditions to closing in the Business Combination Agreement; the risk that DCRC may not be able to obtain the financing necessary to consummate the business combination; the risk that the proposed business combination disrupts current plans and operations of Solid Power or DCRC as a result of the announcement and consummation of the business combination; DCRC’s ability to realize the anticipated benefits of the business combination, which may be affected by, among other things, consumers’ willingness to adopt electric vehicles, competition and the ability of Solid Power to grow and manage growth profitably following the business combination; risks relating to the uncertainty of the projected financial information with respect to Solid Power; risks relating to Solid Power’s status as an early stage company with a history of financial losses, and an expectation to incur significant expenses and continuing losses for the foreseeable future; risks relating to the uncertainty of the success of Solid Power’s research and development efforts; risks relating to the non-exclusive nature of Solid Power’s OEM and JDA relationships; costs related to the business combination; New Solid Power’s success in retaining or recruiting, or changes required in, its officers, key employees or directors following the business combination; the possibility of third-party claims against DCRC’s Trust Account; the amount of redemption requests by DCRC’s stockholders; changes in applicable laws or regulations; the ability of Solid Power to execute its business model, including market acceptance of all-solid-state battery cell technology; the possibility that COVID-19 may hinder DCRC’s ability to consummate the business combination; the possibility that COVID-19 may adversely affect the results of operations, financial position and cash flows of DCRC or the post-combination company; and the possibility that DCRC or the post-combination company may be adversely affected by other economic, business or competitive factors. Should one or more of the risks or uncertainties described in this proxy statement/prospectus, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. Additional information concerning these and other factors that may impact the operations and projections discussed herein can be found in the section entitled “Risk Factors” in DCRC’s final prospectus for its Initial Public Offering, which was filed with the SEC on March 25, 2021, and in DCRC’s periodic filings with the SEC, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2021. DCRC’s SEC filings are available publicly on the SEC’s website at www.sec.gov. The following risk factors will apply to our business and operations following the completion of the business combination. These risk factors are not exhaustive, and investors are encouraged to perform their own investigation with respect to the business, financial condition and prospects of Solid Power and our business, financial condition and prospects following the completion of the business combination. You should carefully consider the following risk factors in addition to the other information included in this proxy statement/prospectus, including matters addressed in the section entitled “Cautionary Note Regarding Forward-Looking Statements.” We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business or financial condition. The following discussion should be read in conjunction with the financial statements of Solid Power and notes to the financial statements included herein. Unless the context otherwise requires, all references in this section to “we,” “us” or “our” refer to Solid Power. It will be challenging to develop all-solid-state battery cells capable of production at volume and with acceptable performance, yields and costs. The pace of development in materials science is often not predictable. Delays or failures in accomplishing particular development objectives may postpone or prevent us from generating revenues from the licensing of our battery cell technology or sales of our sulfide-based solid electrolytes. Our business depends on our ability to develop all-solid-state battery cells that outperform the lithium-ion batteries currently prevalent in electric vehicles. We expect to need at least four years of research and development and automotive qualification efforts before our cells will be advanced enough for us to realize material revenue generation from licensing agreements for our all-solid-state battery cells or reach commercial levels of manufacturing of our sulfide-based solid electrolytes. Developing the technology and know-how to produce all-solid-state battery cells at scale and cost, and which meet the performance requirements for wide adoption by automotive original equipment manufacturers (“OEMs”), is extremely challenging. We must overcome significant hurdles to complete development, validation and automotive qualification of our battery cells prior to being able to license or sell our technology to any customers. Some of the development hurdles that we need to overcome before licensing or selling our all-solid-state battery cell technology to customers include: increasing the volume, yield, reliability and uniformity of our electrode layers, separators and cells; increasing the size and layer count of our multi-layer cells; developing manufacturing techniques to produce the volume of cells needed for customer applications; understanding optimization requirements for high volume manufacturing equipment; designing and engineering packaging to ensure adequate cycle life (i.e., the number of charge and discharge cycles that a battery cell can sustain until its capacity falls below 80% of the original capacity); reducing cost of production; and meeting the rigorous and challenging specifications required by our customers, and ultimately OEMs, including but not limited to, calendar life, energy density, abuse testing, charge rate, cycle life, and operating temperature. We expect to encounter engineering challenges as we increase the dimensions and throughput of components and cells. To achieve target energy density, we need to increase the layer-count and dimensions of our current electrodes, which are enclosed within a single battery package. We have built and tested both ten-layer cells and 22-layer cells. In order to be commercially viable, we expect our cells will need to have at least 40 layers, our cells will need to be capable of being produced at a high yield without compromising performance, and we will have to solve related packaging challenges in a way that is scalable and at an acceptable cost. If we are not able to overcome these engineering and mechanical hurdles, we may not succeed in licensing our all-solid-state battery cell technology or selling our sulfide-based solid electrolytes to customers as needed to continue our business. Even if we complete development and succeed in entering into license agreements, we may not start to generate revenues from such agreements until our customers have retrofitted or constructed and deployed facilities to build our all-solid-state battery cells at scale. Any delay in the development, automotive qualification or third-party manufacturing scale-up of our all-solid-state battery cells would negatively impact our business as it will delay time to revenue. It may also negatively impact end-user relationships, including OEMs. Significant delays in providing licenses to our technology would materially damage our business, prospects, financial condition, operating results and brand. If our all-solid-state battery cells fail to perform as expected, our ability to develop, market, and license our technology could be harmed. Our battery cell architecture is inherently complex and incorporates technology and components that have not been used in commercial battery cell production. We anticipate that our research and development efforts will extend in an iterative process even beyond the time at which we initially deliver our all-solid-state battery cells to OEMs for validation. The continuous need to refine and optimize our products will require us to continue to perform extensive and costly research and development efforts even after the initial delivery of our cells to OEMs. For instance, we may learn from these validation efforts that our cells contain defects or errors that cause the cells not to perform as expected. Fixing any such problems may require design changes or other research and development efforts, take significant time, and be costly. There can be no assurance that we will be able to detect and fix any defects in our all-solid-state battery cell architecture. If our cell design fails to perform as expected, we could lose licensing contracts and customers of our sulfide-based solid electrolytes. In addition, because we have a limited frame of reference from which to evaluate the long-term performance of our all-solid-state battery cell design, it is possible that issues or problems will arise once our technology has been deployed for a longer period. If our customers determine our technology does not perform as expected, they may delay deliveries, terminate further orders, or initiate product recalls, each of which could adversely affect our business, prospects, and results of operations. We may not succeed in developing all-solid-state battery cells for commercialization under our JDAs within the time parameters specified therein. If we do not meet the milestones in the JDAs, our partners may terminate them without liability to us. Termination of a JDA by a partner, particularly a key partner like Ford or BMW of North America LLC, could impair our reputation and prospects materially. We have entered into non-exclusive JDAs with certain of our early investors, including Ford and BMW of North America LLC, to collaborate on the research and development of our all-solid-state battery cell. The terms of our JDAs generally require us to continue our research and development of all-solid-state battery cells and component materials such that our products are capable of being deployed in electric vehicles within the next few years. There is no assurance that we will be able to complete research and development in the time frame required by the JDAs and if are unable to, our partners may terminate their participation in the JDAs. Given the importance to us of these relationships, the termination of our JDA with either Ford or BMW of North America LLC could impair our reputation and prospects materially. Our business depends on our ability to manage our relationships with existing partners, and to develop new relationships over time. We may not succeed in managing these business relationships, which could slow our development progress and impair our business prospects. Our OEM partners may have economic, business, or legal interests or goals that are inconsistent with ours. As a result, it may be challenging for us to resolve issues that arise in respect of the performance of our JDAs, and in particular as any issue might impact development work underway under the JDAs. Any significant disagreements with them, and especially if we become dependent on that OEM partner for our research and development efforts, may impede our ability to maximize the benefits of our partnerships and slow the commercial roll-out of our all-solid-state battery cell designs. In addition, if our partners are unable or unwilling to meet their economic or other obligations under the JDAs, we may be required to fulfill those obligations alone, which could delay research and development progress and otherwise negatively impact our business and financial results. Furthermore, the relationships we have with our existing partners and the rights our partners’ rights have under their respective JDAs, may deter other automotive OEMs from working with us. If we are not able to expand our other customer relationships, our business and prospects could be materially harmed. We have not reached any agreement with our partners on economic terms for the supply of our all-solid-state battery cell technology or sale of sulfide-based solid electrolytes. As a result, our projections of revenue and other financial results are uncertain. Our JDAs provide a framework for our cooperation and contemplate that we will enter into certain additional arrangements with our partners for the purchase and pricing of sulfide-based solid electrolyte materials for integration into our all-solid-state battery cell design, as well as licensing our all-solid-state battery cell technology to cell producers. We have not reached agreement on key commercial terms with any of these partners and the structure for realizing the monetary value of our products is unknown. There can be no assurance that we will be able to agree with our partners on these key elements or that any terms will be financially beneficial for us. The non-exclusive nature of our JDAs exposes us to the risk that our partners may elect to pursue other electric vehicle technologies, which likely would impair our revenue generating ability. Our OEM partners are motivated to develop and commercialize improved electric vehicles. To that end, our partners have invested, and are likely to continue to invest in the future, in their own development efforts and, in certain cases, in JDAs with our current and future competitors. If other technology is developed more rapidly than our all-solid-state battery cells, or if such competing technologies are determined to be more efficient or effective than our all-solid-state battery cells, our partners may elect to adopt and install a competitor’s battery cell technology or products over ours, which could materially impact our business, financial results, and prospects. The terms of each JDA permit our partners to share in the intellectual property developed through the research and development efforts required under our particular agreements with them. Our ability to share developments gained through the course of performance of a particular JDA with our other partners may be limited in certain circumstances. In certain circumstances, our partners may be able to exploit certain of the intellectual property developed under their respective JDAs in ways that are detrimental to us. Our JDAs, generally speaking, provide that, among other things, (i) any intellectual property jointly developed will be owned by both parties, with each party having the right to license that intellectual property to third parties in connection with the development of such party’s products, (ii) each party retains sole ownership of previously or independently developed intellectual property, and (iii) the partner receives a license to our solely developed intellectual property under the JDA for use in the partner’s products. Furthermore, to the extent a development we make jointly with one of our partners involves such partner’s previously developed intellectual property, we may not be able to use any information gleaned in the course of performance under the JDA with such partner in performance of our other partners’ JDAs, which could prevent us from scaling the development or deploying it in work with all of our partners. There are no assurances we will maintain the access we need to any intellectual property of our partners or that any jointly developed intellectual property will be adequately protected, or that our partners will not seek to capitalize on jointly developed intellectual property for their sole benefit, such as through licensing agreements or other contractual arrangements they may enter with third parties that do not benefit us. In our JDAs to date, we have agreed that our partners would receive certain rights to our intellectual property in certain circumstances, including if we were to fail to perform under commercial agreements that we may enter into in the future or otherwise abandon our business following the execution of such commercial agreements. If those provisions are triggered, our partners may receive perpetual, irrevocable, royalty-free licenses to portions of our intellectual property, which may limit the profitability and competitive advantage offered by our intellectual property and adversely affect our revenue. We have only conducted preliminary safety testing on our prototype all-solid-state battery cells. Our all-solid-state battery cells will require additional and extensive safety testing prior to being installed in electric vehicles. To achieve acceptance by automotive OEMs, our anticipated commercial-sized all-solid-state battery cells will have to undergo extensive safety testing. We cannot assure you such tests will be successful, and we may identify different or new safety issues in our development or the commercial cells that have not been present in our prototype cells. If we have to make design changes to address any safety issues, we may have to delay or suspend commercialization, which could materially damage our business, prospects, financial condition, operating results and brand. We are subject to risks relating to the construction and development of facilities for our short-term research and development and long-term production requirements. Our business model contemplates that we will construct additional facilities for research and development and eventually sulfide-based solid electrolyte manufacturing. In the near-term, we need to construct a facility for higher-end research and development and scaling of our sulfide-based solid electrolyte material production. In the longer-term, and in connection with potential supply agreements, we will need to construct facilities to produce commercial volumes of our sulfide-based solid electrolyte. We have not secured a location or obtained the necessary licenses or permits for commercial-level sulfide-based solid electrolyte manufacturing facilities. In connection with constructing these facilities, we will need to identify and acquire the land or obtain leases for suitable locations appropriately zoned for activities involving hazardous materials, which will limit where we are able to locate our facilities and may require us to pay a premium for any such real estate. If we fail to do so, or otherwise encounter delays or lose necessary consents, permits, licenses, or commercial agreements, we could face delays or terminations of construction or development activities. If our planned facilities do not become operable on schedule, or at all, or become inoperable, production of our battery cells and our business will be harmed. We are subject to risks relating to production scale manufacturing of our all-solid-state battery cells through partners in the longer term. Our business plan contemplates top tier battery cell suppliers and automotive OEMs will manufacture our all-solid-state battery cells pursuant to licensing agreements with us. A component of our plan is to develop our products in such a way as to enable our manufacturing partners to utilize existing lithium-ion battery cell manufacturing processes and equipment. While we believe our development of a manufacturing process compatible with existing lithium-ion battery cell manufacturing lines provides significant competitive advantages, modifying or constructing these lines for production of our products could be more complicated or present significant challenges to our manufacturing partners that we do not currently anticipate. As with any large-scale capital project, any modification or construction of this nature could be subject to delays, cost overruns or other complications. Any failure to commence commercial production on schedule likely would lead to additional costs and could delay our ability to generate meaningful revenues. In addition, any such delay could diminish any “first mover” advantage we aim to attain, prevent us from gaining the confidence of OEMs and open the door to increased competition. All of the foregoing could hinder our ability to successfully launch and grow our business and achieve a competitive position in the market. Collaboration with third parties to manufacture our all-solid-state battery cells reduces our level of control over the process. We could experience delays if our partners do not meet agreed upon timelines or experience capacity constraints. There is risk of potential disputes with partners, which could stop or slow battery cell production, and we could be affected by adverse publicity related to our partners, whether or not such publicity is related to such third parties’ collaboration with us. In addition, we cannot guarantee that our suppliers will not deviate from agreed-upon quality standards. We may be unable to enter into agreements with manufacturers on terms and conditions acceptable to us and therefore we may need to contract with other third parties or create our own commercial production capacity. We may not be able to engage other third parties or establish or expand our own production capacity to meet our needs on acceptable terms, or at all. The expense and time required to adequately complete any transition may be greater than anticipated. Any of the foregoing could adversely affect our business, results of operations, financial condition and prospects. We rely on complex equipment for our operations, and production involves a significant degree of risk and uncertainty in terms of operational performance and costs. We rely heavily on complex equipment for our operations and the production of our all-solid-state battery cells. The work required to integrate this equipment into the production of our all-solid-state battery cells is time intensive and requires us to work closely with the equipment providers to ensure that it works properly with our proprietary technology. This integration involves a degree of uncertainty and risk and may result in the delay in the scaling up of production or result in additional cost to our all-solid-state battery cells. Our current manufacturing facilities require, and we expect our future manufacturing facilities will require, large-scale machinery. Such machinery may unexpectedly malfunction and require repairs and spare parts to resume operations, which may not be available when needed. We do not expect to maintain any redundancies in our research and development facilities, so unexpected malfunctions of our production equipment may significantly affect our operational efficiency. In addition, because this equipment has historically not been used to build all-solid-state battery cells, the operational performance and costs associated with this equipment is difficult to predict and may be influenced by factors outside of our control, such as, but not limited to, failures by suppliers to deliver necessary components of our products in a timely manner and at prices and volumes acceptable to us, environmental hazards and associated costs of remediation, difficulty or delays in obtaining governmental permits, damages or defects in systems, industrial accidents, fires, seismic activity and other natural disasters. Problems with our manufacturing equipment could result in the personal injury to or death of workers, the loss of production equipment, damage to manufacturing facilities, monetary losses, delays and unanticipated fluctuations in production. In addition, in some cases operational problems may result in environmental damage, administrative fines, increased insurance costs and potential legal liabilities. Any of these operational problems, or a combination of them could have a material adverse effect on our business, results of operations, cash flows, financial condition or prospects. We may obtain licenses on technology that has not been commercialized or has been commercialized only to a limited extent, and the success of our business may be adversely affected if such technology does not perform as expected. From time to time, we may license from third parties, including our partners under the JDAs, technologies that have not been commercialized or which have been commercialized only to a limited extent. These technologies may not perform as expected within our all-solid-state battery cells and related products. If the cost, performance characteristics, manufacturing process or other specifications of these licensed technologies fall short of our targets, our projected sales, costs, time to market, competitive advantage, future product pricing and potential operating margins may be adversely affected. Substantial increases in the prices for our raw materials and components, some of which are obtained from a limited number of sources where demand may exceed supply, could materially and adversely affect our business. We rely on third-party suppliers for components and equipment necessary to develop our all-solid-state battery cells, including key supplies, such as Li2S, lithium nickel manganese cobalt oxide (“NMC”), silicon, lithium metal foil and manufacturing tools for our all-solid-state battery cells. We face risks relating to the availability of these materials and components, including that we will be subject to demand shortages and supply chain challenges and generally may not have sufficient purchasing power to eliminate the risk of price increases for the raw materials and tools we need. Further, certain components, including Li2S, are not currently produced at a scale we believe necessary to support our proposed commercial operations. To the extent that we are unable to enter into commercial agreements with our current suppliers or our replacement suppliers on favorable terms, or these suppliers experience difficulties meeting our requirements, the development and commercial progression of our all-solid-state battery cells and related technologies may be delayed. Separately, we may be subject to various supply chain requirements regarding, among other things, conflict minerals and labor practices. We may be required to incur substantial costs to comply with these requirements, which may include locating new suppliers if certain issues are discovered. We may not be able to find any new suppliers for certain raw materials or components required for our operations, or such suppliers may be unwilling or unable to provide us with products. Any disruption in the supply of components, equipment or materials could temporarily disrupt research and development activities or production of our all-solid-state battery cells or sulfide-based solid electrolytes until an alternative supplier is able to supply the required material. Changes in business conditions, unforeseen circumstances, governmental changes, and other factors beyond our control or which we do not presently anticipate, could also affect our suppliers’ ability to deliver components or equipment to us on a timely basis. Any of the foregoing could materially and adversely affect our results of operations, financial condition and prospects. Currency fluctuations, trade barriers, tariffs or shortages and other general economic or political conditions may limit our ability to obtain key components or equipment for our all-solid-state battery cells or significantly increase freight charges, raw material costs and other expenses associated with our business, which could further materially and adversely affect our results of operations, financial condition and prospects. We may be unable to adequately control the costs associated with our operations and the components necessary to build our all-solid-state battery cells, and, if we are unable to control these costs and achieve cost advantages in our production of our all-solid-state battery cells at scale, our business will be adversely affected. We require significant capital to develop our all-solid-state battery cell technologies and expect to incur significant expenses, including those relating to research and development, raw material procurement, leases, sales and distribution as we build our brand and market our technologies, and general and administrative costs as we scale our operations. Our ability to become profitable in the future will not only depend on our ability to successfully develop and market our sulfide-based solid electrolytes and all-solid-state cells, but also to control our costs. If we are unable to efficiently design, appropriately price, sell and distribute our sulfide-based solid electrolytes and all-solid-state battery cell technologies, our anticipated margins, profitability and prospects would be materially and adversely affected. If we are unable to attract and retain key employees and qualified personnel, our ability to compete could be harmed. Our success depends on our ability to attract and retain our executive officers, key employees and other qualified personnel, and our operations may be severely disrupted if we lost their services. As we build our brand and become more well known, there is increased risk that competitors or other companies will seek to hire our personnel. Our success also depends on our continuing ability to identify, hire, attract, train and develop other highly qualified personnel. Competition for these employees can be intense, and our ability to hire, attract and retain them depends on our ability to provide competitive compensation. We may not be able to attract, assimilate, develop or retain qualified personnel in the future, and our failure to do so could seriously harm our business and prospects. In addition, we are highly dependent on the services of Douglas Campbell, our Chief Executive Officer, and other senior technical and management personnel, including our executive officers, who would be difficult to replace. If Mr. Campbell or other key personnel were to depart, we may not be able to successfully attract and retain the personnel necessary to grow our business. Our insurance coverage may not be adequate to protect us from all business risks. We may be subject, in the ordinary course of business, to losses resulting from products liability, accidents, acts of God, and other claims against us, for which we may have no insurance coverage. As a general matter, the policies that we do have may include significant deductibles, and we cannot be certain that our insurance coverage will be sufficient to cover all future losses or claims against us. A loss that is uninsured or which exceeds policy limits may require us to pay substantial amounts, which could adversely affect our financial condition and operating results. Furthermore, although we plan to obtain and maintain insurance for damage to our property and the disruption of our business, this insurance may be challenging to obtain and maintain on terms acceptable to us and may not be sufficient to cover all of our potential losses. Our facilities or operations could be damaged or adversely affected as a result of natural disasters and other catastrophic events, including fire and explosions. We currently conduct our operations in a single leased facility. Our current and future development and manufacturing facilities or operations could be adversely affected by events outside of our control, such as natural disasters, wars, health pandemics and epidemics such as the ongoing COVID-19 pandemic, and other calamities. We cannot assure you that any backup systems will be adequate to protect us from the effects of fire, explosions, floods, cyber-attacks (including ransomware attacks), typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events. Any of the foregoing events may give rise to interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to conduct our research and development activities as and on the timeline currently contemplated. These risks will remain particularly acute until we have completed the permitting and build-out of our second facility, which we expect will not occur until 2022 and may be further delayed. We have been, and may in the future be, adversely affected by the global COVID-19 pandemic and/or any other pandemic. We face various risks related to epidemics, pandemics, and other outbreaks, including the recent COVID-19 pandemic and/or any other pandemic. The impact of COVID-19, including changes in consumer and business behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. The spread of COVID-19 has also impacted our potential customers and our suppliers by disrupting the manufacturing, delivery and overall supply chain of battery cell, electric vehicle and equipment manufacturers and suppliers and has led to a global decrease in battery cell and electric vehicle sales in markets around the world. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, stay-at-home or shelter-in-place orders, and business shutdowns. These measures may adversely impact our employees, research and development activities and operations and the operations of our customers, suppliers, vendors and business partners. In addition, various aspects of our business cannot be conducted remotely, including many aspects of the research and development and manufacturing of our all-solid-state material and our all-solid-state battery cells. These measures, to the extent imposed by government authorities, may remain in place for a significant period of time and they may adversely affect our future research and development, manufacturing and building plans, business and results of operations. We may take further actions as may be required by government authorities or that we determine are in the best interests of our customers, employees, suppliers, vendors and business partners. The extent to which the COVID-19 pandemic impacts our business, prospects and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating activities can resume. Even as the COVID-19 pandemic subsides, we may continue to experience an adverse impact to our business as a result of the global economic impact, including any recession that has occurred or may occur in the future. There are no comparable recent events that may provide guidance as to the effect of the spread of COVID-19 and a pandemic, and, as a result, the ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain. If solid-state battery cell technology does not become widely accepted, we may not be successful in generating revenues from the manufacturing and sale of our sulfide-based solid electrolytes. Our business plan contemplates that we will develop the necessary production capabilities to manufacture our sulfide-based solid electrolytes for sale to top tier battery suppliers and automotive OEMs that have determined to manufacture solid-state battery cells, whether or not the ones we are working to develop. If a market for solid-state battery cells does not develop in the time or to the level we anticipate, we might not be able to generate revenues from this product line, which may prevent us from achieving our financial projections or recouping the costs we expect to incur in scaling our production of our sulfide-based solid electrolytes. The battery cell market continues to evolve and is highly competitive, and we may not be successful in competing in this market or establishing and maintaining confidence in our long-term business prospects among current and future partners and customers. The battery cell market in which we compete continues to evolve and is highly competitive. To date, we have focused our efforts on our all-solid-state battery cell technology, a promising alternative to conventional lithium-ion battery cell technology. However, lithium-ion battery cell technology has been widely adopted and our current competitors have, and future competitors may have, greater resources than we do and may also be able to devote greater resources to the development of their current and future technologies. These competitors also may have greater access to customers and may be able to establish cooperative or strategic relationships amongst themselves or with third parties that may further enhance their resources and competitive positioning. In addition, traditional lithium-ion battery cell manufacturers may continue to reduce cost and expand supply of conventional batteries and, therefore, reduce the prospects for our business or negatively impact the ability for us to sell our products at a market-competitive price and yet at sufficient margins. Many automotive OEMs are researching and investing in solid-state battery cell efforts and, in some cases, in battery cell development and production. We do not have exclusive relationships with any OEM to provide their future battery cell technologies, and it is possible that the investments made by these OEMs might result in technological advances earlier than, or superior in certain respect to, the all-solid-state battery cells we are developing. There are a number of companies seeking to develop alternative approaches to solid-state battery cell technology. We expect competition in battery cell technology and electric vehicles to intensify due to increased demand for these vehicles and a regulatory push for electric vehicles, continuing globalization, and consolidation in the worldwide automotive industry. As new companies and larger, existing vehicle and battery cell manufacturers enter the solid-state battery cell space, we may lose any perceived or actual technological advantage we may have in the marketplace and suffer a decline in our position in the market. Furthermore, the battery cell industry also competes with other emerging or evolving technologies, such as natural gas, advanced diesel and hydrogen-based fuel cell powered vehicles. Developments in alternative technologies or improvements in batteries technology made by competitors may materially adversely affect the sales, pricing and gross margins of our products. As technologies change, we will attempt to upgrade or adapt our products to continue to provide products with the latest technology. However, our products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or to create the necessary technology to effectively compete. If we are unable to keep up with competitive developments, including if such technologies achieve lower prices or enjoy greater policy support than the lithium-ion battery cell industry, our competitive position and growth prospects may be harmed. Similarly, if we fail to accurately predict and ensure that our all-solid-state battery cell technology can address customers’ changing needs or emerging technological trends, or if our customers fail to achieve the benefits expected from our all-solid-state battery cells, our business will be harmed. We must continue to commit significant resources to develop our all-solid-state battery cell technology in order to establish a competitive position, and these commitments must be made without knowing whether our investments will result in products potential customers will accept. There is no assurance we will successfully identify new customer requirements, develop and bring our all-solid-state battery cells to market on a timely basis, or that products and technologies developed by others will not render our all-solid-state battery cells obsolete or noncompetitive, any of which would adversely affect our business and operating results. We expect that OEMs and top tier battery cell suppliers will be less likely to license our all-solid-state battery cells and/or incorporate our sulfide-based solid electrolytes if they are not convinced that our business will succeed in the long term. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with us if they are not convinced that our business will succeed in the long term. Accordingly, in order to build and maintain our business, we must instill and maintain confidence among current and future partners, customers, suppliers, analysts, ratings agencies and other parties in our long-term financial viability and business prospects. Maintaining such confidence may be particularly complicated by certain factors including those that are largely outside of our control, such as: our limited operating history; market unfamiliarity with our products; delays in or impediments to completing or achieving our research and development goals; unexpected costs that OEM partners may be required to incur to scale manufacturing, delivery and service operations to meet demand for electric vehicles containing our technologies or products; competition and uncertainty regarding the future of electric vehicles; the development and adoption of competing technologies that are less expensive and/or more effective than our products; and our eventual production and sales performance compared with market expectations. Our future growth and success are dependent upon consumers’ willingness to adopt electric vehicles. Our growth and future demand for our products is highly dependent upon the adoption by consumers of alternative fuel vehicles in general and electric vehicles in particular. The market for new energy vehicles is still rapidly evolving, characterized by rapidly changing technologies, competitive pricing and factors, evolving government regulation and industry standards, and changing consumer demands and behaviors. If the market for electric vehicles in general does not develop as expected, or develops more slowly than expected, our business, prospects, financial condition and operating results could be harmed. We may not succeed in attracting customers during the development stage or for high volume commercial production, and our future growth and success depend on our ability to attract customers. We may not succeed in attracting customers during our development stage or for high volume commercial production. Customers may be wary of unproven products or not be inclined to work with less established businesses. In addition, if we are unable to attract new customers in need of high-volume commercial production of our products, our business will be harmed. OEMs are often large enterprises. Therefore, our future success will depend on our ability to effectively sell our products to such large customers. Sales to these end-customers involve risks that may not be present (or that are present to a lesser extent) with sales to smaller customers. These risks include, but are not limited to, (i) increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us and (ii) longer sales cycles and the associated risk that substantial time and resources may be spent on a potential end-customer that elects not to purchase our products. OEMs that are large organizations often undertake a significant evaluation process that results in a lengthy sales cycle. In addition, product purchases by large organizations are frequently subject to budget constraints, multiple approvals and unanticipated administrative, processing and other delays. Finally, large organizations typically have longer implementation cycles, require greater product functionality and scalability, require a broader range of services, demand that vendors take on a larger share of risks, require acceptance provisions that can lead to a delay in revenue recognition and expect greater payment flexibility. All of these factors can add further risk to business conducted with these potential customers. We may not be able to accurately estimate the future supply and demand for our all-solid-state battery cells and/or our sulfide-based solid electrolytes, which could result in a variety of inefficiencies in our business and hinder our ability to generate revenue. If we fail to accurately predict our manufacturing requirements, we could incur additional costs or experience delays. It is difficult to predict our future revenues and appropriately budget for our expenses, and we may have limited insight into trends that may emerge and affect our business. We anticipate being required to provide forecasts of our demand to our current and future suppliers prior to the scheduled delivery of products to potential customers. Currently, there is no historical basis for making judgments on the demand for our all-solid-state battery cells and/or our sulfide-based solid electrolytes or our ability to develop, manufacture, and deliver such products, or our profitability in the future. If we overestimate our requirements, our suppliers may have excess inventory, which indirectly would increase our costs. If we underestimate our requirements, our suppliers may have inadequate inventory, which could interrupt manufacturing of our products and result in delays in shipments and revenues. In addition, lead times for materials and components that our suppliers order may vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. If we fail to order sufficient quantities of product components in a timely manner, the delivery of our all-solid-state battery cells and/or our sulfide-based solid electrolytes to our potential customers could be delayed, which would harm our business, financial condition and operating results. Our business model has yet to be tested and any failure to commercialize our strategic plans would have an adverse effect on our operating results and business, harm our reputation and could result in substantial liabilities that exceed our resources. Investors should be aware of the difficulties normally encountered by a new enterprise, many of which are beyond our control, including substantial risks and expenses in the course of establishing or entering new markets, organizing operations and undertaking marketing activities. The likelihood of our success must be considered in light of these risks, expenses, complications, delays and the competitive environment in which we operate. There is, therefore, nothing at this time upon which to base an assumption that our business plan will prove successful, and we may not be able to generate significant revenue, raise additional capital or operate profitably. We will continue to encounter risks and difficulties frequently experienced by early commercial stage companies, including scaling up our infrastructure and headcount, and may encounter unforeseen expenses, difficulties or delays in connection with our growth. In addition, as a result of the capital-intensive nature of our business, we can be expected to continue to sustain substantial operating expenses without generating sufficient revenue to cover expenditures. Any investment in our company is therefore highly speculative and could result in the loss of your entire investment. It is difficult to predict our future revenues and appropriately budget for our expenses, and we have limited insight into trends that may emerge and affect our business. In the event that actual results differ from our estimates or we adjust our estimates in future periods, our operating results, prospects and financial position could be materially affected. The projected financial information appearing elsewhere in these materials was prepared by management and reflects current estimates of future performance. The projected results depend on the successful implementation of management’s growth strategies and are based on assumptions and events over which we have only partial or no control. In particular, our projected results are heavily reliant on our ability to license our all-solid-state battery cells and sell our sulfide-based solid electrolytes. The assumptions underlying such projected information require the exercise of judgment and may not occur, and the projections are subject to uncertainty due to the effects of economic, business, competitive, regulatory, legislative, and political or other changes. We are an early stage company with a history of financial losses and expect to incur significant expenses and continuing losses for the foreseeable future. We incurred a net loss of approximately $14.4 million for the year ended December 31, 2020 and an accumulated deficit of approximately $105.3 million from our inception in 2012 through December 31, 2020. We believe that we will continue to incur operating and net losses each quarter until the time significant production of our all-solid-state battery cells or sales of our sulfide-based solid electrolytes begins, which is not expected to occur until at least 2026, and may occur later. We expect the rate at which we will incur losses to be significantly higher in future periods as we, among other things, continue to incur significant expenses in connection with the design, development and manufacturing of our materials and all-solid-state battery cells; expand our research and development activities; invest in additional research and development and manufacturing facilities and capabilities; build up inventories of raw materials and other components; commence sales and marketing activities; develop our distribution infrastructure; and increase our general and administrative functions to support our growing operations. We may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in revenues, which would further increase our losses. We may require additional capital to support business growth, and this capital might not be available on commercially reasonable terms or at all. We may need additional capital before we commence generating revenues, and it may not be available on acceptable terms, if at all. For example, our capital budget assumes, among other things, that (i) DCRC will satisfy its condition precedent under the Business Combination Agreement to have unrestricted cash on hand at the closing of the business combination of at least $300 million (without giving effect to transaction expenses) after consummation of the PIPE Financing and after distribution of the funds in the Trust Account (the “Minimum Cash Condition”), which is a condition that we may choose to waive if not satisfied, and (ii) our development timeline progresses as planned and our corresponding expenditures are consistent with current expectations, both of which are subject to various risks and uncertainties, including those described herein. More specifically, we expect our capital expenditures and working capital requirements to increase materially in the near future, as we accelerate our research and development efforts and scale up production operations with our partners. As we approach commercialization, we expect our operating expenses will increase substantially on account of increased headcount and other general and administrative expenses necessary to support a rapidly growing company. As a result, we may need to access the debt and equity capital markets to obtain additional financing in the future. However, these sources of financing may not be available on acceptable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including: market conditions; the level of success we have experienced with our research and development programs; our operating performance; investor sentiment; and our ability to incur additional debt in compliance with any agreements governing our then-outstanding debt. These factors may make the timing, amount, terms or conditions of additional financings unattractive to us. If we raise additional funds by issuing equity, equity-linked or debt securities, those securities may have rights, references or privileges senior to the rights of our currently issued and outstanding equity or debt, and our existing stockholders may experience dilution. If we are unable to generate sufficient funds from operations or raise additional capital, we may be forced to take actions to reduce our capital or operating expenditures, including by not seeking potential acquisition opportunities, eliminating redundancies, or reducing or delaying our production facility expansions, which may adversely affect our business, operating results, financial condition and prospects. If we fail to effectively manage our future growth, we may not be able to market and license the technology and know-how to manufacture our all-solid-state battery cells or sell our sulfide-based solid electrolyte successfully. We intend to use the net proceeds from our recent Series B Financing, amounts in DCRC’s escrow account after giving effect to redemptions and the net proceeds from the PIPE Financing to expand our operations significantly, with a view toward accelerating our research and development activities and positioning our company for potential commercialization of our technologies. In connection with these efforts, we anticipate hiring, retaining and training personnel, establishing manufacturing plants and other facilities, and implementing administrative infrastructure, systems and processes. That said, our management team will have considerable discretion in the application of the funds available to us following completion of the business combination. We may use these funds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the cash held at closing of the business combination in a manner that does not produce income or that loses value. If we cannot manage our growth effectively, including by controlling our expenditures for these initiatives to the greatest extent possible, our business could be harmed. Our management does not have experience in operating a public company. Our executive officers do not have experience in the management of a publicly traded company. Our management team may not successfully or effectively manage our transition to a public company that will be subject to significant regulatory oversight and reporting obligations under federal securities laws. We may not have adequate personnel with the appropriate level of knowledge, experience, and training in the policies, practices or internal controls over financial reporting required of public companies in the United States. As a result, we may be required to pay higher outside legal, accounting or consulting costs than our competitors, and our management team members may have to devote a higher proportion of their time to issues relating to compliance with the laws applicable to public companies, both of which might put us at a disadvantage relative to competitors. We may not succeed in establishing, maintaining and strengthening our brand, which would materially and adversely affect customer acceptance of our technologies and our business, revenues and prospects. Our business and prospects depend on our ability to develop, maintain and strengthen our brand. If we are not able to establish, maintain and strengthen our brand, we may lose the opportunity to build a critical mass of customers. The automobile industry is intensely competitive, and we may not be successful in building, maintaining and strengthening our brand. Our current and potential competitors, including many battery cell manufacturers and automotive OEMs around the world, have greater name recognition, broader customer relationships and substantially greater marketing resources than we do. If we do not develop and maintain a strong brand, our business, prospects, financial condition and operating results will be materially and adversely impacted. We rely heavily on owned and exclusively-licensed intellectual property, which includes patent rights, trade secrets, copyright, trademarks, and know-how. If we are unable to protect and maintain access to these intellectual property rights, our business and competitive position would be harmed. We may not be able to prevent unauthorized use of our owned and exclusively-licensed intellectual property, which could harm our business and competitive position. We rely on a combination of the intellectual property protections afforded by patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements and other contractual protections, to establish, maintain and enforce rights and competitive advantage in our proprietary technologies. In addition, we seek to protect our intellectual property rights through nondisclosure and invention assignment agreements with our employees and consultants, and through non-disclosure agreements with business partners and other third parties. Despite our efforts to protect our proprietary rights, third parties, including our business partners, may attempt to copy or otherwise obtain and use our intellectual property without our consent or may decline to license or defend necessary intellectual property rights to us on terms favorable to our business. Monitoring unauthorized use of our intellectual property is difficult and costly, and the steps we have taken or will take to prevent misappropriation may not be sufficient. Any enforcement efforts we undertake, including litigation, could require involvement of the licensor, be time-consuming and expensive, and could divert management’s attention, all of which could harm our business, results of operations and financial condition. In addition, existing intellectual property laws and contractual remedies may afford less protection than needed to safeguard our proprietary technologies. A significant portion of our patent rights have been obtained through exclusive licenses. Because we do not own those patent rights, we have less control over their maintenance and enforcement, which could harm our ability to maintain any competitive advantage those patent rights provide. Patent, copyright, trademark and trade secret laws vary significantly throughout the world. A number of foreign countries do not protect intellectual property rights to the same extent as the United States. Therefore, our intellectual property rights may not be as strong or as easily enforced outside of the United States and efforts to protect against the unauthorized use of our intellectual property rights, technology and other proprietary rights may be impossible outside of the United States. Failure to adequately protect our owned and exclusively-licensed intellectual property rights could result in our competitors using our intellectual property to offer products, potentially resulting in the loss of some of our competitive advantage, a decrease in our revenue and reputational harm caused by inferior products offered by third parties, which would adversely affect our business, prospects, financial condition and operating results. Our patent applications may not result in issued patents, which would result in the disclosures in those applications being available to the public. Also, our patent rights may be contested, circumvented, invalidated or limited in scope, any of which could have a material adverse effect on our ability to prevent others from interfering with commercialization of our products. Our patent portfolio includes some patent applications. Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to our products to our disadvantage. The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. As a result, we cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us will afford protection against competitors with similar technology. Numerous patents and pending patent applications owned by others exist in the fields in which we have developed and are developing our technology, any number of which could be considered prior art and prevent us from obtaining a patent. In addition to those who may claim priority, any of our future or existing patents or pending patent applications (including those we have rights to under exclusive license) may also be challenged by others on the basis that they are otherwise invalid or unenforceable. Furthermore, patent applications filed in foreign countries may be subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will be issued. We have not performed exhaustive searches or analyses of the intellectual property landscape of the battery industry; therefore, we are unable to guarantee that our technology, or its ultimate integration into electric vehicle battery packs, does not infringe intellectual property rights of third parties. We may need to defend ourselves against intellectual property infringement claims, which may be time-consuming and could cause us to incur substantial costs. Companies, organizations or individuals, including our current and future competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop, sell, license, lease or market our products or technologies, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from third parties relating to whether we are infringing their intellectual property rights and/or seek court declarations that they do not infringe upon our intellectual property rights. Companies holding patents or other intellectual property rights relating to batteries may bring suits alleging infringement of such rights or otherwise asserting their rights and seeking licenses. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the following: cease selling, leasing, incorporating or using products that incorporate the challenged intellectual property; pay substantial damages; materially alter our research and development activities and proposed production processes; obtain a license from the holder of the infringed intellectual property right, which may not be available on reasonable terms or at all; or redesign our battery cells at significant expense. In the event of a successful claim of infringement against us and our failure or inability to obtain a license to continue to use the technology on reasonable terms, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not well-founded, could result in substantial costs, negative publicity, reputational harm and diversion of resources and management’s attention. We also license patents and other intellectual property from third parties, and we may face claims that our use of this intellectual property infringes the rights of others. In such cases, we may seek indemnification from our licensors under our license contracts with them as permitted by our license agreements. However, our rights to indemnification may be unavailable or insufficient to cover our costs and losses, depending on our use of the technology, whether we choose to retain control over conduct of the litigation, and other factors. Our expectations and targets regarding the times when we will achieve various technical, pre-production and production-level performance objectives depend in large part upon assumptions, estimates, measurements, testing, analyses and data developed and performed by us, which if incorrect or flawed, could have a material adverse effect on our actual operating results and performance. Our expectations and targets regarding the times when we will achieve various technical, pre-production and production objectives reflect our current expectations and estimates. Whether we will achieve these objectives when we expect depends on a number of factors, many of which are outside our control, including, but not limited to: success and timing of our development activity and ability to develop an all-solid-state battery cell that achieves our desired performance metrics and achieves the requisite automotive industry validations before our competitors; unanticipated technical or manufacturing challenges or delays; difficulties identifying or constructing the necessary research and development and manufacturing facilities; technological developments relating to lithium-ion, lithium-metal all-solid-state or other batteries that could adversely affect the commercial potential of our technologies; the extent of consumer acceptance of electric vehicles generally, and those deploying our products, in particular; competition, including from established and future competitors in the battery cell industry or from competing technologies such as hydrogen fuel cells that may be used to power electric vehicles; whether we can obtain sufficient capital when required to build our manufacturing facilities and sustain and grow our business; adverse developments in our partnership relationships like those with Ford and BMW Group (“BMW”), including termination of our partnerships or changes in our partners’ timetables and business plans, which could hinder our development efforts; our ability to manage our growth; whether we can manage relationships with key suppliers and the availability of the raw materials we need to procure from them; our ability to retain existing key management, integrate recent hires and attract, retain and motivate qualified personnel; and the overall strength and stability of domestic and international economies. Unfavorable changes in any of these or other factors, most of which are beyond our control, could materially and adversely affect our ability to achieve our objectives when planned and our business, results of operations and financial results. Incorrect estimates or assumptions by management in connection with the preparation of our financial statements could adversely affect our reported assets, liabilities, income, revenue or expenses. The preparation of our consolidated financial statements requires management to make critical accounting estimates and assumptions that affect the reported amounts of assets, liabilities, income, revenue or expenses during the reporting periods. Incorrect estimates and assumptions by management could adversely affect our reported amounts of assets, liabilities, income, revenue and expenses during the reporting periods. If we make incorrect assumptions or estimates, our reported financial results may be over or understated, which could materially and adversely affect our business, financial condition and results of operations. As part of the independent audit of our 2019 and 2020 financial statements, we undertook a technical evaluation of our accounting of several financial instruments, including the convertible notes and equity grants we issued in 2019 and 2020. Our evaluation did not consider the applicable accounting guidance. As a result, our auditor issued a finding of a material weakness in internal controls over financial reporting related to the review of complex transactions for proper accounting treatment as our control environment would have failed to detect the misstatement prior to the financial statement issuance. A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Management continues to evaluate steps to remediate the material weakness. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will ultimately have the intended effects. In the future, management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements. In addition, we will be required to provide management’s attestation on internal controls. The standards required for a public company under Section 404(a) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) are significantly more stringent than those that were required of us as a privately held company. If we are not able to implement the additional requirements of Section 404(a) in a timely manner or with adequate compliance, we may not be able to assess whether our internal controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence and the market price of our securities. If we identify any new material weaknesses in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case, if we are unable to maintain compliance with securities law requirements regarding timely filing of periodic reports or applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result and we could become subject to litigation or investigations by the SEC or other regulatory authorities, which could require additional financial and management resources. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses. We will incur significant increased expenses and administrative burdens as a public company, which could have an adverse effect on our business, financial condition and results of operations. We will face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated and to be promulgated thereunder, the PCAOB and the securities exchanges, impose additional reporting and other obligations on public companies. The development and implementation of the standards and controls necessary for us to achieve the level of accounting standards required of a public company in the United States may require costs greater than expected. It is possible that we will be required to expand our employee base and hire additional employees to support our operations as a public company, which will increase our operating costs in future periods. Compliance with public company requirements will increase costs and make certain activities more time-consuming. A number of those requirements will require us to carry out activities we have not done previously. For example, we have created, or will create, new Board committees and adopted, or will adopt, new internal controls and disclosure controls and procedures. In addition, we will incur expenses associated with SEC reporting requirements. Furthermore, if any issues in complying with those requirements are identified (for example, if the auditors identify a material weakness or significant deficiency in the internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect our reputation or investor perceptions of it. It will also be more expensive to obtain director and officer liability insurance. The additional reporting and other obligations imposed by these rules and regulations will increase legal and financial compliance costs and the costs of related legal, accounting and administrative activities. These increased costs will require us to spend money that could otherwise be used on our research and development programs and to achieve strategic objectives. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase costs. Our ability to utilize our net operating loss and tax credit carryforwards to offset future taxable income may be subject to certain limitations. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to use its pre-change NOLs to offset future taxable income. The limitations apply if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period. If we have experienced an ownership change at any time since our incorporation, we may be subject to limitations on our ability to utilize our existing NOLs and other tax attributes to offset taxable income or tax liability. In addition, the business combination and future changes in our stock ownership, which may be outside of our control, may trigger an ownership change. Similar provisions of state tax law may also apply to limit our use of accumulated state tax attributes. As a result, even if we earn net taxable income in the future, our ability to use our pre-change NOLs and other tax attributes to offset such taxable income or tax liability may be subject to limitations, which could potentially result in increased future income tax liability to us. There is also a risk that changes in law or regulatory changes may result in suspensions on the use of NOLs or tax credits, possibly with retroactive effect, and our existing NOLs or tax credits expiring or otherwise being unavailable to offset future income tax liabilities. The unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on our business, prospects, financial condition and operating results. We currently, and expect to continue to, benefit from certain government subsidies and economic incentives including tax credits, rebates and other incentives that support the development and adoption of clean energy technology. We cannot assure you that these subsidies and incentive programs will be available to us at the same or comparable levels in the future. Any reduction, elimination or discriminatory application of government subsidies and economic incentives because of policy changes, or the reduced need for such subsidies and incentives due to the perceived success of clean and renewable energy products or other reasons, may require us to seek additional financing, which may not be obtainable on commercially attractive terms or at all, and may result in the diminished competitiveness of the battery cell industry generally or our all-solid-state battery cells in particular. Any change in the level of subsidies and incentives from which we benefit could materially and adversely affect our business, prospects, financial condition and operating results. We are subject to regulations regarding the storage and handling of various products. We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims. We may become subject to product liability claims which could harm our business, prospects, operating results, and financial condition. We face inherent risk of exposure to claims in the event our all-solid-state battery cells do not perform as expected or malfunction resulting in personal injury or death. Our risks in this area are particularly pronounced given our all-solid-state battery cells and sulfide-based solid electrolytes are still in the development stage and have not yet been commercially tested or mass produced. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our technology and business and inhibit or prevent commercialization of our all-solid-state battery cells and sulfide-based solid electrolytes and future product candidates, which would have a material adverse effect on our brand, business, prospects and operating results. Any insurance coverage might not be sufficient to cover all potential product liability claims. Any lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our reputation, business and financial condition. We may not be able to secure additional product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we do face liability for our products and are forced to make a claim under then-existing policies. From time to time, we may be involved in litigation, regulatory actions or government investigations and inquiries, which could have an adverse impact on our profitability and consolidated financial position. We may be involved in a variety of litigation, other claims, suits, regulatory actions or government investigations and inquiries and commercial or contractual disputes that, from time to time, are significant. In addition, from time to time, we may also be involved in legal proceedings and investigations arising in the normal course of business including, without limitation, commercial or contractual disputes, including warranty claims and other disputes with potential customers, former employees and suppliers, intellectual property matters, personal injury claims, environmental issues, tax matters, and employment matters. It is difficult to predict the outcome or ultimate financial exposure, if any, represented by these matters, and there can be no assurance that any such exposure will not be material. Such claims may also negatively affect our reputation. We are subject to substantial regulation, and unfavorable changes to, or failure by us to comply with, these regulations could substantially harm our business and operating results. The sale of electric vehicles, and motor vehicles in general, is subject to substantial regulation under international, federal, state and local laws, including export control laws and other international trade regulations, which are continuously evolving as technology develops and becomes more widely adopted. We anticipate that our all-solid-state battery cells and sulfide-based solid electrolytes also would be subject to these regulations, and we expect to incur significant costs in complying with these regulations. The U.S. government has made and continues to make significant changes in U.S. trade policy and has taken certain actions that could negatively impact U.S. trade, including imposing tariffs on certain goods imported into the United States, increasing scrutiny on foreign direct investment, and modifying export control laws applicable to certain technologies. In retaliation, other countries have implemented, and continue to evaluate, imposing additional trade controls on a wide range of American products and companies. The U.S. or foreign governments may take additional administrative, legislative, or regulatory action that could materially interfere with our ability to source and procure the raw materials we need for our research and development activities and, in the future, to sell products in certain countries. Sustained uncertainty about, or worsening of, current global economic conditions and further escalation of trade tensions between the United States and its trading partners could result in a global economic slowdown and long-term changes to global trade. Any alterations to our business strategy or operations made in order to adapt to or comply with any such changes could be time-consuming and expensive, and certain of our competitors may be better suited to withstand or react to these changes. To the extent the laws change, our products may not comply with applicable international, federal, state or local laws, which would have an adverse effect on our business. Compliance with changing regulations could be burdensome, time consuming, and expensive. To the extent compliance with new regulations is cost prohibitive, our business, prospects, financial condition and operating results would be adversely affected. Internationally, there may be laws in jurisdictions we have not yet entered or laws we are unaware of in jurisdictions we have entered that may restrict our sales or other business practices. The laws in this area can be complex, difficult to interpret and may change over time. Continued regulatory limitations and other obstacles that may interfere with our ability to commercialize our products could have a negative and material impact on our business, prospects, financial condition and results of operations. Our technology and our website, systems, and data we maintain may be subject to intentional disruption, other security incidents, or alleged violations of laws, regulations, or other obligations relating to data handling that could result in liability and adversely impact our reputation and future sales. We may be required to expend significant resources to continue to modify or enhance our protective measures to detect, investigate and remediate vulnerabilities to security incidents, including measures impacting our ability to develop and maintain a supply chain. In addition, we will be required to comply with rapidly evolving laws and regulations legislation in this area. Any future failure by us to comply with applicable cybersecurity or data privacy legislation or regulation could have a material adverse effect on our business, reputation, results of operations or financial condition. We expect to face significant challenges with respect to information security and maintaining the security and integrity of our systems and other systems used in our business, as well as with respect to the data stored on or processed by these systems. We also anticipate receiving and storing confidential business information of our partners and customers. Advances in technology, an increased level of sophistication and expertise of hackers, and new discoveries in the field of cryptography can result in a compromise or breach of the systems used in our business or of security measures used in our business to protect confidential information, personal information, and other data. We may be a target for attacks designed to disrupt our operations or to attempt to gain access to our systems or to data that we possess, including proprietary information that we obtain from our partners pursuant to our JDAs with them. We also are at risk for interruptions, outages and breaches of our and our outsourced service providers’ operational systems and security systems, our integrated software and technology, and data that we or our third-party service providers process or possess. These may be caused by, among other causes, physical theft, viruses or other malicious code, denial or degradation of service attacks, ransomware, social engineering schemes, and insider theft or misuse. The availability and effectiveness of our all-solid-state battery cell technology and our ability to conduct our business and operations depend on the continued operation of information technology and communications systems, some of which we have yet to develop or otherwise obtain the ability to use. Systems we currently use or may use in the future in conducting our business, including data centers and other information technology systems, will be vulnerable to damage or interruption. Such systems could also be subject to break-ins, sabotage and intentional acts of vandalism, as well as disruptions and security incidents as a result of non-technical issues, including intentional or inadvertent acts or omissions by employees, service providers, or others. We currently use, and may use in the future, outsourced service providers to help provide certain services, and any such outsourced service providers face similar security and system disruption risks as us. Our ability to monitor our outsourced service providers’ security measures is limited, and, in any event, third parties may be able to circumvent those security measures, resulting in the unauthorized access to, misuse, acquisition, disclosure, loss, alteration, or destruction of personal, confidential, or other data, including data relating to individuals. Some of the systems used in our business will not be fully redundant, and our disaster recovery planning cannot account for all eventualities. Any data security incidents or other disruptions to any data centers or other systems used in our business could result in lengthy interruptions in our service and may adversely affect our business, prospects, financial condition, reputation and operating results. Significant capital and other resources may be required in efforts to protect against information security breaches, security incidents, and system disruptions, or to alleviate problems caused by actual or suspected information security breaches and other data security incidents and system disruptions. The resources required may increase over time as the methods used by hackers and others engaged in online criminal activities and otherwise seeking to obtain unauthorized access to systems or data, and to disrupt systems, are increasingly sophisticated and constantly evolving. In particular, ransomware attacks have become more prevalent in the industrial sector, which could materially and adversely affect our ability to operate and may result in significant expense. In addition, we may face increased compliance burdens regarding such requirements with regulators and customers regarding our products and services and also incur additional costs for oversight and monitoring of our supply chain. We also cannot be certain that these systems, networks, and other infrastructure or technology upon which we rely, including those of our third-party suppliers or service providers, will be effectively implemented, maintained or expanded as planned, or will be free from bugs, defects, errors, vulnerabilities, viruses, or malicious code. We may be required to expend significant resources to make corrections or to remediate issues that are identified or to find alternative sources. Any failure or perceived failure by us or our service providers to prevent information security breaches or other security incidents or system disruptions, or any compromise of security that results in or is perceived or reported to result in unauthorized access to, or loss, theft, alteration, release or transfer of, our information, or any personal information, confidential information, or other data could result in loss or theft of proprietary or sensitive data and intellectual property, could harm our reputation and competitive position and could expose us to legal claims, regulatory investigations and proceedings, and fines, penalties, and other liability. Any such actual or perceived security breach, security incident or disruption could also divert the efforts of our technical and management personnel and could require us to incur significant costs and operational consequences in connection with investigating, remediating, eliminating and putting in place additional tools, devices, policies, and other measures designed to prevent actual or perceived security breaches and other incidents and system disruptions. Moreover, we could be required or otherwise find it appropriate to expend significant capital and other resources to respond to, notify third parties of, and otherwise address the incident or breach and its root cause, and most jurisdictions have enacted laws requiring companies to notify individuals, regulatory authorities and others of security breaches involving certain types of data. Further, we cannot assure that any limitations of liability provisions in our current or future contracts that may be applicable would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim relating to a security breach or other security-related matter. We also cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover claims related to a security breach or incident, or that the insurer will not deny coverage as to any future claim. The successful assertion of claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation. Additionally, laws, regulations, and other actual and potential obligations relating to privacy, data hosting and transparency of data, data protection, and data security are evolving rapidly, and we expect to potentially be subject to new laws and regulations, or new interpretations of laws and regulations, in the future in various jurisdictions. These laws, regulations, and other obligations, and changes in their interpretation, could require us to modify our operations and practices, restrict our activities, and increase our costs. Further, these laws, regulations, and other obligations are complex and evolving rapidly, and we cannot provide assurance that we will not claims, allegations, or other proceedings related to actual or alleged obligations relating to privacy, data protection, or data security. It is possible that these laws, regulations, and other obligations may be inconsistent with one another or be interpreted or asserted to be inconsistent with our business or practices. We anticipate needing to dedicate substantial resources to comply with laws, regulations, and other obligations relating to privacy and cybersecurity in order to comply. Any failure or alleged or perceived failure to comply with any applicable laws, regulations, or other obligations relating to privacy, data protection, or data security could also result in regulatory investigations and proceedings, and misuse of or failure to secure data relating to individuals could also result in claims and proceedings against us by governmental entities or others, penalties and other liability, and damage to our reputation and credibility, and could have a negative impact on our business, prospects, financial condition and operating results. We are subject to various existing and future environmental health and safety laws, which may result in increased compliance costs or additional operating costs and restrictions. Failure to comply with such laws and regulations may result in substantial fines or other limitations that could adversely impact our financial results or operations. Our company and our operations, as well as our contractors, suppliers, and customers, are subject to numerous federal, state, local and foreign environmental laws and regulations governing, among other things, the generation, storage, transportation, and disposal of hazardous substances and wastes. We are also subject to a variety of product stewardship and manufacturer responsibility laws and regulations, primarily relating to the collection, reuse and recycling of electronic waste, as well as regulations regarding the hazardous material contents of electronic product components and product packaging, and non-hazardous wastes. We or others in our supply chain may be required to obtain permits and comply with procedures that impose various restrictions and operations that could have adverse effects on our operations. If key permits and approvals cannot be obtained on acceptable terms, or if other operations requirements cannot be met in a manner satisfactory for our operations or on a timeline that meets our commercial obligations, it may adversely impact our business. There are also significant capital, operating and other costs associated with compliance with these environmental laws and regulations. Environmental and health and safety laws and regulations are subject to change and may become more stringent in the future, such as through new regulations enacted at the supranational, national, sub-national, and/or local level or new or modified regulations that may be implemented under existing law. The nature and extent of any changes in these laws, rules, regulations, and permits may be unpredictable and may have material effects on our business. Future legislation and regulations or changes in existing legislation and regulations, or interpretations thereof, could cause additional expenditures, restrictions, and delays in connection with our operations as well as our other future projects, or may require us to manufacture with alternative technologies and materials. Our manufacturing process creates regulated air emissions which are typically managed within established permit limits by available emissions control technology. Should permitted limits or other requirements change in the future, the company may be required to install additional, more costly control technology. If we were to violate any such permit or related permit conditions, we may incur significant fines and penalties. We rely on third parties to ensure compliance with certain environmental laws, including those relating to the disposal of wastes. Any failure to properly handle or dispose of wastes, regardless of whether such failure is ours or our contractors, may result in liability under environmental laws, as well as liability for any impacts to human health or natural resources. The costs of liability with respect to contamination could have a material adverse effect on our business, financial condition, or results of operations. Additionally, we may not be able to secure contracts with third parties and contractors to continue their key supply chain and disposal services for our business, which may result in increased costs for compliance with environmental laws and regulations. Our research and development activities expose our employees to potential occupational hazards such as, but not limited to, the presence of hazardous materials, machines with moving parts, and high voltage and/or high current electrical systems typical of large manufacturing equipment and related safety incidents. There may be safety incidents that damage machinery or product, slow or stop production, or harm employees. Employees may be exposed to toxic hydrogen sulfide as a result of the components we use being exposed to moisture. If released in an uncontrolled manner, this hydrogen sulfide can create hazardous working conditions. Consequences may include litigation, fines, increased insurance premiums, mandates to temporarily halt production, workers’ compensation claims, or other actions that impact our brand, finances, or ability to operate. Some of our operations involve the manufacture and/or handling of a variety of explosive and flammable materials. We might experience incidents such as leaks and ruptures, explosions, fires, transportation accidents involving our chemical products, chemical spills and other discharges or releases of toxic or hazardous substances or gases and environmental hazards in the future or that these incidents will not result in production delays or otherwise have a material adverse effect on our business, financial condition or results of operations, for which we may not be adequately insured. We rely on government contracts and grants for a significant portion of our revenue and to partially fund our research and development activities, which are subject to a number of uncertainties, challenges, and risks. We currently rely on government contracts and grants for a significant portion of our revenue and to partially fund our research and development activities. Contracts and grants with government entities are subject to a number of risks. Obtaining grant funding and selling to government entities can be highly competitive, expensive, and time consuming, often requiring significant upfront time and expense without any assurance that we will be successful. In the event that we are successful in being awarded a government contract or grant, such award may be subject to appeals, disputes, or litigation, including, but not limited to, bid protests by unsuccessful bidders. Availability of government funding for our solutions may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solutions. Where government funds are used, the government may require all work to be performed in and/or certain products to be manufactured in the United States, and we may not manufacture all products in locations that meet government requirements, and as a result, our business and results of operations may suffer. Contracts with governmental entities may also include preferential pricing terms, including, but not limited to, “most favored customer” pricing and obligations to disclose aspects of how our pricing is developed. Additionally, we may be required to obtain special certifications to sell some or all of our solutions to government or quasi-government entities. Such certification requirements for our solutions may change, thereby restricting our ability to sell into the federal government sector until we have obtained such certification. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, we may be disqualified from selling our products to such governmental entities, or be at a competitive disadvantage, which would harm our business, results of operations, and financial condition. There are no assurances that we will find the terms for obtaining such certifications to be acceptable or that we will be successful in obtaining or maintaining the certifications. As a government contractor or subcontractor, we must comply with laws, regulations, and contractual provisions relating to the formation, administration, and performance of government contracts and grants and inclusion on government contract vehicles, which affect how we and our partners do business with government agencies. Government contracts often contain provisions and are subject to laws and regulations that provide government customers with additional rights and remedies not typically found in commercial contracts. These rights and remedies allow government customers, among other things, to terminate existing contracts for convenience and/or with short notice and without cause, and whether a government contract or grant might be terminated by the government under such a provision is outside of our control and could adversely affect our revenue. As a result of actual or perceived noncompliance with government contracting laws, regulations, or contractual provisions, we may be subject to non-ordinary course audits and internal investigations which may prove costly to our business financially, divert management time, or limit our ability to continue selling our products and services to our government customers. These laws and regulations may impose other added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our partners, downward contract price adjustments or refund obligations, civil or criminal penalties, and termination of contracts and suspension or debarment from obtaining government contracts and grants for a period of time with government agencies. Any such damages, penalties, disruption, or limitation in our ability to do business with a government could have a material adverse effect on our business, results of operations, financial condition, public perception and growth prospects. We are subject to multiple environmental permitting processes at the national, sub-national, and/or local level. Failure to obtain key permits and approvals may adversely impact our business. Our facilities are subject to local, state and federal siting and environmental permitting requirements. Permitting agencies with discretionary authority may refuse to issue required permits, forcing consideration of alternative sites, or may impose costly permit conditions. Such actions could increase the cost, or lengthen the timeline, of developing additional manufacturing facilities. Even if we successfully navigate our way through the permitting phases, future conflicts may arise in the course of our development activities, including restrictions on our actions due to new or evolving environmental legislation, changes in permitted uses and conflicts with non-governmental organizations regarding the use of land for our manufacturing facilities. If such conflicts arise, we may be delayed or prevented from building our research and development and manufacturing facilities, which could have a negative impact on our financial condition, prospects, and results of operations. We are subject to anti-corruption and anti-bribery laws and anti-money laundering laws, and non-compliance with such laws can subject us to administrative, civil and criminal fines and penalties, collateral consequences, remedial measures and legal expenses, all of which could adversely affect our business, results of operations, financial condition and reputation. We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, and possibly other anti-bribery and anti-corruption laws and anti-money laundering laws in various jurisdictions in which we conduct, or in the future may conduct, activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit us and our officers, directors, employees, business partners agents, representatives and third-party intermediaries from corruptly offering, promising, authorizing or providing, directly or indirectly anything of value to recipients in the public or private sector. We may leverage third parties to sell our products and conduct our business abroad. We, our officers, directors, employees, business partners agents, representatives and third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these employees, agents, representatives, business partners or third-party intermediaries even if we do not explicitly authorize such activities. We cannot assure you that all of our officers, directors, employees, business partners agents, representatives and third-party intermediaries will not take actions in violation of applicable law, for which we may be ultimately held responsible. If we conduct international sales and business, our risks under these laws may increase. These laws also require companies to make and keep books, records and accounts that accurately reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls and compliance procedures designed to prevent any such actions. While we have certain policies and procedures to address compliance with such laws, we cannot assure you that none of our officers, directors, employees, business partners agents, representatives and third-party intermediaries will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. A violation of these laws or regulations could adversely affect our business, results of operations, financial condition and reputation. Our policies and procedures designed to ensure compliance with these regulations may not be sufficient and our directors, officers, employees, representatives, consultants, agents, and business partners could engage in improper conduct for which we may be held responsible. Any allegations or violation of the FCPA or other applicable anti-bribery and anti-corruption laws and anti-money laundering laws could subject us to whistleblower complaints, adverse media coverage, investigations, settlements, prosecutions, enforcement actions, fines, damages, loss of export privileges, and severe administrative, civil and criminal sanctions, suspension or debarment from government contracts, collateral consequences, remedial measures and legal expenses, all of which could materially and adversely affect our business, results of operations, prospects, financial condition and reputation. Responding to any investigation or action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees. Risks Related to DCRC The risks discussed herein have been identified by DCRC’s management based on an evaluation of the historical risks faced by Solid Power and relate to DCRC management’s current expectations as to future risks that may result from DCRC’s anticipated ownership of Solid Power. Unless the context otherwise requires, all references in this section to “we,” “us” or “our” refer to DCRC. Risks Related to Our Business, Operations and Industry The loss of senior management or technical personnel could adversely affect our ability to successfully effect the business combination and successfully operate the business thereafter. Our ability to successfully effect the business combination is dependent upon the efforts of our key personnel. Although some of our key personnel may remain with New Solid Power in senior management or advisory positions following our business combination, it is likely that some or all of the management of Solid Power will remain in place. While we intend to closely scrutinize any individuals we engage after the business combination, we cannot assure you that our assessment of these individuals will prove to be correct. These individuals may be unfamiliar with the requirements of operating a company regulated by the SEC, which could cause us to have to expend time and resources helping them become familiar with such requirements. The loss of the services of our senior management or technical personnel could have a material adverse effect on our business, financial condition and results of operations. DCRC will also be dependent, in part, upon Solid Power’s technical personnel in connection with operating the business following the business combination. A loss by Solid Power of its technical personnel could seriously harm DCRC’s business and results of operations. There are inherent limitations in all control systems, and misstatements due to error or fraud that could seriously harm DCRC’s business may occur and not be detected. DCRC’s management does not expect that DCRC’s internal and disclosure controls will prevent all possible error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, an evaluation of controls can only provide reasonable assurance that all material control issues and instances of fraud, if any, in DCRC have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by the individual acts of some persons or by collusion of two or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. DCRC will also be dependent, in part, upon Solid Power’s internal controls. A failure of DCRC’s or Solid Power’s controls and procedures to detect error or fraud could seriously harm DCRC’s business and results of operations. Cyber incidents or attacks directed at us could result in information theft, data corruption, operational disruption and/or financial loss. We depend on digital technologies, including information systems, infrastructure and cloud applications and services, including those of third parties with which we may deal. Sophisticated and deliberate attacks on, or security breaches in, our systems or infrastructure, or the systems or infrastructure of third parties or the cloud, could lead to corruption or misappropriation of our assets, proprietary information and sensitive or confidential data. As an early-stage company without significant investments in data security protection, we may not be sufficiently protected against such occurrences. We may not have sufficient resources to adequately protect against, or to investigate and remediate any vulnerability to, cyber incidents. It is possible that any of these occurrences, or a combination of them, could have adverse consequences on our business and lead to financial loss. DCRC will also be dependent, in part, upon Solid Power’s information. A failure in the security of Solid Power’s information systems could seriously harm DCRC’s business and results of operations. We have not registered the shares of Class A Common Stock issuable upon exercise of the warrants under the Securities Act or any state securities laws, and such registration may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise its warrants except on a cashless basis and potentially causing such warrants to expire worthless. We have not registered the shares of Class A Common Stock issuable upon exercise of the warrants under the Securities Act or any state securities laws. However, under the terms of the warrant agreement governing the terms of our warrants, we have agreed that as soon as practicable, but in no event later than 15 business days, after the closing of an Initial Business Combination, we will use our best efforts to file a registration statement under the Securities Act covering such shares. We will use our best efforts to cause the same to become effective, but in no event later than 60 business days after the Closing, and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the warrants in accordance with the provisions of the warrant agreement. We cannot assure you that we will be able to do so if, for example, any facts or events arise which represent a fundamental change in the information set forth in the registration statement or prospectus, the financial statements contained or incorporated by reference therein are not current or correct or the SEC issues a stop order. If the shares issuable upon exercise of the warrants are not registered under the Securities Act, we will be required to permit holders to exercise their warrants on a cashless basis. However, no warrant will be exercisable for cash or on a cashless basis, and we will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder, or an exemption from registration is available. Notwithstanding the above, if our Class A Common Stock is at the time of any exercise of a warrant not listed on a national securities exchange such that it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, we may, at our option, require holders of public warrants who exercise their warrants to do so on a cashless basis in accordance with Section 3(a)(9) of the Securities Act and, in the event we so elect, we will not be required to file or maintain in effect a registration statement, but we will be required to use our best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available. In no event will we be required to net cash settle any warrant, or issue securities or other compensation in exchange for the warrants in the event that we are unable to register or qualify the shares underlying the warrants under the Securities Act or applicable state securities laws. If the issuance of the shares upon exercise of the warrants is not so registered or qualified or exempt from registration or qualification, the holder of such warrant shall not be entitled to exercise such warrant and such warrant may have no value and expire worthless. In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price solely for the shares of Class A Common Stock included in the units. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying shares of Class A Common Stock for sale under all applicable state securities laws. Following the consummation of the business combination, New Solid Power’s sole material asset will be its direct equity interest in the Surviving Corporation and, accordingly, New Solid Power will be dependent upon distributions from the Surviving Corporation to pay taxes and cover its corporate and other overhead expenses and pay dividends, if any, on New Solid Power common stock. New Solid Power will be a holding company and, subsequent to the completion of the business combination, will have no material assets other than its direct equity interest in the Surviving Corporation. New Solid Power will have no independent means of generating revenue. To the extent the Surviving Corporation has available cash, New Solid Power will cause the Surviving Corporation to make distributions of cash to pay taxes, cover New Solid Power’s corporate and other overhead expenses and pay dividends, if any, on New Solid Power common stock. To the extent that New Solid Power needs funds and the Surviving Corporation fails to generate sufficient cash flow to distribute funds to New Solid Power or is restricted from making such distributions or payments under applicable law or regulation or under the terms of its financing arrangements, or is otherwise unable to provide such funds, New Solid Power’s liquidity and financial condition could be materially adversely affected. Subsequent to the consummation of the business combination, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and stock price, which could cause you to lose some or all of your investment. Although we have conducted due diligence on Solid Power, we cannot assure you that this diligence revealed all material issues that may be present in Solid Power, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of our control will not later arise. As a result, we may be forced to later write-down or write-off assets, restructure our operations or incur impairment or other charges that could result in losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and may not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us following the completion of the business combination or our securities. In addition, charges of this nature may cause us to be unable to obtain future financing on favorable terms or at all. Accordingly, any stockholders who choose to remain stockholders following the business combination could suffer a reduction in the value of their shares. Such stockholders are unlikely to have a remedy for such reduction in value. Our initial stockholders have agreed to vote in favor of the business combination, regardless of how our public stockholders vote. Unlike many other blank check companies in which the founders agree to vote their founder shares in accordance with the majority of the votes cast by our public stockholders in connection with an Initial Business Combination, our initial stockholders have agreed to vote any shares of Class A Common Stock and Class B Common Stock owned by them in favor of the business combination. As of the date hereof, our initial stockholders own shares equal to approximately 20% of our issued and outstanding shares of Class A Common Stock and Class B Common Stock in the aggregate. Accordingly, it is more likely that the necessary stockholder approval will be received for the business combination than would be the case if the initial stockholders agreed to vote any shares of Class A Common Stock and Class B Common Stock owned by them in accordance with the majority of the votes cast by our public stockholders. Our Sponsor, certain members of the DCRC Board and our officers have interests in the business combination that are different from or are in addition to other stockholders in recommending that stockholders vote in favor of approval of the Business Combination Proposal. When considering the DCRC Board’s recommendation that our stockholders vote in favor of the approval of the Business Combination Proposal, our stockholders should be aware that our directors and officers have interests in the business combination that may be different from, or in addition to, the interests of our stockholders. These interests include: Warrants Value of Private Our initial stockholders hold a significant number of shares of our common stock and our Sponsor holds a significant number of our warrants. They will lose their entire investment in us if we do not complete an Initial Business Combination. Our Sponsor and our independent directors hold all of our 8,750,000 Founder Shares, representing 20% of the total outstanding shares upon completion of our IPO. The Founder Shares will be worthless if we do not complete an Initial Business Combination by March 26, 2023. In addition, our Sponsor and independent directors hold an aggregate of 6,666,667 private placement warrants that will also be worthless if we do not complete an Initial Business Combination by March 26, 2023. The Founder Shares are identical to the shares of Class A Common Stock included in the units, except that (a) the Founder Shares and the shares of Class A Common Stock into which the Founder Shares convert upon an Initial Business Combination are subject to certain transfer restrictions, (b) our Sponsor, officers and directors have entered into a letter agreement with us, pursuant to which they have agreed (i) to waive their redemption rights with respect to their Founder Shares and public shares owned in connection with the completion of an Initial Business Combination, (ii) to waive their rights to liquidating distributions from the Trust Account with respect to their Founder Shares if we fail to complete an Initial Business Combination by March 26, 2023 (although they will be entitled to liquidating distributions from the Trust Account with respect to any public shares they hold if we fail to complete an Initial Business Combination by March 26, 2023) and (c) the Founder Shares are automatically convertible into shares of our Class A Common Stock at the time of an Initial Business Combination, as described herein. The personal and financial interests of our Sponsor, officers and directors may have influenced their motivation in identifying and selecting the business combination, completing the business combination and influencing our operation following the business combination. We will incur significant transaction costs in connection with the business combination. We have and expect to incur significant, non-recurring costs in connection with consummating the business combination. All expenses incurred in connection with the Business Combination Agreement and the business combination, including all legal, accounting, consulting, investment banking and other fees, expenses and costs, will be for the account of the party incurring such fees, expenses and costs. Our transaction expenses as a result of the business combination are currently estimated at approximately $40 million, including approximately $12.25 million in deferred underwriting discounts and commissions to the underwriters of our IPO. We may be subject to business uncertainties while the business combination is pending. Uncertainty about the effect of the business combination on employees and third parties may have an adverse effect on DCRC and Solid Power. These uncertainties may impair the ability to retain and motivate key personnel and could cause third parties that deal with Solid Power to defer entering into contracts or making other decisions or seek to change existing business relationships. The unaudited pro forma condensed combined financial information included in this document may not be indicative of what our actual financial position or results of operations would have been. The unaudited pro forma condensed combined financial information for DCRC following the business combination in this proxy statement/prospectus is presented for illustrative purposes only and is not necessarily indicative of what our actual financial position or results of operations would have been had the business combination been completed on the dates indicated. See the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” for more information. We may waive one or more of the conditions to the business combination. We may agree to waive, in whole or in part, one or more of the conditions to our obligations to complete the business combination, to the extent permitted by our Charter, bylaws and applicable laws. For example, it is a condition to our obligation to close the business combination that certain of Solid Power’s representations and warranties be true and correct to the standards applicable to such representations and warranties. However, if the DCRC Board determines that it is in the best interests of DCRC to proceed with the business combination, then the DCRC Board may elect to waive that condition and close the business combination. If we are unable to complete an Initial Business Combination on or prior to March 26, 2023, our public stockholders may receive only approximately $10.00 per share on the liquidation of our Trust Account (or less than $10.00 per share in certain circumstances where a third party brings a claim against us that our Sponsor is unable to indemnify), and our warrants will expire worthless. If we are unable to complete an Initial Business Combination on or prior to March 26, 2023, our public stockholders may receive only approximately $10.00 per share on the liquidation of our Trust Account (or less than $10.00 per share in certain circumstances where a third party brings a claim against us that our Sponsor is unable to indemnify (as described below)), and our warrants will expire worthless. If third parties bring claims against us, the proceeds held in our Trust Account could be reduced and the per share redemption amount received by stockholders may be less than $10.00 per share. Our placing of funds in the Trust Account may not protect those funds from third-party claims against us. Although we will seek to have all vendors, service providers (other than our independent public accountants), prospective target businesses and other entities with which we do business execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account for the benefit of our public stockholders, such parties may not execute such agreements, or even if they execute such agreements, they may not be prevented from bringing claims against the Trust Account, including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain advantage with respect to a claim against our assets, including the funds held in the Trust Account. Although no third parties have refused to execute an agreement waiving such claims to the monies held in the Trust Account to date, if any third party refuses to execute such an agreement in the future, our management will perform an analysis of the alternatives available to it and will only enter into an agreement with a third party that has not executed a waiver if management believes that such third party’s engagement would be significantly more beneficial to us than any alternative. Making such a request of potential target businesses may make our acquisition proposal less attractive to them and, to the extent prospective target businesses refuse to execute such a waiver, it may limit the field of potential target businesses that we might pursue. Examples of possible instances where we may engage a third party that refuses to execute a waiver include the engagement of a third-party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a service provider willing to execute a waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the Trust Account for any reason. Upon redemption of our public shares, if we are unable to complete our business combination within the prescribed timeframe, or upon the exercise of a redemption right in connection with our business combination, we will be required to provide for payment of claims of creditors that were not waived that may be brought against us within the ten years following redemption. Accordingly, the per-share redemption amount received by public stockholders could be less than the $10.00 per public share initially held in the Trust Account, due to claims of such creditors. Our Sponsor has agreed that it will be liable to us if and to the extent any claims by a third party (other than our independent public accountants) for services rendered or products sold to us, or a prospective target business with which we have entered an acquisition agreement, reduce the amount of funds in the Trust Account to below the lesser of (a) $10.00 per public share and (b) the actual amount per public share held in the Trust Account, if less than $10.00 per share due to reductions in the value of the trust assets as of the date of the liquidation of the Trust Account, in each case including interest earned on the funds held in the Trust Account and not previously released to us to pay our franchise and income taxes, less franchise and income taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable) nor will it apply to any claims under our indemnity of the underwriters of our Initial Public Offering against certain liabilities, including liabilities under the Securities Act. However, we have not asked our Sponsor to reserve for such indemnification obligations, nor have we independently verified whether our Sponsor has sufficient funds to satisfy its indemnity obligations and we believe that our Sponsor’s only assets are securities of our company. Therefore, we cannot assure you that our Sponsor would be able to satisfy those obligations. As a result, if any such claims were successfully made against the Trust Account, the funds available for an Initial Business Combination and redemptions could be reduced to less than $10.00 per public share. In such event, we may not be able to complete an Initial Business Combination, and you would receive such lesser amount per share in connection with any redemption of your public shares. None of our officers or directors will indemnify us for claims by third parties including, without limitation, claims by vendors and prospective target businesses. Our directors may decide not to enforce the indemnification obligations of our Sponsor, resulting in a reduction in the amount of funds in the Trust Account available for distribution to our public stockholders. In the event that the proceeds in the Trust Account are reduced below the lesser of (a) $10.00 per public share and (b) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.00 per share due to reductions in the value of the trust assets, in each case including interest earned on the funds held in the Trust Account and not previously released to us to pay our franchise and income taxes, less franchise and income taxes payable, and our Sponsor asserts that it is unable to satisfy its obligations or that it has no indemnification obligations related to a particular claim, our independent directors would determine whether to take legal action against our Sponsor to enforce its indemnification obligations. While we currently expect that our independent directors would take legal action on our behalf against our Sponsor to enforce its indemnification obligations to us, it is possible that our independent directors in exercising their business judgment and subject to their fiduciary duties may choose not to do so in any particular instance. If our independent directors choose not to enforce these indemnification obligations, the amount of funds in the Trust Account available for distribution to our public stockholders may be reduced below $10.00 per share. We may not have sufficient funds to satisfy indemnification claims of our directors and officers. We have agreed to indemnify our officers and directors to the fullest extent permitted by law. However, our officers and directors have agreed, and any persons who may become officers or directors prior to an Initial Business Combination will agree, to waive any right, title, interest or claim of any kind in or to any monies in the Trust Account and to not seek recourse against the Trust Account for any reason whatsoever. Accordingly, any indemnification provided will be able to be satisfied by us only if (a) we have sufficient funds outside of the Trust Account or (b) we consummate an Initial Business Combination. Our obligation to indemnify our officers and directors may discourage stockholders from bringing a lawsuit against our officers or directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against our officers and directors, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against our officers and directors pursuant to these indemnification provisions. If, after we distribute the proceeds in the Trust Account to our public stockholders, we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, a bankruptcy court may seek to recover such proceeds, and the members of the DCRC Board may be viewed as having breached their fiduciary duties to our creditors, thereby exposing the members of the DCRC Board and us to claims of punitive damages. If, after we distribute the proceeds in the Trust Account to our public stockholders, we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover some or all amounts received by our stockholders. In addition, the DCRC Board may be viewed as having breached its fiduciary duty to our creditors and/or having acted in bad faith, thereby exposing itself and us to claims of punitive damages, by paying public stockholders from the Trust Account prior to addressing the claims of creditors. If, before distributing the proceeds in the Trust Account to our public stockholders, we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, the claims of creditors in such proceeding may have priority over the claims of our stockholders and the per-share amount that would otherwise be received by our stockholders in connection with our liquidation may be reduced. If, before distributing the proceeds in the Trust Account to our public stockholders, we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, the proceeds held in the Trust Account could be subject to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the Trust Account, the per-share amount that would otherwise be received by our stockholders in connection with our liquidation may be reduced. Even if we consummate the business combination, there is no guarantee that the public warrants will be in the money at the time they become exercisable, and they may expire worthless. The exercise price for our warrants is $11.50 per share of Class A Common Stock. There is no guarantee that the public warrants will be in the money following the time they become exercisable and prior to their expiration, and as such, the warrants may expire worthless. We may amend the terms of the warrants in a manner that may be adverse to holders of public warrants with the approval by the holders of at least 50% of the then-outstanding public warrants (or, if applicable, 65% of the then-outstanding public warrants and 65% of the then-outstanding private placement warrants, voting as separate classes). As a result, the exercise price of the warrants could be increased, the exercise period could be shortened and the number of shares of our Class A Common Stock purchasable upon exercise of a warrant could be decreased, all without a holder’s approval. Our warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 50% of the then-outstanding public warrants to make any change that adversely affects the interests of the registered holders of public warrants. Accordingly, we may amend the terms of the public warrants in a manner adverse to a holder if holders of at least 50% of the then-outstanding public warrants (or, if applicable, 65% of the then-outstanding public warrants and 65% of the then-outstanding private placement warrants, voting as separate classes) approve of such amendment. Although our ability to amend the terms of the public warrants with the consent of at least 50% of the then-outstanding public warrants (or, if applicable, 65% of the then-outstanding public warrants and 65% of the then-outstanding private placement warrants, voting as separate classes) is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the warrants, convert the warrants into cash or stock (at a ratio different than initially provided), shorten the exercise period or decrease the number of shares of our Class A Common Stock purchasable upon exercise of a warrant. We may redeem unexpired warrants prior to their exercise at a time that is disadvantageous to warrantholders, thereby making their warrants worthless. We have the ability to redeem outstanding warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last sales price of the Class A Common Stock has been at least $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within the 30 trading-day period ending on the third business day prior to the date on which we give notice of such redemption and provided certain other conditions are met. Redemption of the outstanding warrants could force warrantholders (i) to exercise their warrants and pay the exercise price therefor at a time when it may be disadvantageous for them to do so, (ii) to sell their warrants at the then-current market price when they might otherwise wish to hold their warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of their warrants. None of the private placement warrants will be redeemable by DCRC so long as they are held by our Sponsor or its permitted transferees. In addition, we have the ability to redeem the outstanding warrants at any time after they become exercisable and prior to their expiration, at a price of $0.10 per warrant if, among other things, the last sale price of the Class A Common Stock equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) on the trading day prior to the date on which notice of the redemption is given. In such a case, the holders will be able to exercise their warrants prior to redemption for a number of shares of Class A Common Stock determined by reference to a make-whole table. The value received upon such exercise of the warrants (1) may be less than the value the holders would have received if they had exercised their warrants at a later time where the underlying share price is higher and (2) may not compensate the holders for the value of the warrants, including because the number of shares of Class A Common Stock that may be received in connection with such an exercise is capped at 0.361 shares of Class A Common Stock per whole warrant (subject to adjustment) irrespective of the remaining life of the warrants. Because certain of our shares of Class A Common Stock and warrants currently trade as units consisting of one share of Class A Common Stock and one-third of one warrant, the units may be worth less than units of other blank check companies. Each unit contains one-third of one warrant. Pursuant to the warrant agreement, no fractional warrants will be issued upon separation of the units, and only whole warrants will trade. This is different from other blank check companies similar to ours whose units include one share of common stock and one warrant to purchase one whole share. We have established the components of the units in this way in order to reduce the dilutive effect of the warrants upon completion of an Initial Business Combination since the warrants will be exercisable in the aggregate for one-third of the number of shares compared to units that each contain a whole warrant to purchase one share, thus making us, we believe, a more attractive merger partner for target businesses. Nevertheless, this unit structure may cause our units to be worth less than if they included a warrant to purchase one whole share. Our warrants are accounted for as liabilities and the changes in value of our warrants could have a material effect on our financial results. On April 12, 2021, the Acting Director of the Division of Corporation Finance and Acting Chief Accountant of the SEC together issued a statement regarding the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the “SEC Statement”), which focused on certain settlement terms and provisions related to certain tender offers following a business combination, which terms are similar to those contained in the warrant agreement governing our warrants. As a result of the SEC Statement, we reevaluated the accounting treatment of our 11,666,667 public warrants and 6,666,667 private placement warrants, and determined to classify the warrants as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings. As a result, included on our balance sheet as of June 30, 2021 contained elsewhere in this proxy statement/prospectus are derivative liabilities related to embedded features contained within our warrants. ASC 815 provides for the remeasurement of the fair value of such derivatives at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value being recognized in earnings in the statement of operations. As a result of the recurring fair value measurement, our financial statements and results of operations may fluctuate quarterly, based on factors which are outside of our control. Due to the recurring fair value measurement, we expect that we will recognize non-cash gains or losses on our warrants each reporting period and that the amount of such gains or losses could be material. We have identified a material weakness in our internal control over financial reporting as of June 30, 2021. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results. Following the issuance of the SEC Statement, we reevaluated the accounting treatment of our 11,666,667 public warrants and 6,666,667 private placement warrants, and determined to classify the warrants as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings. See “Our warrants are accounted for as liabilities and the changes in value of our warrants could have a material effect on our financial results.” As part of such process, we identified a material weakness in our internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. We continue to evaluate steps to remediate the material weakness. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will ultimately have the intended effects. If we identify any new material weaknesses in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses. Nasdaq may delist our securities from trading on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions. We cannot assure you that our securities will continue to be listed on Nasdaq after the business combination. In connection with the business combination, we will be required to demonstrate compliance with Nasdaq’s initial listing requirements, which are more rigorous than Nasdaq’s continued listing requirements, in order to continue to maintain the listing of our securities on Nasdaq. For instance, our stock price would generally be required to be at least $4.00 per share and our stockholders’ equity would generally be required to be at least $5.0 million. We cannot assure you that we will be able to meet those initial listing requirements at that time. Our continued eligibility for listing may depend on, among other things, the number of our shares that are redeemed. If Nasdaq delists our securities from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including: potential termination of the Business Combination Agreement if our securities are not listed on another national exchange mutually agreed to by Solid Power; a limited availability of market quotations for our securities; reduced liquidity for our securities; a determination that our Class A Common Stock is a “penny stock” which will require brokers trading in our Class A Common Stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities; a limited amount of news and analyst coverage; and a decreased ability to issue additional securities or obtain additional financing in the future. The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our units, Class A Common Stock and public warrants are listed on Nasdaq, our units, Class A Common Stock and public warrants qualify as covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. While we are not aware of a state having used these powers to prohibit or restrict the sale of securities issued by blank check companies, other than the state of Idaho, certain state securities regulators view blank check companies unfavorably and might use these powers, or threaten to use these powers, to hinder the sale of securities of blank check companies in their states. Further, if we were no longer listed on Nasdaq, our securities would not be covered securities and we would be subject to regulation in each state in which we offer our securities. The DCRC Board did not obtain a third-party valuation or fairness opinion in connection with its determination to approve the business combination. DCRC’s officers and directors have substantial experience in evaluating the operating and financial merits of companies from a wide range of industries and concluded that their experience and backgrounds, together with the experience and sector expertise of DCRC’s advisors, enabled them to make the necessary analyses and determinations regarding the business combination. Accordingly, investors will be relying solely on the judgment of the DCRC Board in valuing Solid Power and assuming the risk that the DCRC Board may not have properly valued the business. The lack of a third-party valuation or fairness opinion may also lead an increased number of stockholders to vote against the proposed business combination or demand redemption of their shares for cash, which could potentially impact DCRC’s ability to consummate the business combination. We cannot assure you that our diligence review has identified all material risks associated with the business combination, and you may be less protected as an investor from any material issues with respect to Solid Power’s business, including any material omissions or misstatements contained in the Registration Statement or this proxy statement/prospectus relating to the business combination than an investor in an initial public offering. Before entering into the Business Combination Agreement, we performed a due diligence review of Solid Power and its business and operations; however, we cannot assure you that our due diligence review identified all material issues, and certain unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Additionally, the scope of due diligence we have conducted in conjunction with the business combination may be different than would typically be conducted in the event Solid Power pursued an underwritten initial public offering. In a typical initial public offering, the underwriters of the offering conduct due diligence on the company to be taken public, and following the offering, the underwriters are subject to liability to private investors for any material misstatements or omissions in the registration statement. While potential investors in an initial public offering typically have a private right of action against the underwriters of the offering for any of these material misstatements or omissions, there are no underwriters of the Class A Common Stock that will be issued pursuant to the Registration Statement and thus no corresponding right of action is available to investors in the business combination for any material misstatements or omissions in the Registration Statement or this proxy statement/prospectus. Therefore, as an investor, you may be exposed to future losses, impairment charges, write-downs, write-offs or other charges that could have a significant negative effect on Solid Power’s financial condition, results of operations and the price of its securities, which could cause you to lose some or all of your investment without recourse against an underwriter that may have been available had Solid Power been taken public through an underwritten public offering. A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our Class A Common Stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of Class A Common Stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A Common Stock. After the business combination (and assuming no redemptions by our public stockholders of public shares), our Sponsor, officers and directors and their affiliates will hold approximately 5.4% of our common stock, including the 8,750,000 shares of Class A Common Stock into which the Founder Shares convert. Assuming a maximum redemption by our public stockholders of 21,500,000 of the public shares, our Sponsor, officers and directors and their affiliates will hold approximately 6.2% of our common stock including the 8,750,000 shares of Class A Common Stock into which the Founder Shares convert. Pursuant to the terms of a letter agreement entered into at the time of the IPO, the Founder Shares (which will be converted into shares of Class A Common Stock at the Closing) may not be transferred until the earlier to occur of (a) one year after the Closing or (b) the date on which we complete a liquidation, merger, stock exchange or other similar transaction that results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property. Notwithstanding the foregoing, if the last sale price of our Class A Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30 trading day period commencing at least 150 days after the Closing, the shares of Class A Common Stock into which the Founder Shares convert will be released from these transfer restrictions. In connection with the Closing, the IPO Registration Rights Agreement will be amended and restated and DCRC and the Reg Rights Holders will enter into the A&R Registration Rights Agreement. Pursuant to the A&R Registration Rights Agreement, DCRC will agree that, within 30 days after the Closing, DCRC will file the Resale Registration Statement with the SEC (at DCRC’s sole cost and expense), and DCRC will use its reasonable best efforts to have the Resale Registration Statement declared effective as promptly as reasonably practicable after the filing thereof. In certain circumstances, the Reg Rights Holders can demand DCRC’s assistance with underwritten offerings and block trades, and the Reg Rights Holders will be entitled to certain piggyback registration rights. Further, under the Subscription Agreements, DCRC agreed that, within 30 calendar days after the Closing Date, DCRC will file with the SEC (at DCRC’s sole cost and expense) the PIPE Resale Registration Statement, and DCRC will use its commercially reasonable efforts to have the PIPE Resale Registration Statement declared effective as soon as practicable after the filing thereof. For more information about the A&R Registration Rights Agreement and Subscription Agreements, see the section entitled “Proposal No. 1—The Business Combination Proposal—Related Documents—A&R Registration Rights Agreement” and the section entitled “Proposal No. 1—The Business Combination Proposal—Related Documents—PIPE Financing.” If the business combination’s benefits do not meet the expectations of investors, stockholders or financial analysts, the market price of our securities may decline. If the benefits of the business combination do not meet the expectations of investors or securities analysts, the market price of our securities prior to the Closing may decline. The market values of our securities at the time of the business combination may vary significantly from their prices on the date the Business Combination Agreement was executed, the date of this proxy statement/prospectus or the date on which our stockholders vote on the business combination. In addition, following the business combination, fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Prior to the business combination, trading in the shares of our Class A Common Stock has not been active. Accordingly, the valuation ascribed to our Class A Common Stock in the business combination may not be indicative of the price that will prevail in the trading market following the business combination. If an active market for our securities develops and continues, the trading price of our securities following the business combination could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline. Factors affecting the trading price of our securities following the business combination may include: actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; changes in the market’s expectations about our operating results; success of competitors; our operating results failing to meet the expectation of securities analysts or investors in a particular period; changes in financial estimates and recommendations by securities analysts concerning New Solid Power or the market in general; operating and stock price performance of other companies that investors deem comparable to us; our ability to market new and enhanced products and technologies on a timely basis; changes in laws and regulations affecting our business; our ability to meet compliance requirements; commencement of, or involvement in, litigation involving New Solid Power; changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; the volume of shares of our common stock available for public sale; any major change in the DCRC Board or management; sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; sales of shares of our Class A Common Stock by the PIPE Investors; the volume of shares of our Class A Common Stock available for public sale, including as a result of the termination of the post-closing lock-up pursuant to the terms thereof; and general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism. Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to New Solid Power following the business combination could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future. Following the business combination, if securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline. The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover New Solid Power following the business combination change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover New Solid Power following the business combination were to cease their coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline. Our Sponsor, directors, officers, advisors or any of their respective affiliates may elect to purchase public shares from public stockholders, which may influence the vote on the Business Combination Proposal and reduce the public “float” of our Class A Common Stock. Our Sponsor, directors, officers, advisors or any of their respective affiliates may purchase public shares in privately negotiated transactions or in the open market either prior to or following the completion of the business combination, although they are under no obligation to do so. There is no limit on the number of public shares our Sponsor, directors, officers, advisors or any of their respective affiliates may purchase in such transactions, subject to compliance with applicable law and Nasdaq rules. Any such privately negotiated purchases may be effected at purchase prices that are in excess of the per share pro rata portion of the Trust Account. However, our Sponsor, directors, officers, advisors and their respective affiliates have not consummated any such purchases or acquisitions, have no current commitments, plans or intentions to engage in such transactions and have not formulated any terms or conditions for any such transactions. None of the funds in the Trust Account will be used to purchase public shares in such transactions. None of our Sponsor, directors, officers, advisors or any of their respective affiliates will make any such purchases when they are in possession of any material non-public information not disclosed to the seller of such public shares or during a restricted period under Regulation M under the Exchange Act. Such a purchase could include a contractual acknowledgement that such stockholder, although still the record holder of such public shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights, and could include a contractual provision that directs such stockholder to vote such shares in a manner directed by the purchaser. In the event that our Sponsor, directors, officers, advisors or any of their respective affiliates purchase shares in privately negotiated transactions from public stockholders who have already elected to exercise their redemption rights, such selling stockholders would be required to revoke their prior elections to redeem their shares. The purpose of any such purchases of public shares could be to vote such shares in favor of the business combination and thereby increase the likelihood of obtaining stockholder approval of the business combination or to satisfy a closing condition in the Business Combination Agreement, where it appears that such requirement would otherwise not be met. Any such purchases of our public shares may result in the completion of the business combination that may not otherwise have been possible. Any such purchases will be reported pursuant to Section 13 and Section 16 of the Exchange Act to the extent the purchasers are subject to such reporting requirements. In addition, if such purchases are made, the public “float” of our Class A Common Stock may be reduced and the number of beneficial holders of our securities may be reduced, which may make it difficult to maintain or obtain the quotation, listing or trading of our securities on a national securities exchange. See the section entitled “Proposal No. 1—The Business Combination Proposal—Potential Purchases of Public Shares” for a description of how our Sponsor, directors, officers, advisors or any of their respective affiliates will select which stockholders or warrantholders to purchase securities from in any private transaction. We may be subject to legal proceedings in connection with the business combination, the outcomes of which would be uncertain, and may delay or prevent the completion of the business combination and adversely affect New Solid Power’s business, financial condition and results of operations. DCRC has received demand letters, and may in the future receive additional demand letters or complaints, from purported stockholders of DCRC regarding certain actions taken in connection with the business combination and the adequacy of the Registration Statement, of which this proxy statement/prospectus forms a part. These demand letters or complaints may lead to litigation against DCRC or its directors and officers in connection with the business combination. Defending against any lawsuits could require DCRC to incur significant costs and draw the attention of DCRC’s management away from the business combination. Further, the defense or settlement of any lawsuit or claim that remains unresolved at the Closing may adversely affect New Solid Power’s business, financial condition and results of operations. Such legal proceedings could also delay or prevent the Closing from occurring within the contemplated timeframe. Changes in laws or regulations, or a failure to comply with any laws or regulations, may adversely affect our business, investments and results of operations. We are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our business, including our ability to negotiate and complete the business combination, and results of operations. As a result of plans to expand New Solid Power’s business operations, including to jurisdictions in which tax laws may not be favorable, its obligations may change or fluctuate, become significantly more complex or become subject to greater risk of examination by taxing authorities, any of which could adversely affect New Solid Power’s after-tax profitability and financial results. Our effective tax rates may fluctuate widely in the future, particularly if New Solid Power’s business expands domestically or internationally. Future effective tax rates could be affected by operating losses in jurisdictions where no tax benefit can be recorded under GAAP, changes in deferred tax assets and liabilities, or changes in tax laws. Factors that could materially affect our future effective tax rates include, but are not limited to: (a) changes in tax laws or the regulatory environment, (b) changes in accounting and tax standards or practices, (c) changes in the composition of operating income by tax jurisdiction and (d) pre-tax operating results of New Solid Power’s business. Additionally, after the business combination, New Solid Power may be subject to significant income, withholding, and other tax obligations in the United States and may become subject to taxation in numerous additional U.S. state and local and non-U.S. jurisdictions with respect to income, operations and subsidiaries related to those jurisdictions. New Solid Power’s after-tax profitability and financial results could be subject to volatility or be affected by numerous factors, including (a) the availability of tax deductions, credits, exemptions, refunds and other benefits to reduce tax liabilities, (b) changes in the valuation of deferred tax assets and liabilities, if any, (c) the expected timing and amount of the release of any tax valuation allowances, (d) the tax treatment of stock-based compensation, (e) changes in the relative amount of earnings subject to tax in the various jurisdictions, (f) the potential business expansion into, or otherwise becoming subject to tax in, additional jurisdictions, (g) changes to existing intercompany structure (and any costs related thereto) and business operations, (h) the extent of intercompany transactions and the extent to which taxing authorities in relevant jurisdictions respect those intercompany transactions, and (i) the ability to structure business operations in an efficient and competitive manner. Outcomes from audits or examinations by taxing authorities could have an adverse effect on New Solid Power’s after-tax profitability and financial condition. Additionally, the IRS and several foreign tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products and services and the use of intangibles. Tax authorities could disagree with New Solid Power’s intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. If New Solid Power does not prevail in any such disagreements, New Solid Power’s profitability may be affected. New Solid Power’s after-tax profitability and financial results may also be adversely affected by changes in relevant tax laws and tax rates, treaties, regulations, administrative practices and principles, judicial decisions and interpretations thereof, in each case, possibly with retroactive effect. Our warrants and Founder Shares may have an adverse effect on the market price of our Class A Common Stock and make it more difficult to effectuate our business combination. We issued warrants to purchase 11,666,667 shares of Class A Common Stock as part of the units. We also issued 6,666,667 private placement warrants, each exercisable to purchase one share of Class A Common Stock at $11.50 per share. Our initial stockholders currently own an aggregate of 8,750,000 Founder Shares. The Founder Shares are convertible into shares of Class A Common Stock on a one-for-one basis, subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like and subject to further adjustment as set forth herein. In addition, if our Sponsor makes any working capital loans, it may convert those loans into up to an additional 1,000,000 private placement warrants, at the price of $1.50 per warrant. Any issuance of a substantial number of additional shares of Class A Common Stock upon exercise of these warrants and conversion rights will increase the number of issued and outstanding shares of Class A Common Stock and reduce the value of the Class A Common Stock issued to complete the business combination. Therefore, our warrants and Founder Shares may make it more difficult to effectuate the business combination or increase the cost of acquiring Solid Power. We do not have a specified maximum redemption threshold. The absence of such a redemption threshold may make it possible for us to complete the business combination even if a substantial majority of our stockholders do not agree. Our Charter does not provide a specified maximum redemption threshold. Our Charter provides we will not redeem our Class A Common Stock in an amount that would cause our net tangible assets to be less than $5,000,001 (so that we are not subject to the SEC’s “penny stock” rules) or any greater net tangible asset or cash requirement which may be contained in the agreement relating to our Initial Business Combination. However, our Charter will be amended and restated immediately prior to the business combination, such that such limitation will no longer apply, and we anticipate our Class A Common Stock will be listed on Nasdaq, which provides a separate exception from being subject to the “penny stock” rules. As a result, we may be able to complete the business combination even though a substantial majority of our public stockholders do not agree with the transaction and have redeemed their shares or have entered into privately negotiated agreements to sell their shares to our Sponsor, officers, directors, advisors or any of their respective affiliates. In the event the aggregate cash consideration we would be required to pay for all shares of Class A Common Stock that are validly submitted for redemption plus any amount required to satisfy cash conditions pursuant to the terms of the proposed business combination exceed the aggregate amount of cash available to us, we will not complete the business combination or redeem any shares, all shares of Class A Common Stock submitted for redemption will be returned to the holders thereof, and we instead may search for an alternate business combination. Risks Related to the Redemption DCRC cannot be certain as to the number of shares of public stock that will be redeemed and the potential impact to public stockholders who do not elect to redeem their public stock. There is no guarantee that a stockholder’s decision whether to redeem its shares for a pro rata portion of the Trust Account will put the stockholder in a better future economic position. We can give no assurance as to the price at which a stockholder may be able to sell its public shares in the future following the completion of the business combination or any alternative business combination. Redemptions of public shares and certain events following the consummation of the business combination may cause an increase or decrease in our stock price, and may result in a lower value realized now than a stockholder of DCRC might realize in the future had the stockholder not redeemed its shares. Similarly, if a stockholder does not redeem its shares, the stockholder will bear the risk of ownership of the public shares after the consummation of the business combination, and there can be no assurance that a stockholder can sell its shares in the future for a greater amount than the redemption price set forth in this proxy statement/prospectus. A stockholder should consult, and rely solely upon, the stockholder’s own tax and/or financial advisor for assistance on how this may affect his, her or its individual situation. On , 2021, the most recent practicable date prior to the date of this proxy statement/prospectus, the closing price per share of the Class A Common Stock was $ . Public stockholders should be aware that, while we are unable to predict the price per share of New Solid Power’s common stock following the consummation of the business combination—and accordingly we are unable to predict the potential impact of redemptions on the per share value of public shares owned by non-redeeming stockholders—increased levels of redemptions by public stockholders may be a result of the price per share of the Class A Common Stock falling below the redemption price. We expect that more public stockholders may elect to redeem their public shares if the share price of the Class A Common Stock is below the projected redemption price of $10.00 per share, and we expect that more public stockholders may elect not to redeem their public shares if the share price of the Class A Common Stock is above the projected redemption price of $10.00 per share. Each public share that is redeemed will represent both (i) a reduction, equal to the amount of the redemption price, of the cash that will be available to DCRC from the Trust Account and (ii) a corresponding increase in each public stockholder’s pro rata ownership interest in New Solid Power following the consummation of the business combination. If our stockholders fail to comply with the redemption requirements specified in this proxy statement/prospectus, they will not be entitled to redeem their shares of Class A Common Stock for a pro rata portion of the funds held in the Trust Account. In order to exercise their redemption rights, holders of public shares are required to submit a request in writing and deliver their shares (either physically or electronically) to our transfer agent at least two business days prior to the special meeting. Stockholders electing to redeem their shares will receive their pro rata portion of the Trust Account, including interest not previously released to us to pay our franchise and income taxes, calculated as of two business days prior to the anticipated consummation of the business combination. See the section entitled “Special Meeting of DCRC Stockholders—Redemption Rights” for additional information on how to exercise your redemption rights. Stockholders who wish to redeem their shares for a pro rata portion of the Trust Account must comply with specific requirements for redemption that may make it more difficult for them to exercise their redemption rights prior to the deadline. Public stockholders who wish to redeem their shares for a pro rata portion of the Trust Account must, among other things, as more fully described in the section entitled “Special Meeting of DCRC Stockholders—Redemption Rights,” tender their certificates to our transfer agent or deliver their shares to the transfer agent electronically through DTC prior to 5:00 p.m., Eastern time, on , 2021. In order to obtain a physical stock certificate, a stockholder’s broker and/or clearing broker, DTC and our transfer agent will need to act to facilitate this request. It is our understanding that stockholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, because we do not have any control over this process or over the brokers, it may take significantly longer than two weeks to obtain a physical stock certificate. If it takes longer than anticipated to obtain a physical certificate, stockholders who wish to redeem their shares may be unable to obtain physical certificates by the deadline for exercising their redemption rights and thus will be unable to redeem their shares. In addition, holders of outstanding units of DCRC must separate the underlying public shares and public warrants prior to exercising redemption rights with respect to the public shares. If you hold units registered in your own name, you must deliver the certificate for such units or deliver such units electronically to Continental Stock Transfer & Trust Company with written instructions to separate such units into public shares and public warrants. This must be completed far enough in advance to permit the mailing of the public share certificates or electronic delivery of the public shares back to you so that you may then exercise your redemption rights with respect to the public shares following the separation of such public shares from the units. If a broker, dealer, commercial bank, trust company or other nominee holds your units, you must instruct such nominee to separate your units. Your nominee must send written instructions by facsimile to Continental Stock Transfer & Trust Company. Such written instructions must include the number of units to be split and the nominee holding such units. Your nominee must also initiate electronically, using DTC’s DWAC system, a withdrawal of the relevant units and a deposit of the corresponding number of public shares and public warrants. This must be completed far enough in advance to permit your nominee to exercise your redemption rights with respect to the public shares following the separation of such public shares from the units. While this is typically done electronically on the same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your public shares to be separated in a timely manner, you will likely not be able to exercise your redemption rights. If a public stockholder fails to receive notice of DCRC’s offer to redeem its public shares in connection with the business combination, or fails to comply with the procedures for tendering its shares, such shares may not be redeemed. DCRC will comply with the proxy rules when conducting redemptions in connection with the business combination. Despite DCRC’s compliance with these rules, if a public stockholder fails to receive DCRC’s proxy materials, such stockholder may not become aware of the opportunity to redeem its shares. In addition, the proxy materials that DCRC will furnish to holders of its public shares in connection with the business combination will describe the various procedures that must be complied with in order to validly redeem public shares. In the event that a stockholder fails to comply with these or any other procedures, its shares may not be redeemed. Whether a redemption of Class A Common Stock will be treated as a sale of such Class A Common Stock for U.S. federal income tax purposes will depend on a shareholder’s specific facts. The U.S. federal income tax treatment of a redemption of Class A Common Stock will depend on whether the redemption qualifies as a sale of such Class A Common Stock under Section 302(a) of the Code, which will depend largely on the total number of shares of our stock treated as held by the stockholder electing to redeem Class A Common Stock (including any shares of stock constructively owned by the holder as a result of owning private placement warrants or public warrants or otherwise) relative to all shares of our stock outstanding both before and after the redemption. If such redemption is not treated as a sale of Class A Common Stock for U.S. federal income tax purposes, the redemption will instead be treated as a corporate distribution of cash from us. For more information about the U.S. federal income tax treatment of the redemption of Class A Common Stock, see the section below entitled “Proposal No. 1—The Business Combination Proposal—Material U. S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders” or “Proposal No. 1—The Business Combination Proposal—Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of Non-U.S. Holders,” as applicable. If DCRC is unable to consummate the business combination or any other Initial Business Combination by March 26, 2023, the public stockholders may be forced to wait beyond such date before redemption from the Trust Account. If DCRC is unable to consummate the business combination by March 26, 2023, DCRC will (a) cease all operations except for the purpose of winding up, (b) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to us to pay our franchise and income taxes (less up to $100,000 of net interest to pay dissolution expenses and net of taxes payable), divided by the number of then-outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (c) as promptly as reasonably possible following such redemption, subject to the approval of DCRC’s remaining stockholders and the DCRC Board, dissolve and liquidate, subject in each case to DCRC’s obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. General Risk Factors The business combination or post-combination company may be materially adversely affected by the ongoing COVID-19 pandemic. In addition to the risks described above under “We have been, and may in the future be, adversely affected by the global COVID-19 pandemic,” our ability to consummate the business combination may be materially adversely affected due to significant governmental measures being implemented to contain the outbreak of COVID-19 or its impact, including travel restrictions, the shutdown of businesses and quarantines, among others, which may limit our ability to have meetings with potential investors or affect the ability of Solid Power’s personnel, vendors and service providers to negotiate and consummate the business combination in a timely manner. The extent to which COVID-19 impacts the business combination or the post-combination company will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period of time, our ability to consummate the business combination may be materially adversely affected. Additionally, if the financial markets or the overall economy are impacted for an extended period, the post-combination company’s results of operations, financial position and cash flows may be materially adversely affected. Changes to applicable tax laws and regulations or exposure to additional income tax liabilities could affect New Solid Power’s business and future profitability. New Solid Power will be a U.S. corporation and thus subject to U.S. corporate income tax on its worldwide income. Further, New Solid Power’s operations and customers will be located in the United States, and, as a result, New Solid Power will be subject to various U.S. federal, state and local taxes. U.S. federal, state and local and non-U.S. tax laws, policies, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to New Solid Power and may have an adverse effect on its business and future profitability. For example, several tax proposals have been set forth that would, if enacted, make significant changes to U.S. tax laws. Such proposals include an increase in the U.S. income tax rate applicable to corporations (such as New Solid Power) from 21% to 28%. Congress may consider, and could include, some or all of these proposals in connection with tax reform that may be undertaken. It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could take effect. The passage of any legislation as a result of these proposals and other similar changes in U.S. federal income tax laws could adversely affect New Solid Power’s business and future profitability. The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies. We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (a) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (b) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (c) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. As a result, our stockholders may not have access to certain information they deem important. We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year (i) following March 26, 2026, the fifth anniversary of our IPO, (ii) in which we have total annual gross revenue of at least $1.07 billion (as adjusted for inflation pursuant to SEC rules from time to time) or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our Class A Common Stock that is held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (b) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three year period. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. We cannot predict if investors will find our Class A Common Stock less attractive because we will rely on these exemptions. If some investors find our Class A Common Stock less attractive as a result, there may be a less active trading market for our Class A Common Stock and our stock price may be more volatile. We may issue additional common stock or preferred stock to complete the business combination or under an employee incentive plan after completion of the business combination. Any such issuances would dilute the interest of our stockholders and likely present other risks. We may issue a substantial number of additional shares of common or preferred stock to complete the business combination or under an employee incentive plan after completion of the business combination. The issuance of additional shares of common or preferred stock: may significantly dilute the equity interests of our investors; may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded our common stock; could cause a change in control if a substantial number of shares of our common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors; and may adversely affect prevailing market prices for our units, Class A Common Stock and/or warrants. Delaware law and provisions in the Proposed Second A&R Charter and New Solid Power bylaws might delay, discourage or prevent a change in control of New Solid Power or changes in New Solid Power’s management, thereby depressing the market price of New Solid Power’s common stock. New Solid Power’s status as a Delaware corporation and the anti-takeover provisions of the DGCL may discourage, delay or prevent a change in control by prohibiting New Solid Power from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, even if a change of control would be beneficial to New Solid Power’s existing stockholders. In addition, the Proposed Second A&R Charter and New Solid Power bylaws will contain provisions that may make the acquisition of New Solid Power more difficult or delay or prevent changes in control of New Solid Power’s management. Among other things, these provisions will: provide advance notice procedures with regard to stockholder nominations of candidates for election as directors or other stockholder proposals to be brought before meetings of New Solid Power stockholders, which may preclude New Solid Power stockholders from bringing certain matters before the New Solid Power stockholders at an annual or special meeting; provide the New Solid Power Board the ability to authorize issuance of preferred stock in one or more series, which makes it possible for the New Solid Power Board to issue, without New Solid Power’s stockholder’s approval, preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of New Solid Power and which may have the effect of deterring hostile takeovers or delaying changes in control or management of New Solid Power; provide for the New Solid Power Board to be divided into three classes of directors, with each class as nearly equal in number as possible, serving staggered three-year terms; a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; provide that certain provisions of the Proposed Second A&R Charter can only be amended or repealed by the affirmative vote of the holders of at least 662⁄3% in voting power of the outstanding shares of New Solid Power common stock entitled to vote thereon, voting together as a single class; provide that certain provisions of New Solid Power’s bylaws can be altered or repealed by (a) the New Solid Power Board or (b) the New Solid Power stockholders upon the affirmative vote of 662⁄3% of the voting power of the New Solid Power common stock outstanding and entitled to vote thereon, voting together as a single class; only the Board of Directors (pursuant to a majority vote), the Chairperson of the Board of Directors, the President or the Chief Executive Officer may call a special meeting; and the designation of Delaware and federal courts as the exclusive forum for certain disputes. New Solid Power’s amended and restated bylaws will designate state courts within the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents. New Solid Power’s amended and restated bylaws will provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another State court in Delaware or the federal district court for the District of Delaware) shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of New Solid Power, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, stockholder, officer or other employee of New Solid Power to New Solid Power or New Solid Power’s stockholders, (c) any action arising pursuant to any provision of the DGCL or New Solid Power’s certificate of incorporation or the bylaws (as either may be amended from time to time) or (d) any action asserting a claim governed by the internal affairs doctrine, except for, as to each of (a) through (d) above, any claim as to which such court determines that there is an indispensable party not subject to the jurisdiction of such court (and the indispensable party does not consent to the personal jurisdiction of such court within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than such court or for which such court does not have subject matter jurisdiction. In addition, New Solid Power’s amended and restated bylaws will provide that, unless New Solid Power consents in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act against any person in connection with any offering of New Solid Power’s securities, including, without limitation and for the avoidance of doubt, any auditor, underwriter, expert, control person, or other defendant. New Solid Power’s amended and restated bylaws will provide that the exclusive forum provision will be applicable to the fullest extent permitted by applicable law. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any rule or regulation promulgated thereunder (in each case, as amended), or any other claim over which the federal courts have exclusive jurisdiction. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Alternatively, if a court were to find the choice of forum provision contained in New Solid Power’s amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition. The following unaudited pro forma condensed combined financial information of New Solid Power has been prepared in accordance with Article 11 of Regulation S-X (as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”) and presents the combination of historical financial information of Solid Power and DCRC, adjusted to give effect to the business combination. The unaudited pro forma condensed combined balance sheet as of June 30, 2021 combines the historical balance sheet of DCRC as of June 30, 2021 with the historical balance sheet of Solid Power as of June 30, 2021 on a pro forma basis as if the business combination and other events, summarized below, had been consummated on June 30, 2021. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 combine the historical statements of operations of DCRC and the historical statements of operations of Solid Power for such periods on a pro forma basis as if the business combination and other events, summarized below, had been consummated on January 1, 2020, the beginning of the earliest period presented. Since DCRC was incorporated on January 29, 2021, there is no statement of operations for the year ended December 31, 2020 to include in the unaudited pro forma condensed combined statement of operations for the year ended December 31 2020. The unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with the following items included elsewhere in this proxy statement/prospectus: the accompanying notes to the unaudited pro forma condensed combined financial statements; the historical audited financial statements and accompanying notes of DCRC as of June 30, 2021 and for the period from January 29, 2021 (inception) to June 30, 2021; the historical audited financial statements and accompanying notes of Solid Power as of and for the year ended December 31, 2020; the historical unaudited financial statements and accompanying notes of Solid Power as of June 30, 2021 and for the six months ended June 30, 2021; and other information relating to DCRC and Solid Power included in this proxy statement/prospectus, including the Business Combination Agreement and the description of certain terms thereof set forth under the section entitled “Proposal No. 1 – The Business Combination Proposal.” The unaudited pro forma condensed combined financial information should also be read together with the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of DCRC,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Solid Power,” and other financial information included elsewhere in this proxy statement/prospectus. Pursuant to the Charter, public stockholders are being offered the opportunity to redeem, upon the closing of the business combination, shares of Class A Common Stock then held by them for cash equal to their pro rata share of the aggregate amount on deposit (as of two business days prior to the Closing) in the Trust Account. For illustrative purposes, based on the fair value of cash and marketable securities held in the Trust Account as of June 30, 2021 of approximately $350.0 million, the estimated per share redemption price would have been approximately $10.00. The unaudited pro forma condensed combined financial information has been prepared using the assumptions below: Assuming No Redemptions: This presentation assumes that no public stockholders exercise redemption rights with respect to their Class A Common Stock. Assuming Maximum Redemptions: This presentation assumes public stockholders holding approximately 21.5 million shares of Class A Common Stock will exercise their redemption rights for their pro rata share (approximately $10.00 per share) of funds in the Trust Account. This scenario gives effect to public share redemptions for aggregate redemption payments of approximately $215 million. The Business Combination Agreement provides that the obligations of Solid Power to consummate the business combination are subject to the satisfaction or waiver at or prior to the Closing of, among other conditions, a condition that as of the Closing, after consummation of the PIPE Financing and distribution of the Trust Account pursuant to the Business Combination Agreement, deducting all amounts to be paid pursuant to the exercise of redemption rights provided for in the Charter, DCRC shall have unrestricted cash on hand equal to or in excess of $300 million (without, for the avoidance of doubt, taking into account any transaction fees, costs and expenses paid or required to be paid in connection with the business combination or the PIPE Financing or any cash on hand of Solid Power). Furthermore, DCRC will only proceed with the business combination if it will have net tangible assets (as determined in accordance with Rule 3a51-1(g)(1) under the Exchange Act) of at least $5,000,001 unless the Class A Common Stock otherwise does not constitute “penny stock” as such term is defined in Rule 3a51-1 under the Exchange Act. Because we anticipate that the Class A Common Stock will be listed on Nasdaq at the Closing, and such listing would mean that the Class A Common Stock would not constitute “penny stock” as such term is defined in Rule 3a51-1 under the Exchange Act, we do not anticipate the $5,000,001 net tangible asset threshold being applicable. Notwithstanding the legal form of the business combination pursuant to the Business Combination Agreement, under both the no redemption and maximum redemption scenarios, the business combination will be accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, DCRC is expected to be treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the financial statements of New Solid Power will represent a continuation of the financial statements of Solid Power with the business combination treated as the equivalent of Solid Power issuing shares for the net assets of DCRC, accompanied by a recapitalization. Operations prior to the reverse recapitalization will be those of Solid Power. Solid Power has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances: the Historical Rollover Stockholders will hold a majority of the outstanding equity interests in New Solid Power in both assuming no redemptions and assuming maximum redemptions scenarios; Solid Power’s existing management will comprise the management of New Solid Power; Solid Power’s existing Board of Directors will constitute a majority of the New Solid Power Board following the business combination; the operations of New Solid Power will represent the current operations of Solid Power; and New Solid Power will assume Solid Power’s name and headquarters. Description of the Business Combination Pursuant to the terms of the Business Combination Agreement, and subject to the terms and conditions contained therein, Merger Sub will merge with and into Solid Power, with Solid Power surviving the merger as a wholly owned subsidiary of DCRC. At the Effective Time, by virtue of the Merger and without any action on the part of DCRC, Merger Sub, Solid Power or the holders of any of Solid Power’s securities: each share of Solid Power Common Stock issued and outstanding immediately prior to the Effective Time (including shares of Solid Power Common Stock resulting from the Conversion, but excluding any Dissenting Shares) will be canceled and converted into the right to receive the number of shares of Class A Common Stock equal to the Exchange Ratio; each Solid Power Warrant (a) to the extent terminated, expired or exercised immediately prior to the Effective Time, either voluntarily prior to the Effective Time or in accordance with its terms in connection with the business combination, will no longer be deemed outstanding and any shares of Company Common Stock issuable in connection therewith shall be treated as described above and (b) to the extent outstanding and unexercised immediately prior to the Effective Time will automatically be converted into an Assumed Warrant to acquire a number of shares of Class A Common Stock equal to (i) the number of shares of Solid Power Common Stock subject to the applicable Solid Power Warrant multiplied by (ii) the Exchange Ratio, rounding the resulting number down to the nearest whole number of shares of Class A Common Stock, at an adjusted price equal to (x) the per share exercise price for the shares of Solid Power Common Stock subject to the applicable Solid Power Warrant, as in effect immediately prior to the Effective Time, divided by (y) the Exchange Ratio, rounding the resulting exercise price up to the nearest whole cent; each award of Solid Power Restricted Stock that is outstanding immediately prior to the Effective Time will be released and extinguished in exchange for an award covering a number of Exchanged Restricted Stock equal to the product (rounded down to the nearest whole number) of (x) the number of shares of Solid Power Common Stock subject to such award of Solid Power Restricted Stock immediately prior to the Effective Time and (y) the Exchange Ratio. In connection with the execution of the Business Combination Agreement, on June 15, 2021, DCRC entered into separate Subscription Agreements with the New PIPE Investors, pursuant to which the New PIPE Investors agreed to purchase, and DCRC agreed to sell to the New PIPE Investors, an aggregate of 16,500,000 PIPE Shares for a purchase price of $10.00 per share and an aggregate purchase price of $165 million, in a private placement. The closing of the sale of the PIPE Shares pursuant to the Subscription Agreements is contingent upon, among other customary closing conditions, the concurrent consummation of the business combination. Assumptions and estimates underlying the unaudited pro forma adjustments set forth in the unaudited pro forma condensed combined financial statements are described in the accompanying notes. The unaudited pro forma condensed combined financial statements have been presented for illustrative purposes only and are not necessarily indicative of the operating results and financial position that would have been achieved had the business combination occurred on the dates indicated. Further, the unaudited pro forma condensed combined financial statements do not purport to project the future operating results or financial position of New Solid Power following the completion of the business combination. The unaudited pro forma adjustments represent DCRC’s management’s estimates based on information available as of the date of these unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and analyses are performed. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 2021 (Dollar amounts in thousands) As of June 30, 2021 As of June 30, (Historical) Solid Power (Historical) Additional Pro (Assuming No Redemption) Pro Forma Combined (Assuming No Redemptions Additional (Assuming Redemptions) $ — $ 120,334 $ )(C) )(D) $ 594,631 $ (215,000 )(G) $ 379,631 Contract receivables — 386 — 386 — 386 561 301 — 862 — 862 561 121,021 474,297 595,879 (215,000 ) 380,879 Cash equivalent held in trust account 350,005 — (350,005 )(B) — — — Property and equipment—net — 11,173 — 11,173 — 11,173 Intangible assets (net) $ 350,978 $ 132,523 $ 124,292 $ 607,793 (215,000 ) $ 392,793 625 1,016 (625 )(C) 1,016 — 1,016 Accrued compensation — 1,235 — 1,235 — 1,235 Other accrued liabilities 83 987 (83 )(C) 987 — 987 708 4,120 (708 ) 4,120 — $ 4,120 12,250 — (12,250 )(D) — — — 48,167 — — 48,167 — 48,167 — 286 — 286 286 $ 61,125 $ 5,490 $ (12,958 ) $ 53,657 $ — $ 53,657 Mezzanine Equity Solid Power Series A-1 Preferred Stock — 250,150 (250,150 )(F) — — — Solid Power Series B Preferred Stock 350,000 — (350,000 )(F) — — — Stockholders’ Equity (Deficit) — 1 (1 )(F) — — — — — 2 (A) 15 (2 )(G) 13 13 (F) )(E) 890,049 (214,998 )(C) 675,051 (60,148 ) (336,331 ) (335,929 ) — (335,929 ) (1,004 )(D) 1,406 (E) Total Stockholders’ Equity (Deficit) (60,147 ) (336,330 ) 950,613 554,136 (215,000 ) 339,136 Total Liabilities and Stockholders’ Equity (Deficit) $ 350,978 $ 132,523 $ 124,292 $ 607,793 $ (215,000 ) $ 392,793 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2021 For the Six Months Ended June 30, 2021 For the Collaboration and support revenue DCRC (Historical) Solid (Historical) Pro Forma Redemptions) Pro Forma Redemptions) Additional $ — 36 $ — $ 36 — $ 36 Total collaboration and support revenue Finance and administrative 2,082 2,929 (2,082 )(AA) 1,523 — 1,523 (1,406 )(BB) 2,082 11,383 (3,488 ) 9,977 — 9,977 Operating Loss (2,082 ) (10,342 ) 3,488 (8,936 ) — (8,936 ) — 342 (263 )(CC) 79 — 79 957 — — 957 — 957 Decrease in fair value of warrants Loss from change in value of embedded derivative liability — 2,680 (2,680 )(DD) — — — Contract termination loss — 3,100 (3,100 )(EE) — — — (5 ) (9 ) 5 (FF) (9 ) — (9 ) Pretax Loss (24,200 ) (16,455 ) 9,526 (31,129 ) — (31,129 ) — (41 ) — (41 ) — (41 ) $ (24,200 ) $ (16,414 ) $ 9,526 $ (31,088 ) — (31,088 ) Deemed dividend related to Solid Power Series A-1 and Series B preferred stock — 219,782 (219,782 )(GG) — — — Net Loss Attributable to Common Stockholders $ (24,200 ) $ (236,196 ) $ (229,308 ) $ (31,088 ) — (31,088 ) Basic and diluted net loss per common share $ (2.77 ) $ (29.74 ) $ (0.19 ) — $ (0.22 ) Weighted average shares outstanding, basic and diluted 8,750 7,943 163,039 — 141,539 For the Year Ended December 31, 2020 For the Year 2020 For the Year Collaboration and support revenue DCRC Redemptions Pro Forma Redemptions) Additional Pro — $ 906 $ — $ 906 — $ 906 — 9,594 — 9,594 — &nbs

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ARTICLE I - GENERAL 8.101 (a). Annual Levy on Property (b) Adoption of Annual Prepared Budget. (c). Budget Administration. 8.102 Annual Statement of Valuation and Ownership. 8.103 County Assessment to be Used 8.104 Due Date of Taxes. 8.105 Penalties for Failure to Pay on Time. 8.106 Execution for Distress and Sale of Property. 8.107 Form of Such Execution. 8.108 Fees of Clerk, Treasurer and Chief of Police. 8.109 Levy of Execution. 8.110 Sale of Real Property. 8.111 Sale of Personal Property. 8.112 Council as Board of Assessment and Equalization. ARTICLE II - LICENSE TAX 8.201 Payment Prerequisite to Engaging in Business, etc. 8.202 When License Due and Payable. 8.203 Procedure Upon Failure to Secure License by March 1, 8.204 Same — Alternative Method. 8.205 Revocation. 8.206 Duties of Town Clerk and Police. 8.207 Transfer between Persons. Sec. 8.101(a). Annual levy on property. That a tax to cover the period from the first day of the fiscal year, January 1, 1977, to the last day of the fiscal year, December 31, 1977; both inclusive; for the sums and in the manner hereinafter mentioned, is and shall be levied, collected and paid into the treasury of the Town of Quinby, South Carolina, for the use and service thereof; i.e., a tax of $2.50 on every one-hundred($100.00) dollars in value of a real estate and personal property of every description owned and used in the Town of Quinby, South Carolina, except such as is exempt from taxation under the Constitution and laws of the State of South Carolina, is and shall be levied and paid into the Town treasury for the credit of the Town of Quinby, South Carolina, for the corporate purposes, permanent improvements and for the purpose of paying current expenses of said municipality; and further, that -0-____ dollars on every one-hundred ($100.00) dollars in value of all real estate and personal property of every description owned and used in the municipality, except such as is exempt from taxation under the Constitution and laws of the State of South Carolina, is and shall be levied and paid into the municipal treasury, for the credit to the Town of Quinby, South Carolina, for the payment of interest and retiring of outstanding bonds of the said municipality, making a total levy of 25_____ mills. Such tax is levied on such property as is assessed for taxation for County and State purposes. (b). Adoption of annual prepared budget. That the prepared budget and the estimated revenue for payment of same is hereby adopted and is hereby made a part hereof as fully as if incorporated herein and a copy thereof is attached hereto. The Mayor shall administer the budget and may authorize the transfer of appropriated funds within and between departments as necessary to achieve the goals of the budget. The Clerk shall make a monthly budget and finance report to the Mayor and Council. Sec. 8.102___ Annual statement of valuation and ownership. The town clerk shall annually, prior to September 1, make out for taxation a statement of the valuation of all property, real or personal within the Town and by whom same is owned. Sec. 8.103 County assessment to be used. The clerk shall copy from the books of the Auditor of Florence County the assessment of valuation and shall use the same assessment for taxes for the Town. Sec. 8.104 Due date of taxes. All taxes for the year shall be due and payable between the first day of September and the 31st day of December after assessment in each and every year. Sec. 8.105 Penalties for failure to pay on time. The annual taxes on property and the commutation tax if not pale by December 31 of each year following assessment shall be subject to the following penalties: January 1, 1% of such tax; February 1, 2% of such tax; March 1, 3% of such tax; April 1, 7% of such tax. The penalties set forth above shall be assessed and collected in addition to the tax. If the tax and penalty is not paid by April 15, the clerk shall place same in execution. Sec. 8.106 Execution for distress and sale of property. On April l5 next after the cue date of the taxes, the clerk and treasurer of the town shall issue, under the town seal, an execution, in duplicate, against each defaulting taxpayer, signed by clerk and treasurer, in his official capacity, directed to the chief of police of the town, requiring and commanding him to levy the same by distress and sale of so much of the defaulting taxpayer's estate, real or personal, or both, as may be sufficient to satisfy the delinquent taxes and penalty. Sec. 8.107 Form of such execution. Such execution shall be substantially in the following form: By____________________, Clerk of the town of Quinby. To_____________________, Chief of Police of the town of Quinby Whereas ________________ has been assessed for the year ____the sum of $________ Dollars tax assessment in accordance with levy duly and legally levied by the town council of the town of Quinby to defray the expenses of the town of Quinby, which sum he has failed to pay. These, are, therefore, in the name of the town of Quinby strictly to charge and command you to levy by distress and sale of the personal property, and if sufficient personal property cannot be found, then by distress and sale of the lands of the said ______________, the sum of _________Dollars, together with ____________Dollars, the charges hereof; and for so doing this shall be your sufficient warrant. GIVEN UNDER MY HAND AND SEAL OF the Town of Quinby, S. C. this __________ day of _________, 19___. ______(Seal)______________ Clerk and Treasurer, Town of Quinby, S.C. Real Estate Assessment ----------------------------$_________________ Personal property assessment----------------------$_________________ Penalty ------------------------------------------------$_________________ Total Tax ---------------------------------------------$_________________ Costs of Execution only ----------------------------$_________________ Levy and advertising extra -------------------------$_________________ Total ---------------------------------------------------$_________________ Sec. 8.108 Fees of clerk, treasurer and chief of police. The clerk and treasurer of the town shall charge a fee of $5.00 to the defaulting taxpayer for issuing execution. The chief of police of the town shall charge $1.00 for serving the execution or levy and for mileage traveled also $5.00 for advertising sale and the same charges for making sale and executing deed and putting purchaser in possession as provided by statute for the sheriff or tax collector for similar services in Florence County. All fees collected by clerk and treasurer and chief of police shall accrue to the town. Sec. 8.109 Levy of Execution. Under and by virtue of the execution referred to in section 3-6 of this chapter, the chief of police of the town shall seize and take exclusive possession of so much of the defaulting taxpayers estate, real or personal, or both, as may be necessary to raise the sums of money named therein. Sec. 8.110 Sale of real property. Upon the levy of the execution, the chief of police, after due advertisement in the manner of tax sales by sheriffs as provided by law, shall sell the real estate levied upon before the Quinby Precinct on a regular sales day and within the usual hours for public sales, for cash, give to the purchaser, upon his compliance with the terms of the sale, a receipt for the purchase money, but not make title to the purchaser until the expiration of twelve months from the day of sale if the property sold be not redeemed as hereinafter provided and annex such receipt to the duplicate execution with the endorsement thereon of his action there- under, and shall, after deducting from proceeds of sale the costs and expenses of such sale, pay over to the town clerk and treasurer the taxes, charges and penalties due and incurred by the defaulting taxpayer and upon written notice given or information ascertained from the records of any mortgage or other lien on the premises so sold for taxes, shall hold the excess, if any, until authorized or directed by proper judicial authority as to mode of disposition, or by the written consent of the defaulting taxpayer that such excess be paid over to the mortgage or lien creditor, and according to priority if more than one; provided, that the owner or grantee or any mortgage creditor, or judgment creditor, may within twelve months from the day of such sale redeem such property by paying to the chief of police of the town the taxes, penalties, costs and expenses of the sale, together with seven percent interest en the whole amount of the purchase price of the land so sold and also any and all amounts paid by the bidder as taxes on the property receipt for which has been filed with the chief of police, and there upon the chief of police shall pay back and refund to the purchaser the amount paid on his bid with interest as above stated and the amount of all taxes paid by the bidder, and the bid by the purchaser shall then be cancelled and revoked, the owner or grantee remaining in possession of his land; upon failure of the defaulting taxpayer or other party interested to redeem said land so sold for taxes within twelve months, then the chief of police of the town shall make title to the purchaser and put the purchaser in possession of the property sold and conveyed. Sec. 8.111 Sale of personal property. Upon the levy of the execution, the chief of police after due advertisement for two weeks, shall sell the personal property levied upon before the Quinby Precinct on a regular sales day, and within the hours of legal sales, for cash, to the highest bidder and deliver the possession of the property so sold to the purchaser, upon payment of the purchase price therefore, and after deducting his costs and the expenses of such sale, pay over to the clerk and treasurer of the town the taxes, costs and penalties incurred and collection on said warrant or execution; provided, that any and all personal property that maybe seized for sale under the provisions hereof may be sold either before the Quinby Precinct or at the place of seizure of the property, as the chief of police may determine to be for the better interest of the people of the town and the person from whom seized. Sec. 8.112 Council as board of assessment and equalization. The council shall constitute a board of assessment and equalization for the purpose specified in this chapter. All matters relating to the assessment and listing of property for taxation or for the relief of taxpayers shall be under the control of the council and it shall be the duty of the council to see that no property in the town escapes taxation, or proper assessment. In case it shall be discovered by, or reported to, the council that there is real or personal property within the limits of the town or subject to taxation by the town, which has not been returned, assessed, or listed for taxation, or is listed on the auditor's books as being outside of the town, or is under or over assessed, or is listed in the name of the wrong person or is a double entry, or is listed through error as being in the town, or, in case any other irregularity appears or exists, it shall be the duty of the council to forthwith report the same to the auditor, or state officials, and follow the same up, to the end that no property properly liable for town taxes shall escape taxation by the town, or its proper assessment or listing, or shall be improperly taxed. Town of Quinby BUSINESS LICENSE ORDINANCE Section 1. License Required. Every person engaged or intending to engage in any calling, business, occupation or profession, in whole or in part, within the limits of the Town of Quinby, South Carolina, is required to pay an annual license tax for the privilege of doing business and obtain a business license as herein provided. Section 2. Definitions. The following words, terms and phrases, when used in this ordinance, shall have the meaning ascribed herein: “Business” means a calling, occupation, profession, or activity engaged in with the object of gain, benefit or advantage, either directly or indirectly. “Charitable Organization” means an organization that is determined by the Internal Revenue Service to be exempt from Federal income taxes under 26 U.S.C. section 501 (c) (3), (4), (6), (7), (8), (10) or (19). “Charitable Purpose” means a benevolent, philanthropic, patriotic, or eleemosynary purpose which does not result in personal gain to a sponsor, organizer, officer, director, trustee or person with ultimate control of the organization. “Classification” means that division of businesses by major groups subject to the same license rate as determined by a calculated index of ability to pay based on national averages, benefits, equalization of tax burden, relationships of services, or other basis deemed appropriate by the Council. “Gross Income” means the gross receipts or gross revenue of a business, received or accrued, for one calendar or fiscal year collected or to be collected from business done within the Municipality, excepting therefrom income earned outside of the Municipality on which a license tax is paid by the business to some other municipality or a county and fully reported to the Municipality. Gross income for agents means gross commissions received or retained, unless otherwise specified. Gross income for insurance companies means gross premiums written. Gross income for business license tax purposes shall not include taxes collected for a governmental entity, escrow funds, or funds which are the property of a third party. The value of bartered goods or trade-in merchandise shall be included in gross income. The gross receipts or gross revenues for business license purposes may be verified by inspection of returns and reports filed with the Internal Revenue Service, the South Carolina Department of Revenue, the South Carolina Department of Insurance, or other government agencies. “License Official” means a person designated to administer this ordinance. “Licensee” means the business, the person applying for the license on behalf of the business, an agent or legal representative of the business, a person who receives any part of the net profit of the business, or a person who owns or exercises control of the business. “Municipality” means the Town of Quinby, South Carolina. “Person” means any individual, firm, partnership, LLP, LLC, cooperative non-profit membership, corporation, joint venture, association, estate, trust, business trust, receiver, syndicate, holding company, or other group or combination acting as a unit, in the singular or plural, and the agent or employee having charge or control of a business in the absence of the principal. Section 3. Purpose and Duration. The business license levied by this ordinance is for the purpose of providing such regulation as may be required for the business subject thereto and for the purpose of raising revenue for the general fund through a privilege tax. Each yearly license shall be issued for the twelve-month period of July 1 to June 30. The provisions of this ordinance and the rates herein shall remain in effect from year to year as amended by the Council. Section 4. License Tax. A. The required license tax shall be paid for each business subject hereto according to the applicable rate classification on or before the due date of the 30thday of June in each year. B. A separate license shall be required for each place of business and for each classification or business conducted at one place. If gross income cannot be separated for classifications at one location, the license tax shall be computed on the combined gross income for the classification requiring the highest rate. A license tax based on gross income shall be computed on the gross income for the preceding calendar or fiscal year, and on a twelve-month projected income based on the monthly average for a business in operation for less than one year. The tax for a new business shall be computed on the estimated probable gross income stated in the license application for the balance of the license year. The initial tax for an annexed business shall be prorated for the number of months remaining in the license year. No refund shall be made for a business that is discontinued. Section 5. Registration Required. A. The owner, agent or legal representative of every business subject to this ordinance, whether listed in the classification index or not, shall register the business and make application for a business license on or before the due date of each year; provided, a new business shall be required to have a business license prior to operation within the Municipality, and an annexed business shall be required to have a business license within thirty (30) days of the annexation. A license for a bar (NAICS 722410) must be issued in the name of the individual who has been issued a State alcohol, beer or wine permit or license and will have actual control and management of the business. B. Application shall be on a form provided by the License Official which shall contain the Social Security Number and/or the Federal Employer's Identification Number, the business name as reported on the South Carolina income tax return, and all information about the applicant and the Licensee and the business deemed appropriate to carry out the purpose of this ordinance by the License Official. Applicants may be required to submit copies of portions of state and federal income tax returns reflecting gross receipts and gross revenue figures. C. The applicant shall certify under oath that the information given in the application is true, that the gross income is accurately reported, or estimated for a new business, without any unauthorized deductions, and that all assessments, personal property taxes on business property and other monies due and payable to the Municipality have been paid. Section 6. Deductions, Exemptions, and Charitable Organizations. A. No deductions from gross income shall be made except income earned outside of the Municipality on which a license tax is paid by the business to some other municipality or a county and fully reported to the Municipality, taxes collected for a governmental entity, or income which cannot be included for computation of the tax pursuant to State or Federal law. The applicant shall have the burden to establish the right to exempt income by satisfactory records and proof. B. No person shall be exempt from the requirements of the ordinance by reason of the lack of an established place of business within the Municipality, unless exempted by State or Federal law. The License Official shall determine the appropriate classification for each business in accordance with the latest issue of the North American Industry Classification System (NAICS) for the United States published by the Office of Management and Budget. No person shall be exempt from this ordinance by reason of the payment of any other tax, unless exempted by State law, and no person shall be relieved of liability for payment of any other tax or fee by reason of application of this ordinance. C. A Charitable Organization shall be exempt from the business license tax on its gross income unless it is deemed a business subject to a business license tax on all or part of its gross income as provided in this section. A Charitable Organization or any for-profit affiliate of a Charitable Organization, that reports income from for-profit activities, or unrelated business income, for Federal income tax purposes to the Internal Revenue Service shall be deemed a business subject to a business license tax on the part of its gross income from such for-profit activities or unrelated business income. A Charitable Organization shall be deemed a business subject to a business license tax on its total gross income if (1) any net proceeds of operation, after necessary expenses of operation, inure to the benefit of any individual or any entity that is not itself a Charitable Organization as defined in this ordinance, or (2) any net proceeds of operation, after necessary expenses of operation, are used for a purpose other than a Charitable Purpose as defined in this ordinance. Excess benefits or compensation in any form beyond fair market value to a sponsor, organizer, officer, director, trustee or person with ultimate control of the organization shall not be deemed a necessary expense of operation. Section 7. False Application Unlawful. It shall be unlawful for any person subject to the provisions of this ordinance to make a false application for a business license, or to give or file, or direct the giving or filing of, any false information with respect to the license or tax required by this ordinance. Section 8. Display and Transfer. A. All persons shall display the license issued to them on the original form provided by the License Official in a conspicuous place in the business establishment at the address shown on the license. A transient or non-resident shall carry the license upon his person or in a vehicle used in the business readily available for inspection by any authorized agent of the Municipality. B. A business license shall not be transferable and a transfer of controlling interest shall be considered a termination of the old business and the establishment of a new business requiring a new business license, based on old business income. Section 9. Administration of Article. The License Official shall administer the provisions of this article, collect license taxes, issue licenses, make or initiate investigations and audits to insure compliance, initiate denial or suspension and revocation procedures, report violations to the municipal attorney, assist in prosecution of violators, produce forms, make reasonable regulations relating to the administration of this ordinance, and perform such other duties as may be duly assigned. Section 10. Inspection and Audits. A. For the purpose of enforcing the provisions of this ordinance, the License Official or other authorized agent of the Municipality is empowered to enter upon the premises of any person subject to this ordinance to make inspections, examine and audit books and records. It shall be unlawful for any such person to fail or refuse to make available the necessary books and records. In the event an audit or inspection reveals that the licensee has filed false information, the costs of the audit shall be added to the correct license tax and late penalties in addition to other penalties provided herein. Each day of failure to pay the proper amount of license tax shall constitute a separate offense. Section 11. Assessments, Payment under Protest, Appeal. A. If a person fails to obtain a business license or to furnish the information required by this ordinance or the License Official, the License Official shall examine such records of the business or any other available records as may be appropriate, and conduct such investigations and statistical surveys as the License Official may deem appropriate to assess a license tax and penalties as provided herein. B. A notice of assessment shall be served by certified mail or personal service. An application for adjustment of the assessment may be made to the License Official within five (5) days after the notice is mailed or personally served or the assessment will become final. The License Official shall establish a uniform procedure for hearing an application for adjustment of assessment and issuing a notice of final assessment. C. A final assessment may be appealed to the Council only by payment in full of the assessment under protest within five (5) days and the filing of written notice of appeal within ten (10) days after payment pursuant to the provisions of this ordinance relating to appeals to Council. Section 12. Delinquent License Taxes, Partial Payment. A. Business License fees are due on July 1 of each year. A late penalty of ten (10) percent of the license fee will be applied if not renewed by July 1, a late penalty of twenty (20) percent of the unpaid fee if such is not paid by July 15 and an additional five (5) percent of the unpaid fee for each month or portion thereof after July 30 until paid in full. Section 13. Notices. The License Official may, but shall not be required to, mail written notices that license taxes are due. If notices are not mailed, there shall be published a notice of the due date in a newspaper of general circulation within the municipality three (3) times prior to the due date in each year. Failure to receive notice shall not constitute a defense to prosecution for failure to pay the tax due or grounds for waiver of penalties. Section 14. Denial of License. The License Official shall deny a license to an applicant when the License Official determines: A. The application is incomplete, contains a misrepresentation, false or misleading statement, evasion or suppression of a material fact; or B. The activity for which a license is sought is unlawful or constitutes a public nuisance per se or per accidens; or C. The applicant, Licensee or prior Licensee or the person in control of the business has been convicted of an offense under a law or ordinance regulating business, a crime involving dishonest conduct or moral turpitude related to a business or a subject of a business, or an unlawful sale of merchandise or prohibited goods; or D. The applicant, Licensee or prior Licensee or the person in control of the business has engaged in an unlawful activity or nuisance related to the business or to a similar business in the Municipality or in another jurisdiction; or E. The applicant, Licensee or prior Licensee or the person in control of the business is delinquent in the payment to the Municipality of any tax or fee; or F. The license for the business or for a similar business of the Licensee in the Municipality or another jurisdiction has been denied, suspended or revoked in the previous license year. A decision of the License Official shall be subject to appeal to Council as herein provided. Denial shall be written with reasons stated. Section 15. Suspension or Revocation of License. When the License Official determines: A. A license has been mistakenly or improperly issued or issued contrary to law; or B. A Licensee has breached any condition upon which the license was issued or has failed to comply with the provisions of this ordinance; or C. A Licensee has obtained a license through a fraud, misrepresentation, a false or misleading statement, evasion or suppression of a material fact in the license application; or D. A Licensee has been convicted of an offense under a law or ordinance regulating business, a crime involving dishonest conduct or moral turpitude related to a business or a subject of a business, or an unlawful sale of merchandise or prohibited goods; or E. A Licensee has engaged in an unlawful activity or nuisance related to the business; or F. A Licensee is delinquent in the payment to the Municipality of any tax or fee, the License Official shall give written notice to the Licensee or the person in control of the business within the Municipality by personal service or certified mail that the license is suspended pending a hearing before Council for the purpose of determining whether the license should be revoked. The notice shall state the time and place at which the hearing is to be held, which shall be at a regular or special Council meeting within thirty (30) days from the date of service of the notice, unless continued by agreement. The notice shall contain a brief statement of the reasons for suspension and proposed revocation and a copy of the applicable provisions of this ordinance. Section 16. Appeals to Council. A. Any person aggrieved by a decision, final assessment, proposed revocation, suspension, or a denial of a business license by the License Official may appeal the decision to the Council by written request stating the reasons therefore, filed with the License Official within ten (10) days after service by mail or personal service of the notice of decision, final assessment, proposed revocation, suspension or denial. B. An appeal or a hearing on proposed revocation shall be held by the Council within thirty (30) days after receipt of a request for appeal or service of notice of suspension at a regular or special meeting of which the applicant or licensee has been given written notice, unless continued by agreement. At the hearing, all parties shall have the right to be represented by counsel, to present testimony and evidence and to cross-examine witnesses. The proceedings shall be recorded and transcribed at the expense of the party so requesting. The rules of evidence and procedure prescribed by Council shall govern the hearing. Council shall by majority vote of members present render a written decision based on findings of fact and application of the standards herein which shall be served upon all parties or their representatives and shall be the final decision of the Municipality. Section 17. Consent, franchise or license required for use of streets. A. It shall be unlawful for any person to construct, install, maintain or operate in, on, above or under any street or public place under control of the municipality any line, pipe, cable, pole, structure or facility for utilities, communications, cablevision or other purposes without a consent agreement or franchise agreement issued by the Council by ordinance that prescribes the term, fees and conditions for use. B. The annual fee for use of streets or public places authorized by a consent agreement or franchise agreement shall be set by the ordinance approving the agreement and shall be consistent with limits set by State law. Existing franchise agreements shall continue in effect until expiration dates in the agreements. Franchise and consent fees shall not be in lieu of or be credited against business license taxes unless specifically provided by the franchise or consent agreement. Section 18. Confidentiality. Except in accordance with proper judicial order or as otherwise provided by law, it shall be unlawful for any official or employee to divulge or make known in any manner the amount of income or any particulars set forth or disclosed in any report or return required under this ordinance. Nothing in this section shall be construed to prohibit the publication of statistics so classified as to prevent the identification of particular reports or returns. Any license data may be shared with other public officials or employees in the performance of their duties, whether or not those duties relate to enforcement of the license ordinance. Section 19. Violations. Any person violating any provision of this ordinance shall be deemed guilty of an offense and shall be subject to a fine of up to $500.00 or imprisonment for not more than thirty (30) days or both, upon conviction. Each day of violation shall be considered a separate offense. Punishment for violation shall not relieve the offender of liability for delinquent taxes, penalties and costs provided for herein. Section 20. Severability. A determination that any portion of this ordinance is invalid or unenforceable shall not affect the remaining portions. Section 21. Classification and Rates. A. The Class Structure Model by the North American Industry Classification System code, designated as Appendix B to this ordinance, may be amended by the Council from time to time, and current copies shall be filed in the office of the municipal clerk. Appendix B is a tool for classification and not a limitation on businesses subject to a license tax. The License Official shall determine the proper class for a business according to the applicable NAICS code. B. The license tax for each class of businesses subject to this ordinance shall be computed in accordance with the Rate Schedule, designated as Appendix A to this ordinance, which may be amended by the Council from time to time and a current copy filed in the office of the municipal clerk. Section 22. Exceptions The License Official may waive business license fees for individuals under the age of 18 years of age who are engaged in seasonal landscaping, general labor or school / civic related fund-raising events. RATE SCHEDULE INCOME: $0 - $2,000 INCOME OVER $2,000 RATE CLASS BASE RATE Rate per Thousand or fraction thereof 1 $ 50.00 $ See Appendix A1 8.1 $ 50.00 $ See Appendix A1 8.2 $ set by State statute 8.3 MASC Telecommunications 8.41 $ 50.00 $ See Appendix A1 8.61 $ 150.00 $ See Appendix A1 8.7 MASC Insurance 8.81 $12.50 + $12.50 per machine 8.10 $ 50.00 + $5.00 per table $ See Appendix A1 NON-RESIDENT RATES Unless otherwise specifically provided, all taxes and rates shall be doubled for nonresidents and itinerants having no fixed principal place of business within the municipality. DECLINING RATES Declining Rates apply in all Classes for gross income in excess of $1,000,000, unless otherwise specifically provided for in this ordinance. Gross Income in $ Millions Percent of Class Rate for each additional $1,000 0 - 1 100% 2 – 3 80% OVER 4 60% CLASS 8 RATES Each NAICS Number designates a separate sub-classification. The businesses in this section are treated as separate and individual subclasses due to provisions of State law, regulatory requirements, service burdens, tax equalization considerations, etc., which are deemed to be sufficient to require individually determined rates. Non-resident rates do not apply except where indicated. 8.1 NAICS 230000 - Contractors, Construction, All Types [Non-resident rates apply] Having permanent place of business within the municipality Minimum on first $2,000..............................................................................$ 50.00 PLUS Each additional 1,000.........……………………………..………..........................$ 0.25 A trailer at the construction site or structure in which the contractor temporarily resides is not a permanent place of business under this ordinance. The total tax for the full amount of the contract shall be paid prior to commencement of work and shall entitle contractor to complete the job without regard to the normal license expiration date. An amended report shall be filed for each new job and the appropriate additional license fee per $1,000 of the contract amount shall be paid prior to commencement of new work. Only one base tax shall be paid in a license year. No contractor shall be issued a business license until all state and municipal qualification examination and trade license requirements have been met. Each contractor shall post a sign in plain view on each job identifying the contractor with the job. Sub-contractors shall be licensed on the same basis as general or prime contractors for the same job. No deductions shall be made by a general or prime contractor for value of work performed by a sub-contractor. No contractor shall be issued a business license until all performance and indemnity bonds required by the Building Code have been filed and approved. Zoning permits must be obtained when required by the Zoning Ordinance. Each prime contractor shall file with the License Official a list of sub-contractors furnishing labor or materials for each project. 8.2 NAICS 482 - Railroad Companies – (See S.C. Code § 12-23-210) For the first 1000 inhabitants of the City ..................................................................$_____ For each additional 1000 inhabitants according to the last US census .................... $_____ [Census population: _______. Tax = $______] 8.3 NAICS 5171, 5172 - Telephone Companies: A. Notwithstanding any other provisions of the Business License Ordinance, the business license tax for "retail telecommunications services", as defined in S. C. Code Section 58-9-2200, shall be at the maximum rate authorized by S. C. Code Section 58-9-2220, as it now provides or as provided by amendment. The business license tax year shall begin on January 1 of each year. Declining rates shall not apply. B. In conformity with S.C. Code Section 58-9-2220, the business license tax for "retail telecommunications services" shall apply to the gross income derived from the sale of retail telecommunications services for the preceding calendar or fiscal year which either originate or terminate in the municipality and which are charged to a service address within the municipality regardless of where these amounts are billed or paid and on which a business license tax has not been paid to another municipality. The measurement of the amounts derived from the retail sale of mobile telecommunications services shall include only revenues from the fixed monthly recurring charge of customers whose service address is within the boundaries of the municipality. For a business in operation for less than one year, the amount of business license tax shall be computed on a twelve-month projected income. C. The business license tax for "retail telecommunications services" shall be due on January 1 of each year and payable by January 31 of that year, without penalty. D. The delinquent penalty shall be five percent (5 %) of the tax due for each month, or portion thereof, after the due date until paid. E. Exemptions in the business license ordinance for income from business in interstate commerce are hereby repealed. Properly apportioned gross income from interstate commerce shall be included in the gross income for every business subject to a business license tax. F. Nothing in this Ordinance shall be interpreted to interfere with continuing obligations of any franchise agreement or contractual agreement in the event that the franchise or contractual agreement should expire after December 31, 2003. G. All fees collected under such a franchise or contractual agreement expiring after December 31, 2003, shall be in lieu of fees or taxes which might otherwise be authorized by this Ordinance. H. As authorized by S. C. Code Section 5-7-300, the Agreement with the Municipal Association of South Carolina for collection of current and delinquent license taxes from telecommunications companies pursuant to S. C. Code Section 58-9-2200 shall continue in effect. 8.41 NAICS 423930 - Junk or Scrap Dealers [Non-resident rates apply] Minimum on first $ 2,000 ...............................................................................$ 50.00 PLUS Per $1,000, or fraction, over $ 2.000………. .................................. See Appendix A1 8.42 NAICS 522298 - Pawn Brokers - All Types Minimum on first $ 2,000 .............................................................................. $25.00 PLUS Per $1,000, or fraction, over $ 2,000 .................................... See Appendix A1 8.5 NAICS 4411, 4412 - Automotive, Motor Vehicles, Boats, Farm Machinery or Retail (except auto supply stores - see 4413) Minimum on first $ 2,000 .............................................................................$ 50.00 PLUS Per $1,000, or fraction, over $ 2,000..........................................See Appendix A1 One sales lot not more than 400 feet from the main showroom may be operated under this license provided that proceeds from sales at the lot are included in gross receipts at the main office when both are operated under the same name and ownership. Gross receipts for this classification shall include value of trade-ins. Dealer transfers or internal repairs on resale items shall not be included in gross income. NAICS 454390 - Peddlers, Solicitors, Canvassers, Door-To-Door Sales direct retail sales of merchandise. [Non-resident rates apply] 8.61 Regular activities- Minimum on first $ 2,000 ......................48 hour permit........................................$125.00 Applicant for a license to sell on private property must provide written authorization from the property owner to use the intended location. 8.7 NAICS 5241 - Insurance Companies: Except as to fire insurance, “gross premiums” means gross premiums written for policies for property or a risk located within the municipality. In addition, “gross premiums” shall include premiums written for policies that are sold, solicited, negotiated, taken, transmitted, received, delivered, applied for, produced or serviced by (1) the insurance company’s office located in the municipality, (2) the insurance company’s employee conducting business within the municipality, or (3) the office of the insurance company’s licensed or appointed producer (agent) conducting business within the municipality, regardless of where the property or risk is located, provided no tax has been paid to another municipality in which the property or risk is located based on the same premium. Solicitation for insurance, receiving or transmitting an application or policy, examination of a risk, collection or transmitting of a premium, adjusting a claim, delivering a benefit, or doing any act in connection with a policy or claim shall constitute conducting business within the municipality, regardless of whether or not an office is maintained in the municipality. As to fire insurance, “gross premiums” means gross premiums (1) collected in the municipality, and/or (2) realized from risks located within the limits of the municipality. Gross premiums shall include all business conducted in the prior calendar year. Gross premiums shall include new and renewal business without deductions for any dividend, credit, return premiums or deposit. Declining rates shall not apply. NAICS 52411 - Life, Health and Accident ......................................... 0.75% of Gross Premiums NAICS 524126 - Fire and Casualty.......................................................... 2% of Gross Premiums NAICS 524127 - Title Insurance ............................................................. 2% of Gross Premiums Notwithstanding any other provisions of this ordinance, license taxes for insurance companies shall be payable on or before May 31 in each year without penalty. The penalty for delinquent payments shall be 5% of the tax due per month, or portion thereof, after the due date until paid. Any exemptions in the business license ordinance for income from business in interstate commerce are hereby repealed. Gross income from interstate commerce shall be included in the gross income for every business subject to a business license tax. Pursuant to S.C. Code Ann. §§ 38-45-10 and 38-45-60, the Municipal Association of South Carolina, by agreement with the municipality, is designated the municipal agent for purposes of administration of the municipal broker’s premium tax. The agreement with the Association for administration and collection of current and delinquent license taxes from insurance companies as authorized by S.C. Code § 5-7-300. [The South Carolina General Assembly, in order to ensure consistency with the federal Non-admitted and Reinsurance Reform Act of 2010 (“NRRA”), ratified an act (Rat# 283) on June 28, 2012, amending S.C. Code §§ 38-7-16 and 38-45-10 through 38-45-195. The act establishes a blended broker’s premium tax rate of 6 percent comprised of a 4 percent state broker’s premium tax and a 2 percent municipal broker’s premium tax. The act states a municipality may not impose on brokers of non-admitted insurance in South Carolina an additional license fee or tax based upon a percentage of premiums.] NAICS 713120 - Amusement Machines, coin operated (except gambling) - Music machines, juke boxes, kiddy rides, video games, pin tables with levers, and other amusement machines with or without free play feature licensed by SC Department of Revenue pursuant to S.C. Code §12-21-2720(A)(1) and (A)(2) – [Type I and Type II] 8.81 Operator of machine ........................................................................$12.50/machine PLUS ......................................................................................................................$12.50 business license for operation of all machines (not on gross income).[§12-21-2746] 8.82 Distributor selling or leasing machines (not licensed by the State as an operator pursuant to §12-21-2728) - [Nonresident rates apply.] Minimum on first $2,000 .............................................................................. $50.00 PLUS Per $1,000 or fraction over $ 2,000......................................... See Appendix A1 NAICS 713290 - Amusement Machines, coin operated, non-payout Amusement machines of the non-payout type or in-line pin game licensed by SC Department of Revenue pursuant to S.C. Code §12-21-2720(A)(3) [Type III] 8.83 Operator of machine .........................................................................$12.50/machine PLUS for operation of all machines (not on gross income). [§12-21-2720(B)] 8.82 -. Distributor selling or leasing machines (not licensed by the State as an operator pursuant to §12-21-2728) - [Nonresident rates apply.] -Minimum on first $2,000.................. $50.00 PLUS Per $1,000, or fraction, over $ 2,000 ................................................. See Appendix A1 8.91 NAICS 713290 - Bingo halls, parlors, Event Hall– Minimum on first $2,000 ..............................................................................$150.00 PLUS Per $1,000, or fraction, over $ 2,000 .............................................. See Appendix A1 8.92 NAICS 711190 - Carnivals and Circuses - Minimum on first $2,000 ..............................................................................$100.00 8.93 NAICS 722410 - Drinking Places, bars, lounges, cabarets (Alcoholic beverages consumed on premises) Per $1,000, or fraction, over $2,000 ............................................. See Appendix A1 License must be issued in the name of the individual who has been issued a State alcohol, beer or wine permit or license and will have actual control and management of the business. 8.10 NAICS 713990 - Billiard or Pool Rooms, all types ............... $12.50 stamp/table PLUS Minimum on first $2,000 ...............................................................................$50.00 PLUS Per $1,000, or fraction, over $2,000................................................ See Appendix A1 NAICS 22112 - Electric Power Distribution………………………… See Consent or Franchise NAICS 22121 – Natural Gas Distribution ..............………………. ...See Consent or Franchise NAICS 517110 – Television: Cable or Pay Services using public streets..........................................................................See Franchise Appendix A1 Fee on Gross Receipts: First 2,000 or fractional part $ 50.00 . Per $1,000 or fraction over $ 2,000 $0.15 Group VI Group VII Group VIII

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Internal Revenue Bulletin: 2005-4 Highlights of This Issue EMPLOYEE PLANS SELF-EMPLOYMENT TAX The IRS Mission Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 T.D. 9168 Rev. Rul. 2005-4 Part III. Administrative, Procedural, and Miscellaneous Notice 2005-8 Part IV. Items of General Interest REG-139683-04 Announcement2005-2 Announcement 2005-6 Definition of Terms and Abbreviations Numerical Finding List Effect of Current Actions on Previously Published Items Finding List of Current Actions on Previously Published Items How to get the Internal Revenue Bulletin INTERNAL REVENUE BULLETIN CUMULATIVE BULLETINS ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET INTERNAL REVENUE BULLETINS ON CD-ROM We Welcome Comments About the Internal Revenue Bulletin These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. Rev. Rul. 2005-4 Rev. Rul. 2005-4 Interest suspension; time sensitive penalties. Section 6404(g) of the Code suspends interest and time sensitive penalties, additions to tax and additional amounts with respect to an increased tax liability reported on an individual's amended income tax return filed more than 18 months after the date that is the later of (1) the original due date of the return (without regard to extensions) or (2) the date on which the taxpayer timely filed the return. T.D. 9168 T.D. 9168 Final regulations under section 59 of the Code provide rules governing the time and manner for making and revoking an election to treat certain qualified expenditures which are otherwise deductible under the Code as amortized over the applicable period provided for in the statute. The regulations provide that the election may be made for any specific dollar amount of the qualified expenditures, but cannot be made by reference to a formula. To revoke the election, a taxpayer must receive the permission of the Commissioner. Permission will only be granted in rare and unusual circumstances. If permission is granted, the revocation will be effective in the taxpayer's earliest open taxable year affected by the election. Final, temporary, and proposed regulations under section 1374 of the Code provide that (a) section 1374(d)(8) applies to any transaction described in that section that occurs on or after December 27, 1994, regardless of the date of the S corporation's election under section 1362; and (b) for purposes of the Tax Reform Act of 1986, as amended, a corporation's most recent S election, not an earlier election that has been revoked or terminated, determines whether or not it is subject to current section 1374. REG-139683-04 REG-139683-04 Notice 2005-8 Notice 2005-8 This notice states that a partnership's contributions to a partner's Health Savings Account (HSA) may be treated as distributions under section 731 of the Code or as guaranteed payments under section 707(c). HSA contributions treated as section 731 distributions are not deductible by the partnership, and may be deductible by the partner under sections 223(a) and 62(a)(19) and are excluded from net earnings from self-employment. HSA contributions treated as guaranteed payments under section 707(c) derived from the partnership's trade or business and for services rendered to the partnership may be deductible by the partnership, are included in the partner's gross income, may be deductible by the partner under sections 223(a) and 62(a)(19), and are included in net earnings from self-employment. An S corporation's contributions to 2-percent shareholder-employee's HSA for services rendered to the S corporation are treated as section 707(c) guaranteed payments. For employment tax purposes, the 2-percent shareholder-employee is treated as an employee subject to FICA, unless the requirements of section 3121(a)(2)(B) are met. Announcement 2005-6 Announcement 2005-6 In July 2004, the Service issued a revision to Form 656, Offer in Compromise. The purpose of this announcement is to highlight the addition of a “check-the-box” disclosure authorization (new Item 14), which allows the taxpayer to designate someone to assist him or her while the Service is processing the offer. Weighted average interest rate update; corporate bond indices; 30-year Treasury securities. The weighted average interest rate for January 2005 and the resulting permissible range of interest rates used to calculate current liability and to determine the required contribution are set forth. A list is provided of organizations now classified as private foundations. Harlem Agencies for Neighborhood Development, Inc., of New York, NY, no longer qualifies as an organization to which contributions are deductible under section 170 of the Code. Final regulations under section 330 of title 31 of the U.S. Code revise regulations governing practice before the IRS (Circular 230) that set forth best practices for tax advisors providing advice to taxpayers relating to federal tax issues or submissions to the Internal Revenue Service and modify the standards for certain tax shelter opinions. Proposed regulations under section 330 of title 31 of the U.S. Code amend provisions of Circular 230 (Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, etc.) relating to state or local bond opinions. A public hearing is scheduled for March 22, 2005. Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are compiled semiannually into Cumulative Bulletins, which are sold on a single-copy basis. It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same. The Bulletin is divided into four parts as follows: Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986. Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforcement). Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements. The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period. Optional 10-Year Writeoff of Certain Tax Preferences 26 CFR Parts 1 and 602 Internal Revenue Service (IRS), Treasury. Final regulation. This document contains final regulations relating to the optional 10-year writeoff of certain tax preference items under section 59(e) of the Internal Revenue Code (Code). The final regulations affect taxpayers who utilize section 59(e) for the optional 10-year writeoff of certain tax preferences. These final regulations provide guidance on the time and manner of making an election under section 59(e). The regulations also provide guidance on revoking an election under section 59(e). The regulations reflect changes to the law made by the Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 1988, and the Omnibus Budget Reconciliation Act of 1989. Effective Date: These regulations are effective December 22, 2004. Applicability Date: These regulations apply to a section 59(e) election made for a taxable year ending, or a request to revoke a section 59(e) election submitted, on or after December 22, 2004. The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1903. Responses to this collection of information are required to obtain the benefit of the section 59(e) election. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget. The estimated annual burden per respondent is one hour. Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. This document contains amendments to 26 CFR part 1 under section 59(e) of the Code. Section 59(e)(1) allows taxpayers to elect to deduct any qualified expenditure ratably over a 10-year period (3-year period in the case of circulation expenditures described in section 173) beginning with the taxable year in which the expenditure was made (or, in the case of a qualified expenditure under section 263(c), over the 60-month period beginning with the month in which such expenditure was paid or incurred). Section 59(e)(2) defines qualified expenditure as any amount that, but for an election under section 59(e), would have been allowed as a deduction (determined without regard to section 291) for the taxable year in which paid or incurred under section 173 (relating to circulation expenditures), section 174 (relating to research and experimental expenditures), section 263(c) (relating to intangible drilling and development expenditures), section 616(a) (relating to development expenditures), or section 617(a) (relating to mining exploration expenditures). Section 59(e)(4)(A) states that an election under section 59(e) (section 59(e) election) may be made with respect to any portion of any qualified expenditure. The legislative history of section 59(e) suggests that this allows a section 59(e) election to be made “dollar for dollar.” See H.R. Rep. 99-426, 99th Cong., 1st Sess. 327 (1985), 1986-3 (Vol. 2) C.B. 1, 327; S. Rep. No. 99-313, 99th Cong., 2d Sess. 539 (1986), 1986-3 (Vol. 3) C.B. 1, 539. Section 59(e)(4)(B) states that a section 59(e) election may only be revoked with the consent of the Secretary. Provisions similar to those currently contained in section 59(e) were originally enacted as section 58(i) under the Tax Equity and Fiscal Responsibility Act of 1982 (Public Law 97-248; 96 Stat. 324). Under section 58(i)(1), the optional 10-year writeoff was available only to individuals. Section 58(i)(5)(C) directed the Secretary to promulgate regulations governing the time and manner for making an election under section 58(i) (section 58(i) election). Section 5f.0(a)(2)(i)(A) and (B) of the temporary Income Tax Regulations that were promulgated under section 58(i) required that a section 58(i) election be made by the later of the due date (including extensions) of the income tax return for the taxable year for which the election was to be effective, or April 15, 1983. T.D. 7870, 1983-1 C.B. 13 [48 FR 1486]. Section 5f.0(a)(3) provided that a section 58(i) election was made by attaching a statement to the income tax return (or amended return) for the taxable year in which the election was made. Section 5f.0 was redesignated as §301.9100-5T by T.D. 8435, 1992-2 C.B. 324 [57 FR 43893], on October 15, 1992. Section 59(e) was enacted as part of the Tax Reform Act of 1986 (Public Law 99-514; 100 Stat. 2085) and, unlike section 58(i), is not limited to individuals. While both the Senate Finance Committee Report and the House Ways and Means Committee Report state that the time and manner of the election would be governed by regulations, Congress did not include a provision similar to former section 58(i)(5)(C) directing the Secretary to promulgate regulations governing the time and manner for making a section 59(e) election. See H.R. Rep. No. 99-426, 99th Cong., 1st Sess. 327 (1985), 1986-3 (Vol. 2) C.B. 1, 327; S. Rep. No. 99-313, 99th Cong., 2d Sess. 539 (1986), 1986-3 (Vol. 3) C.B. 1, 539. A notice of proposed rulemaking (REG-124405-03, 2004-35 I.R.B. 394 [69 FR 43367]) was published in the Federal Register on July 20, 2004. Two requests for a public hearing were received. A public hearing was held on December 7, 2004. The IRS received written and electronic comments responding to the notice of proposed rulemaking. After consideration of all the comments, the proposed regulations are adopted as amended by this Treasury decision. The revisions are discussed below. Summary of Comments and Explanation of Revisions Several commentators recommended changes regarding the information taxpayers would be required to submit as part of their section 59(e) election. Specifically, commentators requested that the IRS reconsider §1.59-1(b)(1)(ii) and (iii) of the proposed regulations, which would require taxpayers to identify (i) the type and amount, for each activity or project, of qualified expenditures identified in section 59(e)(2) the taxpayer elects to deduct ratably over the applicable period described in section 59(e)(1), and (ii) a description of each specific activity or project to which the qualified expenditures relate. The commentators suggest that the majority of taxpayers who incur research and experimentation expenditures under section 174(a) and make a section 59(e) election with respect to such expenditures do not currently maintain records on a project-by-project basis. As a result, the commentators stated that requiring taxpayers to account for their section 59(e) qualified expenditures on a project-by-project basis would be a financial and administrative burden. Some of the commentators also discussed section 1016(a)(20), which provides that proper adjustment in respect of the property shall in all cases be made for amounts allowed as deductions under section 59(e) (relating to optional 10-year writeoff of certain tax preferences). Compliance with section 1016(a)(20) requires that taxpayers be able to account for their section 59(e) expenditures through appropriate basis adjustments for each property, project, or activity. Sections 1.59-1(b)(1)(ii) and (iii) of the proposed regulations were intended to improve compliance with section 1016(a)(20) by requiring that section 59(e) qualified expenditures be allocated among the properties, projects or activities to which they relate. Comments received regarding this provision indicate that, for taxpayers incurring section 174(a) expenditures, the basis rules of section 1016(a)(20) are only of importance when a project to which a section 59(e) election relates is disposed of, and that it is rare for a research project to be disposed of prior to the full amortization of the allocable section 59(e) qualified expenditures. As such, the commentators argue that the burden of requiring taxpayers to identify on a section 59(e) election the type and amount of qualified expenditures for each activity or project greatly exceeds the potential harm caused by non-compliance with section 1016(a)(20). Having fully considered all comments received, the final regulations are modified to reflect the comments discussed above. Taxpayers making a section 59(e) election will not be required to identify on the election the type and amount of qualified expenditures for each activity or project nor will they be required to provide a description of each specific activity or project to which the qualified expenditures relate. Instead, taxpayers will be required only to identify the type and amount of qualified expenditures identified in section 59(e)(2) that the taxpayer elects to deduct ratably over the applicable period described in section 59(e)(1). However, taxpayers remain responsible for full compliance with the requirements of section 1016(a)(20). Specifically, taxpayers who allocate their section 59(e) expenditures to reduce the gain otherwise recognized on the disposition of a property, project, or activity must maintain books and records sufficient to support that allocation. The preamble to the proposed regulations stated that, with respect to an otherwise valid section 59(e) election filed for a taxable year ending prior to the effective date of the final regulations, such election would not be challenged by the IRS merely because the election was made later than the date prescribed by law for filing the taxpayer’s original income tax return (including any extensions of time) for the taxable year in which the amortization of the qualified expenditures subject to the section 59(e) election begins. One commentator requested guidance on what the IRS considers an otherwise valid section 59(e) election filed for a tax year ending prior to the effective date of the final regulations. Although the IRS will treat a section 59(e) election prepared in a manner described in the final regulations as sufficient for a tax year ending prior to the effective date of the final regulations, because the final regulations only apply prospectively the final regulations do not provide guidance on what constitutes an otherwise valid section 59(e) election filed for a tax year prior to the effective date of the final regulations. Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the reporting burden, as discussed earlier in this preamble, is expected to be insignificant. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Adoption of Amendments to the Regulations Accordingly, 26 CFR parts 1 and 602 are amended as follows: Paragraph 1. The authority citation for part 1 reads, in part, as follows: Authority: 26 U.S.C. 7805, * * * Par. 2. Section 1.59-1 is added to read as follows: §1.59-1 Optional 10-year writeoff of certain tax preferences. (a) In general. Section 59(e) allows any qualified expenditure to which an election under section 59(e) applies to be deducted ratably over the 10-year period (3-year period in the case of circulation expenditures described in section 173) beginning with the taxable year in which the expenditure was made (or, in the case of intangible drilling and development costs deductible under section 263(c), over the 60-month period beginning with the month in which the expenditure was paid or incurred). (b) Election—(1) Time and manner of election. An election under section 59(e) shall only be made by attaching a statement to the taxpayer’s income tax return (or amended return) for the taxable year in which the amortization of the qualified expenditures subject to the section 59(e) election begins. The statement must be filed no later than the date prescribed by law for filing the taxpayer’s original income tax return (including any extensions of time) for the taxable year in which the amortization of the qualified expenditures subject to the section 59(e) election begins. Additionally, the statement must include the following information — (i) The taxpayer’s name, address, and taxpayer identification number; and (ii) The type and amount of qualified expenditures identified in section 59(e)(2) that the taxpayer elects to deduct ratably over the applicable period described in section 59(e)(1). (2) Elected amount. A taxpayer may make an election under section 59(e) with respect to any portion of any qualified expenditure paid or incurred by the taxpayer in the taxable year to which the election applies. An election under section 59(e) must be for a specific dollar amount and the amount subject to an election under section 59(e) may not be made by reference to a formula. The amount elected under section 59(e) is properly chargeable to a capital account under section 1016(a)(20), relating to adjustments to basis of property. (c) Revocation—(1) In general. An election under section 59(e) may be revoked only with the consent of the Commissioner. Such consent will only be granted in rare and unusual circumstances. The revocation, if granted, will be effective in the first taxable year in which the section 59(e) election was applicable. However, if the period of limitations for the first taxable year the section 59(e) election was applicable has expired, the revocation, if granted, will be effective in the earliest taxable year for which the period of limitations has not expired. (2) Time and manner for requesting consent. A taxpayer requesting the Commissioner’s consent to revoke a section 59(e) election must submit the request prior to the end of the taxable year the applicable amortization period described in section 59(e)(1) ends. The application for consent to revoke the election must be submitted to the Internal Revenue Service in the form of a letter ruling request. (3) Information to be provided. A request to revoke a section 59(e) election must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. (4) Treatment of unamortized costs. The unamortized balance of the qualified expenditures subject to the revoked section 59(e) election as of the first day of the taxable year the revocation is effective is deductible in the year the revocation is effective (subject to the requirements of any other provision under the Code, regulations, or any other published guidance) and the taxpayer will be required to amend any federal income tax returns affected by the revocation. (d) Effective date. These regulations apply to a section 59(e) election made for a taxable year ending, or a request to revoke a section 59(e) election submitted, on or after December 22, 2004. PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 3. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 4. In §602.101, paragraph (b) is amended by adding an entry in numerical order to the table to read as follows: §602.101 OMB Control numbers. (b) * * * CFR part or section where identified and described Current OMB Control No. 1.59-1 1545-1903 Mark E. Matthews, Deputy Commissioner for Services and Enforcement. Approved December 15, 2004. Gregory F. Jenner, Acting Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on December 21, 2004, 8:45 a.m., and published in the issue of the Federal Register for December 22, 2004, 69 F.R. 76614) Drafting Information The principal author of these final regulations is Eric B. Lee of the Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development. Regulations Governing Practice Before the Internal Revenue Service Office of the Secretary, Treasury. Final regulations. This document contains final regulations revising the regulations governing practice before the Internal Revenue Service (Circular 230). These regulations affect individuals who practice before the Internal Revenue Service. These final regulations set forth best practices for tax advisors providing advice to taxpayers relating to Federal tax issues or submissions to the IRS. These final regulations also provide standards for covered opinions and other written advice. Applicability Date: For dates of applicability, see §§10.33(c), 10.35(g), 10.36(b), 10.37(b), 10.38(b), 10.52(b) and 10.93. Heather L. Dostaler at (202) 622-4940, or Brinton T. Warren at (202) 622-7800 (not toll-free numbers). The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1871.The collections of information (disclosure requirements) in these final regulations are in §10.35(e). Section 10.35(e) requires a practitioner providing a covered opinion to make certain disclosures in the beginning of marketed opinions, limited scope opinions and opinions that fail to conclude at a confidence level of at least more likely than not. In addition, certain relationships between the practitioner and a person promoting or marketing a tax shelter must be disclosed. A practitioner may be required to make one or more disclosures. The collection of this material helps to ensure that taxpayers who receive a tax shelter opinion are informed of any facts or circumstances that might limit the use of the opinion. The collection of information is mandatory. Estimated total annual disclosure burden is 13,333 hours. Estimated annual burden per disclosing practitioner varies from 5 to 10 minutes, depending on individual circumstances, with an estimated average of 8 minutes. Estimated number of disclosing practitioners is 100,000. Estimated annual frequency of responses is on occasion. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number. Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503. Books or records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Section 330 of title 31 of the United States Code authorizes the Secretary of the Treasury to regulate practice before the Treasury Department. The Secretary has published the regulations in Circular 230 (31 CFR part 10). On December 30, 2003, the Treasury Department and the IRS published in the Federal Register (68 FR 75186) proposed amendments to the regulations (REG-122379-02, 2004-5 I.R.B. 392) (the proposed regulations) to set forth best practices for tax advisors providing advice to taxpayers relating to Federal tax issues or submissions to the IRS and to modify the standards for certain tax shelter opinions. A public hearing was held on February 19, 2004. Written public comments responding to the proposed regulations were received. After thorough consideration of the public comments, the proposed regulations are adopted as revised by this Treasury decision. Explanation of Provisions Tax advisors play a critical role in the Federal tax system, which is founded on principles of compliance and voluntary self-assessment. The tax system is best served when the public has confidence in the honesty and integrity of the professionals providing tax advice. To restore, promote, and maintain the public’s confidence in those individuals and firms, these final regulations set forth best practices applicable to all tax advisors. These regulations also provide mandatory requirements for practitioners who provide covered opinions. The scope of these regulations is limited to practice before the IRS. These regulations do not alter or supplant other ethical standards applicable to practitioners. On October 22, 2004, the President signed the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418) (the Act), which amended section 330 of title 31 of the United States Code to clarify that the Secretary may impose standards for written advice relating to a matter that is identified as having a potential for tax avoidance or evasion. The Act also authorizes the Treasury Department and the IRS to impose a monetary penalty against a practitioner who violates any provision of Circular 230. These final regulations do not reflect amendments made by the Act. The Treasury Department and the IRS expect to propose additional regulations implementing the Act’s provisions. The final regulations adopt the best practices set forth in the proposed regulations with modifications. These best practices are aspirational. A practitioner who fails to comply with best practices will not be subject to discipline under these regulations. Similarly, the provision relating to steps to ensure that a firm’s procedures are consistent with best practices, now set forth in §10.33(b), is aspirational. Although best practices are solely aspirational, tax professionals are expected to observe these practices to preserve public confidence in the tax system. Standards for Covered Opinions The opinion standards of §10.35 are adopted with modifications. The provisions of §10.35 in the final regulations are reorganized to clarify the provisions. Opinions subject to §10.35 are defined as covered opinions. Definition of Covered Opinion Under the final regulations, the definition of a covered opinion includes written advice (including electronic communications) that concerns one or more Federal tax issue(s) arising from: (1) a listed transaction; (2) any plan or arrangement, the principal purpose of which is the avoidance or evasion of any tax; or (3) any plan or arrangement, a significant purpose of which is the avoidance or evasion of tax if the written advice (A) is a reliance opinion, (B) is a marketed opinion, (C) is subject to conditions of confidentiality, or (D) is subject to contractual protection. A reliance opinion is written advice that concludes at a confidence level of at least more likely than not that one or more significant Federal tax issues would be resolved in the taxpayer’s favor. Written advice will not be treated as a reliance opinion if the practitioner prominently discloses in the written advice that it was not written to be used and cannot be used for the purpose of avoiding penalties. Similarly, written advice generally will not be treated as a marketed opinion if it does not concern a listed transaction or a plan or arrangement having the principal purpose of avoidance or evasion of tax and the written advice contains this disclosure.The Treasury Department and the IRS intend to amend 26 CFR 1.6664-4 to clarify that a taxpayer may not rely upon written advice that contains this disclosure to establish the reasonable cause and good faith defense to the accuracy-related penalties. Written advice regarding a plan or arrangement having a significant purpose of tax avoidance or evasion is excluded from the definition of a covered opinion if the written advice concerns the qualification of a qualified plan or is included in documents required to be filed with the Securities and Exchange Commission. The final regulations also adopt an exclusion for preliminary advice if the practitioner is reasonably expected to provide subsequent advice that satisfies the requirements of the regulations. Written advice that is not a covered opinion for purposes of §10.35 is subject to the standards set forth in new §10.37. Municipal Bond Opinions After careful consideration, the Treasury Department and the IRS have concluded that practitioners rendering opinions concerning the tax treatment of municipal bonds should be subject to the same professional standards that are applicable to all other practitioners. The standards for certain opinions concerning the tax treatment of municipal bonds (State or local bond opinions) that are included in offering materials that otherwise would be covered opinions are being issued separately in proposed form. The proposed standards will require practitioners to exercise the same degree of diligence with respect to ascertaining the relevant facts and discussing the significant Federal tax issues, but will take into account the unique circumstances of the municipal bond market. To give bond practitioners an opportunity to comment on the proposed standards for State or local bond opinions, opinions that are included in offering materials, including an official statement, are excluded from the definition of covered opinions in these final regulations. Thus, State or local bond opinions included in offering materials will not be subject to the opinion standards of §10.35 or proposed §10.39 until 120 days after the proposed regulations are finalized. The exclusion for State or local bond opinions applies only to the requirements for covered opinions set forth in §10.35. State or local bond opinions are subject to the standards set forth in §10.37 relating to requirements for other written advice, and practitioners who prepare bond opinions must comply with any other applicable requirement provided in Circular 230. Requirements for Covered Opinions In general, the requirements for all covered opinions are adopted as proposed. The final regulations provide that a practitioner providing a covered opinion, including a marketed opinion, must not assume that a transaction has a business purpose or is potentially profitable apart from tax benefits, or make an assumption with respect to a material valuation issue. In general, the required disclosures of §10.35(e) are adopted as proposed. These disclosures ensure that taxpayers receive information that is necessary to their evaluation of, and reliance on, a covered opinion. Requirements for other written advice The final regulations also set forth requirements for written advice that is not a covered opinion. Under §10.37, a practitioner must not give written advice if the practitioner: (1) bases the written advice on unreasonable factual or legal assumptions; (2) unreasonably relies upon representations, statements, findings or agreements of the taxpayer or any other person; (3) fails to consider all relevant facts; or (4) takes into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be settled. Section 10.37, unlike §10.35, does not require that the practitioner describe in the written advice the relevant facts (including assumptions and representations), the application of the law to those facts, or the practitioner’s conclusion with respect to the law and the facts. The scope of the engagement and the type and specificity of the advice sought by the client, in addition to all other facts and circumstances, will be considered in determining whether a practitioner has failed to comply with the requirements of §10.37. Procedures to Ensure Compliance In general, the procedures to ensure compliance with requirements of §10.35 are adopted as proposed and set forth in §10.36. Advisory Committees on the Integrity of Tax Professionals Newly designated §10.38, formerly §10.37 in the proposed regulations, is adopted as proposed with the following modifications. Section 10.38 is modified to clarify that an advisory committee may not make recommendations about actual practitioner cases, or have access to information pertaining to actual cases. The section also is modified to clarify that the Director of the Office of Professional Responsibility should ensure that membership of these committees is balanced among those individuals who practice as attorneys, accountants and enrolled agents. Applicability Dates To eliminate any adverse impact that the adoption of the new requirements for covered opinions or other written advice could have on pending or imminent transactions, the applicability date of the standards for covered opinions under §10.35 and other written advice under §10.37 (and the procedures to ensure compliance as they relate to covered opinions under §10.36) is June 20, 2005. It has been determined that this final rule is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. Persons authorized to practice before the IRS have long been required to comply with certain standards of conduct. The added disclosure requirements for tax shelter opinions imposed by these regulations will not have a significant economic impact on a substantial number of small entities because, as previously noted, the estimated burden of disclosures is minimal. Practitioners have the information needed to determine whether any of the disclosures will be required before the opinion is prepared and, for some disclosures, the regulations provide practitioners with the language to be included in the opinion. Therefore, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the proposed regulations preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses. Accordingly, 31 CFR part 10 is amended as follows: PART 10 — PRACTICE BEFORE THE INTERNAL REVENUE SERVICE Paragraph 1. The authority citation for subtitle A, part 10 continues to read as follows: [Authority: Sec. 3, 23 Stat. 258, secs. 2-12, 60 Stat. 237 et seq.; 5 U.S.C. 301, 500, 551-559; 31 U.S.C. 330, as amended by P.L. 108-357, 118 Stat. 1418; Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-1953 Comp., P. 1017.] Par. 2. Section 10.33 is revised to read as follows: §10.33 Best practices for tax advisors. (a) Best practices. Tax advisors should provide clients with the highest quality representation concerning Federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the Internal Revenue Service. In addition to compliance with the standards of practice provided elsewhere in this part, best practices include the following: (1) Communicating clearly with the client regarding the terms of the engagement. For example, the advisor should determine the client’s expected purpose for and use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered. (2) Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts. (3) Advising the client regarding the import of the conclusions reached, including, for example, whether a taxpayer may avoid accuracy-related penalties under the Internal Revenue Code if a taxpayer acts in reliance on the advice. (4) Acting fairly and with integrity in practice before the Internal Revenue Service. (b) Procedures to ensure best practices for tax advisors. Tax advisors with responsibility for overseeing a firm’s practice of providing advice concerning Federal tax issues or of preparing or assisting in the preparation of submissions to the Internal Revenue Service should take reasonable steps to ensure that the firm’s procedures for all members, associates, and employees are consistent with the best practices set forth in paragraph (a) of this section. (c) Applicability date. This section is effective after June 20, 2005. Par. 3. Sections 10.35, 10.36, 10.37 and 10.38 are added to subpart B to read as follows: §10.35 Requirements for covered opinions. (a) A practitioner who provides a covered opinion shall comply with the standards of practice in this section. (b) Definitions. For purposes of this subpart— (1) A practitioner includes any individual described in §10.2(e). (2) Covered opinion—(i) In general. A covered opinion is written advice (including electronic communications) by a practitioner concerning one or more Federal tax issues arising from— (A) A transaction that is the same as or substantially similar to a transaction that, at the time the advice is rendered, the Internal Revenue Service has determined to be a tax avoidance transaction and identified by published guidance as a listed transaction under 26 C.F.R. §1.6011-4(b)(2); (B) Any partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, the principal purpose of which is the avoidance or evasion of any tax imposed by the Internal Revenue Code; or (C) Any partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, a significant purpose of which is the avoidance or evasion of any tax imposed by the Internal Revenue Code if the written advice— (1) Is a reliance opinion; (2) Is a marketed opinion; (3) Is subject to conditions of confidentiality; or (4) Is subject to contractual protection. (ii) Excluded advice. A covered opinion does not include— (A) Written advice provided to a client during the course of an engagement if a practitioner is reasonably expected to provide subsequent written advice to the client that satisfies the requirements of this section; or (B) Written advice, other than advice described in paragraph (b)(2)(i)(A) of this section (concerning listed transactions) or paragraph (b)(2)(i)(B) of this section (concerning the principal purpose of avoidance or evasion) that— (1) Concerns the qualification of a qualified plan; (2) Is a State or local bond opinion; or (3) Is included in documents required to be filed with the Securities and Exchange Commission. (3) A Federal tax issue is a question concerning the Federal tax treatment of an item of income, gain, loss, deduction, or credit, the existence or absence of a taxable transfer of property, or the value of property for Federal tax purposes. For purposes of this subpart, a Federal tax issue is significant if the Internal Revenue Service has a reasonable basis for a successful challenge and its resolution could have a significant impact, whether beneficial or adverse and under any reasonably foreseeable circumstance, on the overall Federal tax treatment of the transaction(s) or matter(s) addressed in the opinion. (4) Reliance opinion—(i) Written advice is a reliance opinion if the advice concludes at a confidence level of more likely than not (a greater than 50 percent likelihood) that one or more significant Federal tax issues would be resolved in the taxpayer’s favor. (ii) For purposes of this section, written advice, other than advice described in paragraph (b)(2)(i)(A) of this section (concerning listed transactions) or paragraph (b)(2)(i)(B) of this section (concerning the principal purpose of avoidance or evasion), is not treated as a reliance opinion if the practitioner prominently discloses in the written advice that it was not intended or written by the practitioner to be used, and that it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (5) Marketed opinion—(i) Written advice is a marketed opinion if the practitioner knows or has reason to know that the written advice will be used or referred to by a person other than the practitioner (or a person who is a member of, associated with, or employed by the practitioner’s firm) in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayer(s). (ii) For purposes of this section, written advice, other than advice described in paragraph (b)(2)(i)(A) of this section (concerning listed transactions) or paragraph (b)(2)(i)(B) of this section (concerning the principal purpose of avoidance or evasion), is not treated as a marketed opinion if the practitioner prominently discloses in the written advice that— (A) The advice was not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer; (B) The advice was written to support the promotion or marketing of the transaction(s) or matter(s) addressed by the written advice; and (C) The taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. (6) Conditions of confidentiality. Written advice is subject to conditions of confidentiality if the practitioner imposes on one or more recipients of the written advice a limitation on disclosure of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of that practitioner’s tax strategies, regardless of whether the limitation on disclosure is legally binding. A claim that a transaction is proprietary or exclusive is not a limitation on disclosure if the practitioner confirms to all recipients of the written advice that there is no limitation on disclosure of the tax treatment or tax structure of the transaction that is the subject of the written advice. (7) Contractual protection. Written advice is subject to contractual protection if the taxpayer has the right to a full or partial refund of fees paid to the practitioner (or a person who is a member of, associated with, or employed by the practitioner’s firm) if all or a part of the intended tax consequences from the matters addressed in the written advice are not sustained, or if the fees paid to the practitioner (or a person who is a member of, associated with, or employed by the practitioner’s firm) are contingent on the taxpayer’s realization of tax benefits from the transaction. All the facts and circumstances relating to the matters addressed in the written advice will be considered when determining whether a fee is refundable or contingent, including the right to reimbursements of amounts that the parties to a transaction have not designated as fees or any agreement to provide services without reasonable compensation. (8) Prominently disclosed. An item required to be prominently disclosed must be set forth in a separate section at the beginning of the written advice in a bolded typeface that is larger than any other typeface used in the written advice. (9) State or local bond opinion. A State or local bond opinion is written advice with respect to a Federal tax issue included in any materials delivered to a purchaser of a State or local bond in connection with the issuance of the bond in a public or private offering, including an official statement (if one is prepared), that concerns only the excludability of interest on a State or local bond from gross income under section 103 of the Internal Revenue Code, the application of section 55 of the Internal Revenue Code to a State or local bond, the status of a State or local bond as a qualified tax-exempt obligation under section 265(b)(3) of the Internal Revenue Code, the status of a State or local bond as a qualified zone academy bond under section 1397E of the Internal Revenue Code, or any combination of the above. (c) Requirements for covered opinions. A practitioner providing a covered opinion must comply with each of the following requirements. (1) Factual matters. (i) The practitioner must use reasonable efforts to identify and ascertain the facts, which may relate to future events if a transaction is prospective or proposed, and to determine which facts are relevant. The opinion must identify and consider all facts that the practitioner determines to be relevant. (ii) The practitioner must not base the opinion on any unreasonable factual assumptions (including assumptions as to future events). An unreasonable factual assumption includes a factual assumption that the practitioner knows or should know is incorrect or incomplete. For example, it is unreasonable to assume that a transaction has a business purpose or that a transaction is potentially profitable apart from tax benefits. A factual assumption includes reliance on a projection, financial forecast or appraisal. It is unreasonable for a practitioner to rely on a projection, financial forecast or appraisal if the practitioner knows or should know that the projection, financial forecast or appraisal is incorrect or incomplete or was prepared by a person lacking the skills or qualifications necessary to prepare such projection, financial forecast or appraisal. The opinion must identify in a separate section all factual assumptions relied upon by the practitioner. (iii) The practitioner must not base the opinion on any unreasonable factual representations, statements or findings of the taxpayer or any other person. An unreasonable factual representation includes a factual representation that the practitioner knows or should know is incorrect or incomplete. For example, a practitioner may not rely on a factual representation that a transaction has a business purpose if the representation does not include a specific description of the business purpose or the practitioner knows or should know that the representation is incorrect or incomplete. The opinion must identify in a separate section all factual representations, statements or findings of the taxpayer relied upon by the practitioner. (2) Relate law to facts. (i) The opinion must relate the applicable law (including potentially applicable judicial doctrines) to the relevant facts. (ii) The practitioner must not assume the favorable resolution of any significant Federal tax issue except as provided in paragraphs (c)(3)(v) and (d) of this section, or otherwise base an opinion on any unreasonable legal assumptions, representations, or conclusions. (iii) The opinion must not contain internally inconsistent legal analyses or conclusions. (3) Evaluation of significant Federal tax issues—(i) In general. The opinion must consider all significant Federal tax issues except as provided in paragraphs (c)(3)(v) and (d) of this section. (ii) Conclusion as to each significant Federal tax issue. The opinion must provide the practitioner’s conclusion as to the likelihood that the taxpayer will prevail on the merits with respect to each significant Federal tax issue considered in the opinion. If the practitioner is unable to reach a conclusion with respect to one or more of those issues, the opinion must state that the practitioner is unable to reach a conclusion with respect to those issues. The opinion must describe the reasons for the conclusions, including the facts and analysis supporting the conclusions, or describe the reasons that the practitioner is unable to reach a conclusion as to one or more issues. If the practitioner fails to reach a conclusion at a confidence level of at least more likely than not with respect to one or more significant Federal tax issues considered, the opinion must include the appropriate disclosure(s) required under paragraph (e) of this section. (iii) Evaluation based on chances of success on the merits. In evaluating the significant Federal tax issues addressed in the opinion, the practitioner must not take into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised. (iv) Marketed opinions. In the case of a marketed opinion, the opinion must provide the practitioner’s conclusion that the taxpayer will prevail on the merits at a confidence level of at least more likely than not with respect to each significant Federal tax issue. If the practitioner is unable to reach a more likely than not conclusion with respect to each significant Federal tax issue, the practitioner must not provide the marketed opinion, but may provide written advice that satisfies the requirements in paragraph (b)(5)(ii) of this section. (v) Limited scope opinions. (A) The practitioner may provide an opinion that considers less than all of the significant Federal tax issues if— (1) The practitioner and the taxpayer agree that the scope of the opinion and the taxpayer’s potential reliance on the opinion for purposes of avoiding penalties that may be imposed on the taxpayer are limited to the Federal tax issue(s) addressed in the opinion; (2) The opinion is not advice described in paragraph (b)(2)(i)(A) of this section (concerning listed transactions), paragraph (b)(2)(i)(B) of this section (concerning the principal purpose of avoidance or evasion) or paragraph (b)(5) of this section (a marketed opinion); and (3) The opinion includes the appropriate disclosure(s) required under paragraph (e) of this section. (B) A practitioner may make reasonable assumptions regarding the favorable resolution of a Federal tax issue (an assumed issue) for purposes of providing an opinion on less than all of the significant Federal tax issues as provided in this paragraph (c)(3)(v). The opinion must identify in a separate section all issues for which the practitioner assumed a favorable resolution. (4) Overall conclusion. (i) The opinion must provide the practitioner’s overall conclusion as to the likelihood that the Federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment and the reasons for that conclusion. If the practitioner is unable to reach an overall conclusion, the opinion must state that the practitioner is unable to reach an overall conclusion and describe the reasons for the practitioner’s inability to reach a conclusion. (ii) In the case of a marketed opinion, the opinion must provide the practitioner’s overall conclusion that the Federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment at a confidence level of at least more likely than not. (d) Competence to provide opinion; reliance on opinions of others. (1) The practitioner must be knowledgeable in all of the aspects of Federal tax law relevant to the opinion being rendered, except that the practitioner may rely on the opinion of another practitioner with respect to one or more significant Federal tax issues, unless the practitioner knows or should know that the opinion of the other practitioner should not be relied on. If a practitioner relies on the opinion of another practitioner, the relying practitioner’s opinion must identify the other opinion and set forth the conclusions reached in the other opinion. (2) The practitioner must be satisfied that the combined analysis of the opinions, taken as a whole, and the overall conclusion, if any, satisfy the requirements of this section. (e) Required disclosures. A covered opinion must contain all of the following disclosures that apply— (1) Relationship between promoter and practitioner. An opinion must prominently disclose the existence of— (i) Any compensation arrangement, such as a referral fee or a fee-sharing arrangement, between the practitioner (or the practitioner’s firm or any person who is a member of, associated with, or employed by the practitioner’s firm) and any person (other than the client for whom the opinion is prepared) with respect to promoting, marketing or recommending the entity, plan, or arrangement (or a substantially similar arrangement) that is the subject of the opinion; or (ii) Any referral agreement between the practitioner (or the practitioner’s firm or any person who is a member of, associated with, or employed by the practitioner’s firm) and a person (other than the client for whom the opinion is prepared) engaged in promoting, marketing or recommending the entity, plan, or arrangement (or a substantially similar arrangement) that is the subject of the opinion. (2) Marketed opinions. A marketed opinion must prominently disclose that— (i) The opinion was written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the opinion; and (ii) The taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. (3) Limited scope opinions. A limited scope opinion must prominently disclose that— (i) The opinion is limited to the one or more Federal tax issues addressed in the opinion; (ii) Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of the opinion and the opinion does not consider or provide a conclusion with respect to any additional issues; and (iii) With respect to any significant Federal tax issues outside the limited scope of the opinion, the opinion was not written, and cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (4) Opinions that fail to reach a more likely than not conclusion. An opinion that does not reach a conclusion at a confidence level of at least more likely than not with respect to a significant Federal tax issue must prominently disclose that— (i) The opinion does not reach a conclusion at a confidence level of at least more likely than not with respect to one or more significant Federal tax issues addressed by the opinion; and (ii) With respect to those significant Federal tax issues, the opinion was not written, and cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (5) Advice regarding required disclosures. In the case of any disclosure required under this section, the practitioner may not provide advice to any person that is contrary to or inconsistent with the required disclosure. (f) Effect of opinion that meets these standards—(1) In general. An opinion that meets the requirements of this section satisfies the practitioner’s responsibilities under this section, but the persuasiveness of the opinion with regard to the tax issues in question and the taxpayer’s good faith reliance on the opinion will be determined separately under applicable provisions of the law and regulations. (2) Standards for other written advice. A practitioner who provides written advice that is not a covered opinion for purposes of this section is subject to the requirements of §10.37. (g) Effective date. This section applies to written advice that is rendered after June 20, 2005. §10.36 Procedures to ensure compliance. (a) Requirements for covered opinions. Any practitioner who has (or practitioners who have or share) principal authority and responsibility for overseeing a firm’s practice of providing advice concerning Federal tax issues must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with §10.35. Any such practitioner will be subject to discipline for failing to comply with the requirements of this paragraph if— (1) The practitioner through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that the firm has adequate procedures to comply with §10.35, and one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply with §10.35; or (2) The practitioner knows or should know that one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, that does not comply with §10.35 and the practitioner, through willfulness, recklessness, or gross incompetence, fails to take prompt action to correct the noncompliance. (b) Effective date. This section is applicable after June 20, 2005. §10.37 Requirements for other written advice. (a) Requirements. A practitioner must not give written advice (including electronic communications) concerning one or more Federal tax issues if the practitioner bases the written advice on unreasonable factual or legal assumptions (including assumptions as to future events), unreasonably relies upon representations, statements, findings or agreements of the taxpayer or any other person, does not consider all relevant facts that the practitioner knows or should know, or, in evaluating a Federal tax issue, takes into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised. All facts and circumstances, including the scope of the engagement and the type and specificity of the advice sought by the client will be considered in determining whether a practitioner has failed to comply with this section. In the case of an opinion the practitioner knows or has reason to know will be used or referred to by a person other than the practitioner (or a person who is a member of, associated with, or employed by the practitioner’s firm) in promoting, marketing or recommending to one or more taxpayers a partnership or other entity, investment plan or arrangement a significant purpose of which is the avoidance or evasion of any tax imposed by the Internal Revenue Code, the determination of whether a practitioner has failed to comply with this section will be made on the basis of a heightened standard of care because of the greater risk caused by the practitioner’s lack of knowledge of the taxpayer’s particular circumstances. (b) Effective date. This section applies to written advice that is rendered after June 20, 2005. §10.38 Establishment of Advisory Committees. (a) Advisory committees. To promote and maintain the public’s confidence in tax advisors, the Director of the Office of Professional Responsibility is authorized to establish one or more advisory committees composed of at least five individuals authorized to practice before the Internal Revenue Service. The Director should ensure that membership of an advisory committee is balanced among those who practice as attorneys, accountants, and enrolled agents. Under procedures prescribed by the Director, an advisory committee may review and make general recommendations regarding professional standards or best practices for tax advisors, including whether hypothetical conduct would give rise to a violation of §§10.35 or 10.36. (b) Effective date. This section applies after December 20, 2004. Par. 4. Section 10.52 is amended to read as follows: §10.52 Violation of regulations. (a) Prohibited conduct. A practitioner may be censured, suspended or disbarred from practice before the Internal Revenue Service for any of the following: (1) Willfully violating any of the regulations (other than §10.33) contained in this part; or (2) Recklessly or through gross incompetence (within the meaning of §10.51(l)) violating §§10.34, 10.35, 10.36 or 10.37. (b) Effective date. This section applies after June 20, 2005. §10.93 Effective date. Except as otherwise provided in each section and subject to §10.91, Part 10 is applicable on July 26, 2002. Approved December 8, 2004. Arnold I. Havens, General Counsel, Department of the Treasury. The principal authors of the regulations are Heather L. Dostaler and Brinton T. Warren of the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. Section 1374 Effective Dates 26 CFR Part 1 Final and temporary regulations. These temporary regulations provide guidance concerning the applicability of section 1374 to S corporations that acquire assets in carryover basis transactions from C corporations on or after December 27, 1994, and to certain corporations that terminate S corporation status and later elect again to become S corporations. The text of the temporary regulations also serves as the text of the proposed regulations (REG-139683-04) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin. Applicability Date: Section 1.1374-8T applies to any transaction described in section 1374(d)(8) that occurs on or after December 27, 1994. Section 1.1374-10T applies for taxable years beginning after December 22, 2004. The applicability of §1.1374(d)-8T and §1.1374(d)-10T will expire on or before December 20, 2007. Stephen R. Cleary, (202) 622-7750, (not a toll-free number). Background and Explanation of Provisions 1. Section 1374 and its Effective Dates Under the General Utilities doctrine, see General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935), a C corporation, in certain cases, could distribute appreciated assets to its shareholders or sell appreciated assets without recognizing gain. Section 1374 of the Internal Revenue Code of 1986 (Code), amended in the Tax Reform Act of 1986 (TRA) as part of the repeal of the General Utilities doctrine, prevents a corporation from circumventing General Utilities repeal by converting to S corporation status before distributing appreciated assets to its shareholders or selling appreciated assets. Section 1374 generally imposes a corporate level tax on an S corporation’s net recognized built-in gain attributable to assets that it held on the date it converted from a C corporation to an S corporation. This tax is imposed on built-in gain recognized during the 10-year period beginning on the first day the corporation is an S corporation. Section 1374(d)(8), which was added by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), imposes a corporate level tax on an S corporation’s net recognized built-in gain attributable to assets that it acquired in a carryover basis transaction from a C corporation for the 10-year recognition period beginning on the day of the carryover basis transaction. Under section 1374(d)(9), which also was added by TAMRA, any reference in section 1374 to the first taxable year the corporation was an S corporation is a reference to the first taxable year it was an S corporation pursuant to its most recent S corporation election under section 1362. Section 1019 of TAMRA states that, except as otherwise provided, any amendments made by TAMRA are effective as if included in the provision of TRA to which such amendment relates. The current version of section 1374 replaced a prior version of section 1374 that generally only taxed income or gain recognized within the three year period following the date the corporation converted from C to S status. Section 633 of TRA, as amended by TAMRA, provides the effective dates of the current version of section 1374. Specifically, section 633(b)(1) of TRA, as amended by TAMRA, provides that the amendments to section 1374 apply to taxable years beginning after December 31, 1986, but only in cases where the return for the taxable year is filed pursuant to an S election made after December 31, 1986. Section 633(d)(8) of TRA, as amended by TAMRA, provides a transition rule granting a limited postponement of the above effective date for “qualified corporations”, which are certain small corporations as defined in that section. Under the transition rule, if a C corporation that is a qualified corporation makes an election to be an S corporation under section 1362 before January 1, 1989, then it is subject to former section 1374 for dispositions of long-term capital gain assets and current section 1374 for dispositions of short-term capital gain assets and ordinary income assets, without regard to whether such corporation is completely liquidated. 2. Section 1374(d)(8) As discussed above, the general effective date of current section 1374, which is contained in section 633(b)(1) of the TRA, as amended by TAMRA, provides that current section 1374 applies to tax years beginning after December 31, 1986, but only in cases where the return for the taxable year is filed pursuant to an S election made after December 31, 1986. In TAMRA, Congress added subsection (d)(8) to section 1374, and provided that the provision was effective as if included in TRA. Section 1.1374-8 provides regulations interpreting section 1374(d)(8). Example 1 of §1.1374-8(d) applies section 1374(d)(8) to a merger of a C corporation into an S corporation that elected S status before the effective date of TRA amendments, as further amended by TAMRA, to section 1374. Section 1.1374-10(a) provides that §1.1374-8 applies for taxable years ending on or after December 27, 1994, but only in cases where the corporation’s tax return is filed pursuant to an S election or a section 1374(d)(8) transaction occurring after December 27, 1994 (emphasis added). Despite the provisions of §1.1374-8 and the effective date provisions of §1.1374-10, the IRS understands that some taxpayers contend that section 1374(d)(8) does not apply to carryover basis transfers from C corporations to S corporations that filed S elections before January 1, 1987, because the provisions in TAMRA that added section 1374(d)(8) indicated that the amendment was effective only if the return for the taxable year was filed pursuant to an S election made after December 31, 1986. Section 337(d)(1) authorizes the Secretary to prescribe regulations to prevent the circumvention of the purposes of the repeal of the General Utilities doctrine through the use of any provision of law or regulations. The Treasury Department and the IRS believe that these temporary regulations are necessary to implement General Utilities repeal to prevent the use of corporations with pre-1987 S elections as a method for C corporations to transfer appreciated assets out of C corporation solution without gain recognition. Accordingly, these regulations confirm that section 1374(d)(8) applies to any transaction described in that section that occurs on or after December 27, 1994, the effective date of §1.1374-8, regardless of the date of the S corporation’s election under section 1362. 3. Revocation and Re-election of S Corporation Status As discussed above, section 633(d)(8) of TRA, as amended by TAMRA, provides a transition rule granting a limited postponement of the general effective date of current section 1374 for qualified corporations that make an election to be an S corporation under section 1362 before January 1, 1989. In Colorado Gas Compression, Inc. v. Commissioner, 366 F.3d 863 (10th Cir. 2004), reversing and remanding 116 T.C. 1 (2001), a qualified corporation eligible for the special transition rule elected S corporation status on February 1, 1988 (before the extended effective date of January 1, 1989), revoked S status on December 1, 1989, and subsequently re-elected S status effective on January 1, 1994. During the years 1994 through 1996, the taxpayer sold assets. The Tax Court held that such sales were subject to current section 1374, and that the transition rule did not preclude the application of current section 1374 because the taxpayer’s most recent S election was made after 1989. The Tax Court concluded that section 1374(d)(9) requires that the 1994 election, the taxpayer’s most recent election, be the election considered for effective date purposes. The Tenth Circuit reversed the Tax Court, holding that, because the 1988 election was made before the extended effective date, the corporation was exempt from current section 1374 despite the intervening revocation of S status. The Treasury Department and the IRS believe that the Tenth Circuit’s holding is inconsistent with the legislative history and underlying policy of section 633 of TRA, as amended by TAMRA, and believe the Tax Court was correct in holding that a corporation’s most recent S election must have been made before the deadline of the transition rule (i.e., before January 1, 1989) in order for the corporation to be entitled to the benefit of the transition rule. As indicated above, section 337(d)(1) authorizes the Secretary to prescribe regulations to prevent the circumvention of the purposes of the repeal of the General Utilities doctrine through the use of any provision of law or regulations. The Treasury Department and the IRS believe that these temporary regulations are necessary to implement General Utilities repeal to prevent avoidance of corporate level tax on appreciation in the assets of a C corporation attributable to periods after the extended effective date of January 1, 1989. Accordingly, these regulations provide that the transition rule regarding qualified corporations in section 633(d)(8) of TRA, as amended by TAMRA, applies only if the corporation’s most recent S election was made before January 1, 1989. Although these regulations apply to built-in gain recognized in taxable years beginning after December 22, 2004, the IRS will continue to assert this position for prior taxable years. In summary, the temporary regulations provide that (1) section 1374(d)(8) applies to any transaction described in that section that occurs on or after December 27, 1994, regardless of the date of the S corporation’s election under section 1362, and (2) for purposes of section 633(d)(8) of TRA, as amended by TAMRA, a corporation’s most recent S election, not an earlier election that has been revoked or terminated, determines whether or not it is subject to current section 1374. It has been determined that this temporary regulation is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to §1.1374-8T(a)(2) of these regulations. With respect to §1.1374-10T(c) of these regulations, it has been determined, pursuant to 5 U.S.C. 553(b)(B), that it would be contrary to the public interest to issue the regulations with notice and public procedure and, pursuant to 5 U.S.C. 553(d)(3), that good cause exists to dispense with a delayed effective date. The regulations are necessary to provide immediate guidance to taxpayers with respect to the application of the transition rule regarding qualified corporations in section 633(d)(8) of TRA, as amended by TAMRA, and, accordingly, with respect to the application of current section 1374 to asset dispositions which occur during taxable years beginning after December 22, 2004. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analysis section of the Notice of Proposed Rulemaking published in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these temporary regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Accordingly, 26 CFR part 1 is amended as follows: PART 1 — INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.1374-8T also issued under 26 U.S.C. 337(d) and 1374(e).* * * Section 1.1374-10T also issued under 26 U.S.C. 337(d) and 1374(e).* * * Par. 2. Section 1.1374-8 is amended by redesignating paragraph (a) as paragraph (a)(1) and adding paragraph (a)(2) to read as follows: §1.1374-8 Section 1374(d)(8) transactions. (a)(1) * * * (2) (Reserved) For further guidance, see §1.1374-8T(a)(2). Par. 3. Section 1.1374-8T is added to read as follows: §1.1374-8T Section 1374(d)(8) transactions (temporary). (a)(1) (Reserved)For further guidance, see §1.1374-8(a). (2) Section 1374(d)(8) applies to any section 1374(d)(8) transaction, as defined in paragraph (a)(1) of this regulation, that occurs on or after December 27, 1994, without regard to the date of the corporation’s election to be an S corporation under section 1362. (b) through (d) (Reserved) For further guidance, see §1.1374-8(b) through (d). Par. 4. Section 1.1374-10 is amended by adding paragraph (c) to read as follows: §1.1374-10 Effective date and additional rules. (c) (Reserved) For further guidance, see §1.1374-10T(c). Par. 5. Section 1.1374-10T is added to read as follows: § 1.1374-10T Effective date and additional rules (temporary). (a) through (b)(4) (Reserved) For further guidance, see § 1.1374-10(a) through (b)(4). (c) Revocation and re-election of S corporation status—(1) In general. For purposes of section 633(d)(8) of the Tax Reform Act of 1986, as amended, any reference to an election to be an S corporation under section 1362 shall be treated as a reference to the corporation’s most recent election to be an S corporation under section 1362. This paragraph (c) applies for taxable years beginning after December 22, 2004, without regard to the date of the corporation’s most recent election to be an S corporation under section 1362. (2) Example. The following example illustrates the rules of this paragraph (c): Example. (i) On February 1, 1988, X, a C corporation that is a qualified corporation under section 633(d) of the Tax Reform Act of 1986, as amended, elects to be an S corporation under section 1362. On December 1, 1989, X revokes its S status and becomes a C corporation. On January 1, 2004, X again elects to be an S corporation under section 1362. X disposes of assets in 2006, 2007, and 2008, recognizing gain. (ii) X is not eligible for treatment under the transition rule of section 633(d)(8) of the Tax Reform Act of 1986, as amended, with respect to these assets. Accordingly, X is subject to section 1374, as amended by the Tax Reform Act of 1986 and TAMRA, and the 10-year recognition period begins on January 1, 2004. (iii) To the extent the gain that X recognizes on the asset sales in 2006, 2007, and 2008 reflects built-in gain inherent in such assets in X’s hands on January 1, 2004, such gain is subject to tax under section 1374 as amended by the Tax Reform Act of 1986 and TAMRA. Acting Assistant of the Treasury. The principal author of these regulations is Stephen R. Cleary of the Office of Associate Chief Counsel (Corporate). Other personnel from Treasury and the IRS participated in their development. Does section 6404(g) suspend interest and time sensitive penalties, additions to tax and additional amounts with respect to an increased tax liability reported on an individual’s amended income tax return (or other written notice to the Service of additional liability not listed on the original return) that is filed after the individual files a timely return? If so, when does the accrual of interest and time sensitive penalties, additions to tax and additional amounts begin and end with respect to the additional amount? Situation 1. TP, an individual taxpayer, files an income tax return for the 2002 taxable year on the due date of April 15, 2003. On October 4, 2004, within 18 months after the due date of TP’s return, TP files an amended income tax return that reports additional tax due for 2002. TP files the amended return before the Service notifies TP of the amount or the basis for the additional tax reported on the amended return. TP does not pay the additional tax due with the amended return. Situation 2. The facts are the same as in Situation 1, except that TP files the amended return on November 26, 2004, more than 18 months after the due date of TP’s return, and TP remits payment with the amended return. Situation 3. The facts are the same as Situation 2, except that TP does not remit payment with the amended return. LAW AND ANALYSIS Section 6601 requires the payment of interest on any amount of tax imposed by Title 26 that is not paid on or before the last date prescribed for payment of the tax. Interest is computed using the underpayment rate established under section 6621. Section 6151 provides that the date for payment of tax is the date a taxpayer must file the return reporting the tax due (determined without regard to any extension for filing the return). Section 6072(a) provides that individuals shall file income tax returns made on a calendar year basis on or before April 15th of the year following the calendar year for which the tax is due. Accordingly, interest is imposed on individual calendar year taxpayers under section 6601 on any underpayment that is not paid on or before April 15th of the year following the calendar year for which the tax is due for the period from April 15th until the date on which the tax is paid. Section 6404(g) requires the Secretary to suspend the accrual of interest and time sensitive penalties if the Secretary does not provide a notice specifically stating the amount and basis for the taxpayer’s liability within 18 months following the date that is the later of (1) the original due date of the return (without regard to extensions) or (2) the date on which the taxpayer timely filed the return (the “notification period”). The suspension of the accrual of interest and penalties begins upon the expiration of the notification period and ends 21 days after the date on which the Service provides the notice to the taxpayer (the “suspension period”). Section 6404(g)(3). The legislative history to section 6404(g) states that section 6404(g) was enacted to limit the period during which interest and penalties accrue because the IRS should promptly inform taxpayers of their obligations with respect to tax deficiencies and additional amounts due. S. Rep. No. 174, 105th Cong., 2d Sess., at 64-65, 1998-3 C.B. 537, 600-01. Section 6404(g)(1) provides that the suspension of the accrual of interest and penalties under section 6404(g) only applies to taxpayers who file an income tax return “on or before the due date for the return (including extensions).” (Emphasis added.) Section 6404(g)(2)(C) provides that “any tax liability shown on the return” is excluded from the suspension provisions of section 6404(g)(1). (Emphasis added.) Because section 6404(g)(2) provides exceptions to 6404(g)(1), “the return” referred to in section 6404(g)(2)(C) is the timely filed return described in section 6404(g)(1), i.e., the original return. An amended return (or other written notice to the Service of additional liability not listed on the original return) filed after the due date (including extensions) is not “the return” described in sections 6404(g)(1) and 6404(g)(2)(C). Accordingly, interest and time sensitive penalties are suspended under section 6404(g) with respect to any tax shown on an amended return (or other written notice to the Service of additional liability not listed on the original return) if the Service does not provide to the taxpayer the notice described under section 6404(g)(1) within the notification period. When a taxpayer files an amended return (or other written notice to the Service of additional liability not listed on the original return), the taxpayer knows the amount and the basis for the additional tax reported on the amended return. The filing of the amended return (or other written notice to the Service of additional liability not listed on the original return), therefore, renders unnecessary notice to the taxpayer under section 6404(g)(1). In Situation 1, TP filed an amended return on October 4, 2004, within 18 months of filing the income tax return. TP’s amended return renders unnecessary notice of the amount and the basis for the additional tax reported on the amended return prior to the termination of the notification period. Section 6404(g)(1) will not suspend interest and time sensitive penalties with respect to the additional tax liability reported on the amended return. Interest and time sensitive penalties will accrue on the additional tax liability from the due date of the original return. In Situation 2, TP filed an amended return on November 26, 2004, more than 18 months after the filing of an income tax return. The Service did not provide TP with the notice required to be provided under section 6404(g) prior to October 14, 2004, the date on which the notification period expired. Section 6404(g) suspends the imposition of interest and time sensitive penalties beginning on October 15, 2004, until November 26, 2004, the date on which TP filed the amended return and paid the additional tax due. In Situation 3, TP filed an amended return on November 26, 2004, more than 18 months after the filing of an income tax return, but did not pay the additional tax due. The Service did not provide TP with the notice required to be provided under section 6404(g) before October 14, 2004, the date on which the notification period expired. Section 6404(g) suspends the imposition of interest and time sensitive penalties beginning on October 15, 2004, and ending on December 17, 2004, the date that is 21 days after November 26, 2004, the date that TP filed an amended return. Section 6404(g) suspends interest and time sensitive penalties, additions to tax and additional amounts with respect to an increased tax liability reported on an individual’s amended income tax return filed more than 18 months after the date that is the later of (1) the original due date of the return (without regard to extensions) or (2) the date on which the taxpayer timely filed the return. The suspension of the accrual of interest and time sensitive penalties, additions to tax and additional amounts begins 18 months and one day after the date that is the later of (1) the original due date of the return (without regard to extensions) or (2) the date on which the individual timely filed the return. The suspension of the accrual of interest and time sensitive penalties, additions to tax and additional amounts ends (1) on the date on which the individual files an amended return if the individual pays the additional tax due with the amended return or (2) on the date that is 21 days after the date on which the individual files the amended return if the individual does not pay the additional tax due with the amended return. This revenue ruling is effective for tax years ending after July 22, 1998, for which the period of limitations on filing a claim for refund has not expired. The principal author of this revenue ruling is Julie A. Jebe of the Office of Associate Chief Counsel (Procedure & Administration), Administrative Provisions and Judicial Practice Division.For further information regarding this revenue ruling, contact Julie A. Jebe at (202) 622-7950 (not a toll-free call). Health Savings Accounts — Partnership Contributions to a Partner’s Health Savings Account (HSA); S Corporation’s Contributions to a 2-Percent Shareholder-Employee’s HSA This notice provides guidance on a partnership’s contributions to a partner’s Health Savings Account (HSA) and an S corporation’s contributions to a 2-percent shareholder-employee’s HSA. Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, added section 223 to the Internal Revenue Code to permit eligible individuals to establish Health Savings Accounts (HSAs) for taxable years beginning after December 31, 2003. Generally, contributions made to an HSA, within permissible limits, by or on behalf of a taxpayer who is an eligible individual are deductible by a taxpayer under section 223(a). The deduction is an adjustment to gross income (i.e., an above the line deduction) under section 62(a)(19). If an employer makes a contribution, within permissible limits, to the HSA on behalf of an employee who is an eligible individual, the contribution is excluded from the employee’s gross income and wages. See section 106(d). A partnership may also contribute to a partner’s HSA and an S corporation may contribute to the HSA of a 2-percent shareholder-employee (as defined below). The Questions and Answers below discuss the tax treatment of HSA contributions made on behalf of such partners and 2-percent shareholder-employees who are eligible individuals. Q-1. What is the tax treatment of a partnership’s contributions to a partner’s HSA that are treated as distributions to the partner under section 731? A-1. Contributions by a partnership to a bona fide partner’s HSA are not contributions by an employer to the HSA of an employee. See Rev. Rul. 69-184, 1969-1 C.B. 256. Contributions by a partnership to a partner’s HSA that are treated as distributions to the partner under section 731 are not deductible by the partnership and do not affect the distributive shares of partnership income and deductions. See Rev. Rul. 91-26, 1991-1 C.B. 184 (analysis of situation 1, last paragraph). The contributions are reported as distributions of money on Schedule K-1 (Form 1065). These distributions are not included in the partner’s net earnings from self-employment under section 1402(a) because the distributions under section 731 do not affect a partner’s distributive share of partnership income or loss under section 702(a)(8). The partner, if an eligible individual as defined in section 223(c)(1), is entitled under sections 223(a) and 62(a)(19) to deduct the amount of the contributions made to the partner’s HSA during the taxable year as an adjustment to gross income on his or her federal income tax return. Q-2. What is the tax treatment of a partnership’s contributions to a partner’s HSA that are treated as guaranteed payments under section 707(c), are derived from the partnership’s trade or business, and are for services rendered to the partnership? A-2. Contributions by a partnership to a bona fide partner’s HSA are not contributions by an employer to the HSA of an employee. See Rev. Rul. 69-184. Contributions by a partnership to a partner’s HSA for services rendered to the partnership that are treated as guaranteed payments under section 707(c) are deductible by the partnership under section 162 (if the requirements of that section are satisfied (taking into account the rules of section 263)) and are includible in the partner’s gross income. The contributions are not excludible from the partner’s gross income under section 106(d) because the contributions are treated as a distributive share of partnership income under § 1.707-1(c) of the Income Tax Regulations for purposes of all Code sections other than sections 61(a) and 162(a). See Rev. Rul. 91-26. Contributions by a partnership to a partner’s HSA that are treated as guaranteed payments under section 707(c), are reported as guaranteed payments on Schedule K-1 (Form 1065). Because the contributions are guaranteed payments that are derived from the partnership’s trade or business, and are for services rendered to the partnership, the contributions are included in the partner’s net earnings from self-employment under section 1402(a) on the partner’s Schedule SE (Form 1040). The partner, if an eligible individual as defined in section 223(c)(1), is entitled under sections 223(a) and 62(a)(19) to deduct the amount of the contributions made to the partner’s HSA during the taxable year as an adjustment to gross income on his or her federal income tax return. The following example illustrates the answers in A-1 and A-2. Example. Partnership is a limited partnership with three equal individual partners, A (a general partner), B (a limited partner), and C (a limited partner). C is to be paid $500 annually for services rendered to Partnership in his capacity as a partner and without regard to Partnership income (a section 707(c) guaranteed payment). The $500 payment to C is derived from Partnership’s trade or business. Partnership has no employees. A, B, and C are eligible individuals as defined in section 223(c)(1) and each has an HSA. During Partnership’s Year 1 taxable year, Partnership makes the following contributions: a $300 contribution to each of A’s and B’s HSAs which are treated by Partnership as section 731 distributions to A and B; and a $500 contribution to C’s HSA in lieu of paying C the guaranteed payment directly. Partnership’s contributions to A’s and B’s HSAs are not deductible by Partnership and, therefore, do not affect Partnership’s calculation of its taxable income or loss. See Rev. Rul. 91-26. A and B are entitled to an above the line deduction, under sections 223(a) and 62(a)(19), for the amount of the contributions made to their individual HSAs. The section 731 distributions to A’s and B’s individual HSAs are reported as cash distributions to A and B on A’s and B’s Schedule K-1 (Form 1065). The distributions to A’s and B’s HSAs are not includible in A’s and B’s net earnings from self employment under section 1402(a), because distributions under section 731 do not affect a partner’s distributive share of the partnership’s income or loss under section 702(a)(8). Partnership’s contribution to C’s HSA that is treated as a guaranteed payment under section 707(c) for services rendered to the partnership is deductible by Partnership under section 162 (if the requirements of that section are satisfied (taking into account the rules of section 263)) and is includible in C’s gross income. The contribution is not excludible from C’s gross income under section 106(d) because the contribution is treated as a distributive share of partnership income for purposes of all Code sections other than sections 61(a) and 162(a), and a guaranteed payment to a partner is not treated as compensation to an employee. See Rev. Rul. 91-26. The payment to C’s HSA should be reported as a guaranteed payment on Schedule K-1 (Form 1065). Because the contribution is a guaranteed payment that is derived from the partnership’s trade or business and is for services rendered to the partnership, the contribution constitutes net earnings from self-employment to C under section 1402(a) which should be reported on Schedule SE (Form 1040). C is entitled under sections 223(a) and 62(a)(19) to deduct as an adjustment to gross income the amount of the contribution made to C’s HSA. Q-3. What is the tax treatment of an S corporation’s contributions to the HSA of a 2-percent shareholder (as defined in section 1372(b)) who is also an employee (2-percent shareholder-employee) in consideration for services rendered to the S corporation? A-3. Under section 1372, for purposes of applying the provisions of Subtitle A that relate to fringe benefits, an S corporation is treated as a partnership, and any 2-percent shareholder of the S corporation is treated as a partner of such partnership. Therefore, contributions by an S corporation to an HSA of a 2-percent shareholder-employee in consideration for services rendered are treated as guaranteed payments under section 707(c). Accordingly, the contributions are deductible by the S corporation under section 162 (if the requirements of that section are satisfied (taking into account the rules of section 263)) and are includible in the 2-percent shareholder-employee’s gross income. In addition, the 2-percent shareholder-employee is not entitled to exclude the contribution from gross income under section 106(d). See Rev. Rul. 91-26. For employment tax purposes, when contributions are made by an S corporation to an HSA of a 2-percent shareholder-employee, the 2-percent shareholder-employee is treated as an employee subject to Federal Insurance Contributions Act (FICA) tax and not as an individual subject to Self-Employment Contributions Act (SECA) tax. (See Announcement 92-16, 1992-5 I.R.B. 53, clarifying the FICA (Social Security and Medicare) tax treatment of accident and health premiums paid by an S corporation on behalf of a 2-percent shareholder-employee.) However, if the requirements for the exclusion under section 3121(a)(2)(B) are satisfied, the S corporation’s contributions to an HSA of a 2-percent shareholder-employee are not wages subject to FICA tax, even though the amounts must be included in wages for income tax withholding purposes on the 2-percent shareholder-employee’s Form W-2, Wage and Tax Statement. The 2-percent shareholder-employee, if an eligible individual as defined in section 223(c)(1), is entitled under sections 223(a) and 62(a)(19) to deduct the amount of the contributions made to the 2-percent shareholder-employee’s HSA during the taxable year as an adjustment to gross income on his or her federal income tax return. See Notice 2004-2, Q&A 19, 2004-2 I.R.B. 269, for employment tax rules for employer contributions to HSAs of employees other than 2-percent shareholder-employees. The principal authors of this notice are Elizabeth Purcell of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) and Pietro E. Canestrelli of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding HSA issues in this notice, contact Ms. Purcell at (202) 622-6080. For information regarding partnership or S corporation issues, contact Mr. Canestrelli at (202) 622-3060 (not toll-free calls). Weighted Average Interest Rates Update This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code. In addition, it provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II), and the weighted average interest rate and permissible ranges of interest rates based on the 30-year Treasury securities rate. CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004, provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 or 2005 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year. Notice 2004-34, 2004-18 I.R.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The composite corporate bond rate for December 2004 is 5.57 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month. The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below. For Plan Years Beginning in: Corporate Bond Weighted Average 90% to 110% Permissible Range January 2005 6.10 5.49 to 6.10 30-YEAR TREASURY SECURITIES WEIGHTED AVERAGE INTEREST RATE Section 417(e)(3)(A)(ii)(II) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual interest rate on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin. Section 404(a)(1) of the Code, as amended by the Pension Funding Equity Act of 2004, permits an employer to elect to disregard subclause (II) of § 412(b)(5)(B)(ii) to determine the maximum amount of the deduction allowed under § 404(a)(1). The rate of interest on 30-year Treasury securities for December 2004 is 4.86 percent. Pursuant to Notice 2002-26, 2002-1 C.B. 743, the Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2031. The following 30-year Treasury rates were determined for the plan years beginning in the month shown below. 30-Year Treasury Average 90% to 105% Range January 2005 5.10 4.59 to 5.35 4.59 to 5.61 The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday. Mr. Stern may be reached at 1-202-283-9703. Mr. Montanaro may be reached at 1-202-283-9714. The telephone numbers in the preceding sentences are not toll-free. Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations Section 1374 Effective Dates Notice of proposed rulemaking by cross-reference to temporary regulations. In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9170) that provide guidance concerning the applicability of section 1374 to S corporations that acquire assets in carryover basis transactions from C corporations on or after December 27, 1994, and to certain corporations that terminate S corporation status and later elect again to become S corporations. The text of those regulations also serves as the text of these proposed regulations. Written or electronic comments, and a request for a public hearing, must be received by March 22, 2005. Send submissions to: CC:PA:LPD:PR (REG-139683-04), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-139683-04), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS internet site at www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-139683-04). Concerning the proposed regulations, Stephen R. Cleary, (202) 622-7750, concerning submissions of comments, Sonya Cruse, (202) 622-4693 (not toll-free numbers). Temporary Regulations in this issue of the Bulletin amend 26 CFR Part 1 relating to section 1374. The temporary regulations provide that (a) section 1374(d)(8) applies to any transaction described in that section that occurs on or after December 27, 1994, regardless of the date of the S corporation’s election under section 1362, and (b) for purposes of section 633(d)(8) of the Tax Reform Act of 1986, as amended by the Technical and Miscellaneous Revenue Act of 1988, a corporation’s most recent S election, not an earlier election that has been revoked or terminated, determines whether or not it is subject to current section 1374. The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments. Special Analysis It has been determined that this proposed regulation is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to §1.1374-8(a)(2) of these regulations. Because §1.1374-8(a)(2) does not impose a collection of information on small entities, it is not subject to the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6). It is hereby certified that §1.1374-10(c) of this regulation will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that §1.1374-10(c) of this regulation addresses an uncommon fact situation not likely to affect a significant number of small entities. Therefore, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department specifically request comments on the clarity of the proposed rules and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: Paragraph 1. The authority citation for part 1 continues to read, in part, as follows: (2) [The text of the proposed amendment to §1.1374-8(a)(2) is the same as the text of §1.1374-8T(a)(2) published elsewhere in this issue of the Bulletin.]. Par. 3. In §1.1374-10, paragraph (c) is added to read as follows: (c) [The text of proposed §1.1374-10(c) is the same as the text of §1.1374-10T(c) published elsewhere in this issue of the Bulletin]. Notice of Proposed Rulemaking and Notice of Public Hearing Regulations Governing Practice Before the Internal Revenue Service Notice of proposed rulemaking and notice of public hearing. This notice proposes amendments to the regulations governing practice before the Internal Revenue Service (Circular 230). These regulations affect individuals who are eligible to practice before the IRS. The proposed modifications set forth standards for State or local bond opinions. This document also provides notice of a public hearing regarding the proposed regulations. Written or electronically generated comments and outlines of topics to be discussed at the public hearing scheduled for March 22, 2005, must be received by March 1, 2005. Send submissions to: CC:PA:LPD:PR (REG-159824-04), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-159824-04), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the IRS Internet site at: www.irs.gov/regs. The hearing will be held in the Internal Revenue Service auditorium on the seventh floor. Concerning issues for comment, Heather L. Dostaler at (202) 622-4940 or Vicki Tsilas at (202) 622-3980; concerning submissions of comments, Treena Garrett of the Publications and Regulations Branch at (202) 622-7180 (not toll-free numbers). The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by February 18, 2005. Comments are specifically requested concerning: Whether the proposed collection of information and retention is necessary for the proper performance of the Office of Professional Responsibility, including whether the information will have practical utility; The accuracy of the estimated burden associated with the proper collection and retention of information (see below); How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the proposed collection and retention of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. The collection of information in these proposed regulations is in §10.39. This information is required to ensure practitioners comply with minimum standards when writing a State or local bond opinion. This information will assist the Commissioner, through the Office of Professional Responsibility, to ensure that practitioners properly advise taxpayers regarding state or local bonds. The collection of information is mandatory. The likely recordkeepers and respondents are individuals. To comply with §10.39, a practitioner may provide a single State or local bond opinion or may provide a combination of documents, but only if the documents, taken together, satisfy the requirements of §10.39. The estimates below are based on an average of 10 opinions given by a practitioner per year with an average increased time of 1 to 3 hours per opinion. Estimated total recordkeeping and reporting burden is 30,000 hours. Estimated annual burden per practitioner varies from 10 to 30 hours, depending on individual circumstances, with an estimated average of 20 hours. Estimated number of affected practitioners is 1,500. Estimated annual frequency of responses (providing a State or local bond opinion or a combination of documents) is on occasion. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103 of the Internal Revenue Code. Section 330 of title 31 of the United States Code authorizes the Secretary of the Treasury to regulate the practice of representatives before the Treasury Department. The Secretary has published the regulations governing standards of practice in Circular 230 (31 CFR part 10). Municipal bond opinions have been excluded from the standards for tax shelter opinions since the Treasury Department and the IRS first published standards for tax shelter opinions in Circular 230. On December 30, 2003, the Treasury Department and the IRS proposed amendments to the standards of practice that would have eliminated the exclusion for municipal bond opinions. See 68 FR 75186 (REG-122379-02, 2004-5 I.R.B. 392). Public comments were submitted in response to the proposed amendments addressing the special characteristics of the market for municipal bond opinions. After careful consideration, the Treasury Department and the IRS have concluded that practitioners rendering opinions concerning the tax treatment of municipal bonds should be subject to the same professional standards that are applicable to other practitioners. Recognizing the special characteristics of the bond market, the Treasury Department and the IRS are proposing regulations that provide standards of practice for practitioners rendering municipal bond opinions. The proposed regulations are substantially similar to the standards of practice for covered opinions that were promulgated on December 20, 2004, which included final regulations providing best practices for tax advisors, minimum standards for covered opinions and other written advice and procedures to ensure compliance with the minimum standards. Under the final regulations, a practitioner providing a covered opinion must comply with the minimum standards set forth in §10.35. Specifically, a practitioner providing a covered opinion must: (1) identify and ascertain all relevant facts; (2) relate the applicable law to the relevant facts; (3) evaluate each significant Federal tax issue; and (4) provide an overall conclusion. In addition, covered opinions may be required to contain certain disclosures provided in §10.35(e), if applicable. Under §10.35, the definition of a covered opinion excludes State or local bond opinions. The definition of a State or local bond opinion contemplates opinions that issuers routinely receive at the time bonds are issued. Specifically, a State or local bond opinion is written advice that is included in the offering materials for the issuance of a State or local bond and that concerns only the excludability of interest on a State or local bond from gross income under section 103, the application of section 55, the status of the bond as a qualified tax-exempt obligation under section 265(b)(3), the status of the bond as a qualified zone academy bond under section 1397E, or any combination of these issues. Offering materials include any written material delivered to a purchaser of a State or local bond in connection with the issuance of the bond in a private or public placement (bond offering materials). Under §10.35(b)(2)(ii)(B)(2), a covered opinion does not include a State or local bond opinion. Under proposed §10.35(b)(9), a State or local bond opinion is written advice, included in bond offering materials for the issuance of a State or local bond, if (1) the written advice as to Federal tax matters addressed in the bond offering materials consists only of advice that concerns specified issues under section 103, section 55, section 265(b)(3), or section 1397E, or any combination of those issues; and (2) the practitioner separately provides to the issuer of the bond, and includes in the transcript of proceedings if one is prepared, written advice that satisfies the requirements set forth in §10.39. An opinion is a State or local bond opinion even if the written advice addresses matters not directly related to a Federal tax issue, e.g., a State law issue. An opinion also is a State or local bond opinion if the opinion is redelivered unchanged, e.g., if the opinion is redelivered with a qualified tender bond that is tendered to the remarketing agent and remarketed. If the State or local bond opinion with respect to that bond issue is changed or otherwise updated after bonds are issued, the altered opinion is not a State or local bond opinion, and is subject to the requirements of §10.35. The Treasury Department and the IRS recognize the special characteristics of the market for municipal bonds and are proposing amendments to the requirements of Circular 230 that take into account these characteristics. The manner in which practitioners provide State or local bond opinions suggests that the form of these bond opinions should be more flexible than §10.35 permits. The proposed regulations exclude a State or local bond opinion from the requirements of §10.35, if the practitioner provides the issuer with separate written advice that satisfies the requirements of §10.39. Proposed §10.39 sets forth the minimum requirements for a State or local bond opinion. Although the minimum requirements are substantially similar to those of §10.35(c), §10.39 is tailored to take into account the customary practice and special circumstances of the market for municipal bonds. Furthermore, the proposed regulations provide practitioners flexibility in determining how the separate written advice should be conveyed. The practitioner may provide the separate written advice in a tax certificate that customarily would be prepared for inclusion in the transcript of proceedings, or in a tax certificate and an additional memorandum or letter, or in any other combination of documents that are made available to the issuer and included in the transcript of proceedings, if one is prepared. The requirements for all State or local bond opinions include: (1) identifying and considering all relevant facts and not relying on unreasonable factual assumptions or unreasonable representations; (2) relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts and not relying on any unreasonable legal assumptions, representations or conclusions; and (3) considering all significant Federal tax issues relevant to reaching the overall conclusion with respect to the Federal tax treatment of the bonds and reaching a conclusion, supported by the facts and the law, with respect to each significant Federal tax issue. As provided in §10.35(b)(3), a Federal tax issue is significant if the Internal Revenue Service has a reasonable basis for a successful challenge and its resolution could have a significant impact, whether beneficial or adverse and under any reasonably foreseeable circumstance, on the overall Federal tax treatment of the transaction(s) or matter(s) addressed in the opinion. A practitioner must not base the written advice on an assumption or factual representation, statement or finding of any person unless the practitioner has exercised due diligence in identifying and ascertaining the relevant facts. Even if a third party has certified a representation, the practitioner is responsible for exercising due diligence. For example, a practitioner may not rely on a representation, certified or otherwise, to conclude that the requirements of the safe harbor for establishing the fair market value of a guaranteed investment contract in 26 CFR 1.148-5(d)(6)(iii) were met if the representation does not include a specific description of how those requirements were satisfied or if the practitioner knows or should know that the representation was incorrect or incomplete. Proposed §10.39 permits a practitioner to incorporate the facts, factual assumptions, and findings, representations and statements of any person by reference to another document, such as a tax certificate, provided that the document is included in the transcript of proceedings. Similarly, the legal analysis may be appended or included in a tax certificate or similar document, provided that it is clear that the practitioner provided the written advice. Unlike §10.35(e) with respect to covered opinions, proposed §10.39 does not require any disclosures in the written advice. Proposed §§10.35(b)(9) and 10.39 will require that the written advice the practitioner is required to provide separately to the issuer of a state or local bond be included in the transcript of proceedings if one is prepared or in a document available to the issuer if no transcript is prepared. Inclusion of the written advice in the transcript of proceedings is intended to ensure that the practitioner’s written advice is made available to the issuer and is intended to be consistent with the current practice of including the tax certificate and other documents supporting the State or local bond opinion in the transcript of proceedings. The Treasury Department and the IRS request comments regarding this requirement. Proposed Effective Date Consistent with Announcement 2004-29, 2004-17 I.R.B. 828 (April 26, 2004), these proposed regulations will be applicable no sooner than 120 days after the final regulations are published in the Federal Register. It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. Persons authorized to practice before the IRS have long been required to comply with certain standards of conduct. Therefore, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses. Comments and Public Hearing Before the regulations are adopted as final regulations, consideration will be given to any written comments and electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS specifically request comments on the clarity of the proposed regulations and how they can be made easier to understand. All comments will be available for public inspection and copying. The public hearing is scheduled for March 22, 2005, at 10:00 a.m., and will be held in the Internal Revenue Service auditorium on the seventh floor. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. All visitors must present photo identification to enter the building. Visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments and submit an outline of the topics to be discussed and the time to be devoted to each topic by March 1, 2005. A period of 10 minutes will be allocated to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Accordingly, 31 CFR part 10 is proposed to be amended as follows: PART 10—PRACTICE BEFORE THE INTERNAL REVENUE SERVICE [Authority: Sec. 3, 23 Stat. 258, secs. 2-12, 60 Stat. 237 et seq.; 5 U.S.C. 301, 500, 551-559; 31 U.S.C. 330; Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-1953 Comp., P. 1017.] Par. 2. Section 10.35 is amended by revising paragraph (b)(9) to read as follows: (9) State or local bond opinion. Written advice, included in bond offering materials (as defined in §10.39(c)) for the issuance of a State or local bond, is a State or local bond opinion if— (i) The written advice as to Federal tax matters addressed in the bond offering materials consists only of advice that concerns the excludability of interest on a State or local bond from gross income under section 103 of the Internal Revenue Code, the application of section 55 of the Internal Revenue Code to a State or local bond, the status of a State or local bond as a qualified tax-exempt obligation under section 265(b)(3) of the Internal Revenue Code, the status of a State or local bond as a qualified zone academy bond under section 1397E of the Internal Revenue Code, or any combination of the above; and (ii) The practitioner separately provides to the issuer of the bond written advice that satisfies the requirements set forth in §10.39. (a) Requirements for covered opinions. Any practitioner who has (or practitioners who have or share) principal authority and responsibility for overseeing a firm’s practice of providing advice concerning Federal tax issues must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with §§10.35 and 10.39, as applicable. Any such practitioner will be subject to discipline for failing to comply with the requirements of this paragraph if— (1) The practitioner through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that the firm has adequate procedures to comply with §§10.35 and 10.39, as applicable, and one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply with §§10.35 and 10.39, as applicable; or (2) The practitioner knows or should know that one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, that does not comply with §§10.35 and 10.39, as applicable, and the practitioner, through willfulness, recklessness, or gross incompetence fails to take prompt action to correct the noncompliance. (c) Effective date. This section is applicable on the date that is 120 days after publication of the final regulations in the Federal Register. (a) Advisory committees. To promote and maintain the public’s confidence in tax advisors, the Director of the Office of Professional Responsibility is authorized to establish one or more advisory committees composed of at least five individuals authorized to practice before the Internal Revenue Service. The Director should ensure that membership of an advisory committee is balanced among those who practice as attorneys, accountants, and enrolled agents. Under procedures prescribed by the Director, an advisory committee may review and make general recommendations regarding professional standards or best practices for tax advisors, including whether hypothetical conduct would give rise to a violation of §§10.35, 10.36 or 10.39. (b) Effective date. This section is applicable 120 days after publication of the final regulations in the Federal Register. Par. 5. Section 10.39 is added to read as follows: §10.39 Requirements for State or local bond opinions. (a) In general. A practitioner who provides a State or local bond opinion shall comply with the standards of practice in this section. (b) Requirements for separately provided written advice. A practitioner providing a State or local bond opinion must separately provide to the issuer of the bond written advice that satisfies each of the following requirements. For purposes of this section, the written advice may be set forth in a tax certificate or in other documents included in the transcript of proceedings, or, if no transcript is prepared, in one or more other documents made available to the issuer, provided that the documents constituting the written advice taken together satisfy each of the following requirements. (1) Factual matters. (i) The practitioner must use reasonable efforts to identify and ascertain the facts, which may relate to future events, and to determine which facts are relevant. The written advice must identify and consider all facts that the practitioner determines to be relevant. (ii) The practitioner must not base the written advice on any unreasonable factual assumptions (including assumptions as to future events). An unreasonable factual assumption includes a factual assumption that the practitioner knows or should know is incorrect or incomplete. A factual assumption includes reliance on a projection, financial forecast or appraisal. It is unreasonable for a practitioner to rely on a projection, financial forecast or appraisal if the practitioner knows or should know that the projection, financial forecast or appraisal is incorrect or incomplete or was prepared by a person lacking the skills or qualifications necessary to prepare such projection, financial forecast or appraisal. The written advice must identify in a separate section all factual assumptions relied upon by the practitioner. (iii) The practitioner must not base the written advice on any unreasonable factual representations, statements or findings of any person. An unreasonable factual representation includes a factual representation that the practitioner knows or should know is incorrect or incomplete. The written advice must identify in a separate section all factual representations, statements or findings relied upon by the practitioner. (iv) If the facts required to be identified and considered under this paragraph (b)(1) are set forth in a tax certificate or other similar document that is included in the transcript of proceedings and the analysis required by paragraphs (b)(2) and (b)(3) of this section is set forth in a separate document, the practitioner may incorporate the facts required to be identified or considered in the separate document by reference to the tax certificate or other document. (2) Relate law to facts. (i) The written advice must relate the applicable law (including potentially applicable judicial doctrines) to the relevant facts. (ii) The practitioner must not assume the favorable resolution of any significant Federal tax issue except as provided in paragraph (d) of this section, or otherwise base an opinion on any unreasonable legal assumptions, representations, or conclusions. (iii) The written advice must not contain internally inconsistent legal analysis or conclusions. (3) Evaluation of significant Federal tax issues—(i) In general. The written advice must consider all significant Federal tax issues that are relevant to the overall conclusion provided in the State or local bond opinion with respect to the application of section 103 of the Internal Revenue Code, section 55 of the Internal Revenue Code, section 265(b)(3) of the Internal Revenue Code, or section 1397E of the Internal Revenue Code, or any combination thereof, except as provided in paragraph (d) of this section. (ii) Conclusion as to each significant Federal tax issue. The written advice must provide the practitioner’s conclusion as to the likelihood that a taxpayer will prevail on the merits with respect to each significant Federal tax issue considered in the written advice. The written advice must describe the reasons for the conclusions, including the facts and analysis supporting the conclusions. (iii) Evaluation based on chances of success on the merits. In evaluating the significant Federal tax issue(s) addressed in the written advice, the practitioner must not take into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised. (c) Bond offering materials. The term bond offering materials means any written materials delivered to a purchaser of a State or local bond in connection with the issuance of the bond in a public or private offering, including an official statement (if one is prepared). (d) Competence to provide opinion; reliance on opinions of others. (1) The practitioner must be knowledgeable in all of the aspects of Federal tax law relevant to the opinion being rendered, except that the practitioner may rely on the opinion of another practitioner with respect to one or more Federal tax issues unless the practitioner knows or should know that the opinion of the other practitioner should not be relied on. If a practitioner relies on the opinion of another practitioner regarding a significant Federal tax issue, the relying practitioner must identify the other opinion and set forth in the written advice the conclusions reached in the other opinion. (2) The practitioner must be satisfied that the combined analysis of the opinions, taken as a whole satisfy the requirements of this section. (e) Effective date. This section applies to State or local bond opinions that are rendered on a date that is on or after 120 days after publication of the final regulations in the Federal Register. (2) Recklessly or through gross incompetence (within the meaning of §10.51(l)) violating §§10.34, 10.35, 10.36, 10.37 or 10.39. The principal authors of the regulations are Heather L. Dostaler and Brinton T. Warren of the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division, and Vicki Tsilas of the Office of the Associate Chief Counsel (Tax Exempt/Government Entities). Announcement of Disciplinary Actions Involving Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries — Suspensions, Censures, Disbarments, and Resignations Under Title 31, Code of Federal Regulations, Part 10, attorneys, certified public accountants, enrolled agents, and enrolled actuaries may not accept assistance from, or assist, any person who is under disbarment or suspension from practice before the Internal Revenue Service if the assistance relates to a matter constituting practice before the Internal Revenue Service and may not knowingly aid or abet another person to practice before the Internal Revenue Service during a period of suspension, disbarment, or ineligibility of such other person. To enable attorneys, certified public accountants, enrolled agents, and enrolled actuaries to identify persons to whom these restrictions apply, the Director, Office of Professional Responsibility, will announce in the Internal Revenue Bulletin their names, their city and state, their professional designation, the effective date of disciplinary action, and the period of suspension. This announcement will appear in the weekly Bulletin at the earliest practicable date after such action and will continue to appear in the weekly Bulletins for five successive weeks. Consent Suspensions From Practice Before the Internal Revenue Service Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her consent to suspension from such practice. The Director, Office of Professional Responsibility, in his discretion, may suspend an attorney, certified public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered. The following individuals have been placed under consent suspension from practice before the Internal Revenue Service: Nadler, Herbert New York, NY Enrolled Actuary November 1, 2004 to February 28, 2005 Check-the-Box Disclosure Authority In July 2004, the Internal Revenue Service issued a revision to Form 656, Offer in Compromise. Form 656 is used by taxpayers to request that the Service enter into an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed. The purpose of this announcement is to highlight the addition of a “check-the-box” disclosure authorization on Form 656. The check-the-box authorization, which is provided in Item 14 on Form 656, allows a taxpayer to designate the person identified in the taxpayer’s Form 2848, Power of Attorney and Declaration of Representative, or another third party to assist the taxpayer by discussing the offer in compromise and related return information with the Service. The check-the-box authorization facilitates the processing of the offer in compromise by enabling the Service to discuss the offer with the third party so that the Service is able to obtain information needed to complete the processing of the offer. The authorization of a third party to discuss the offer with the Service is limited to assisting the taxpayer in providing information to the Service for the initial processing of the taxpayer’s offer in compromise. The authorization does not permit the designated third party to practice before the Service, including the Service’s collection function, under Circular 230, 31 C.F.R. pt. 10, § 10.2(d), unless the designated person is an attorney, a CPA, or an enrolled agent. If the designated person is an attorney, a CPA, or an enrolled agent, and the taxpayer has attached a properly completed Form 2848 to the Form 656, the designated person may represent the taxpayer before the Service with respect to the offer in compromise. The principal author of this announcement is Debra A. Kohn of the Office of Associate Chief Counsel (Procedure and Administration), Collection, Bankruptcy & Summonses Division. For further information regarding this announcement, contact Branch 2 of Collection, Bankruptcy & Summonses at (202) 622-3620 (not a toll-free call). Foundations Status of Certain Organizations The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions. Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations: Org. Name 2111 Foundation for Exploration, La Jolla CA Access to Lifelong Fitness, Inc., Santa Barbara CA African Heritage Association, Houston TX African Pastors Training Institute, Inc., San Jose CA Alexander Foundation, Houston TX Alpha Beta Sigma Chapter Scholarship Fund, Houston TX American Bicycle Racing, Incorporated, Tinley Park IL American Indian Wilderness School, Nederland CO Anderson-Terrell-Keller Community Development Corporation, New Orleans LA Angel Academy, Inc., Houston TX Angels Way Group Home, Los Angeles CA Apple-Barrell Foundation, Inc., Houston TX Arctic Cultural Institute of the United States, Greenwood Village CO Arise Woman Arise, Dallas TX Athena Art Project, Houston TX Aurora Project, Aurora CO Ayl-Rams (Aurora Youth League-Rams Football/Baseball, Aurora CO Backcountry Horsemen Education Foundation of America, Garham WA Big Country Boys Productions, Inc., Abilene TX Big Island Residential, Inc., Honolulu HI Born Again Marriages, Inc., Sonora CA Brighter Beginning Community Development Corporation, Cedarhill TX Broken Promises, Inc., Richardson TX Bucket Productions, Dallas TX California Latino Agricultural Association, Watsonville CA California Wild Mustang & Burro Sanctuary, Sequim WA Camp Hope America, Inc., Arroyo Grande CA Caption Works of the Deaf, Inc., Farmington Hills MI Castaway Ministry International, The Woodlands TX Cedar Crest Community Development Corporation, Dallas TX Celama Educational Charities Tr., Sugar Land TX Center for Non-Profit Organization Development, Inc., Houston TX Center of Hope, Inc., Long Beach CA Central America for Christ, Sugar Land TX Central California Down Syndrome Foundation, Sunnyvale CA Champions for Kids, Incorporated, Raleigh NC Chardi Kalaa Sikh Community Center, Palo Alto CA Cheltenham York Road Nursing and Rehabilitation Center, Inc., Philadelphia PA Childrens Art Car Project, Houston TX Childrens Home Society Services of North Florida, Tallahassee FL Christian Challenge of Modesto, Modesto CA Chrysalis, Inc., Denver CO Citizens for Childrens Rights, Cheyenne WY Citizens for the Carpinteria Bluffs, Inc., Carpinteria CA City County Preservation Committee, Marlowton MT City Gates Ministries, Inc., Houston TX City of Dreams, Golden CO Colorado Center for Healthy Communities, Denver CO Colorado General Aviation Council, Inc., Englewood CO Community Hospice Memorial Foundation, Inc., Denver CO Conadec, Kingwood TX Concrete Classic, Inc., Coralville IA Dalhart Hispanic Organization, Inc., Dalhart TX Dallas First Priority, Plano TX Dal-Tex Computer Learning Center, Dallas TX Delano Police Activities League, Delano CA Dr. Watsons Neglected Patients, Broomfield CO Education & Resource Center, Inc., Greenville TX Educational Learning Opportunities Foundation, Richmond VA El Gran Mandamiento, Inc., Merkel TX El Rio Community Gymnasium Commission, Oxnard CA Elite Houston, Inc., Houston TX Embrace the Cross Foundation, Houston TX Ephesus Outreach Ministries, Inc., Oklahoma City OK Family Harvest Ministry, Dayton TX Family Tree a Supervised Visitation Program, Cupertino CA Farmington Valley Antiques Guild, Farmington CT FDS Ministry, Chicago IL Fifteen Twelve Foundation, Inc., Cripple Creek CO Fifty-Fifty Leadership, Inc., Glendale CA Final Destiny Ministries, Inc., Missoula MT Food Fest, Inc., Beaumont TX Forgotten Children, Fort Worth TX Fort Bend Youth Foundation, Sugar Land TX Forward USA, Inc., San Jose CA Foundation for Literacy in Science and Technology, Houston TX Foundation Prison Ministries, Inc., Grandview TX Freedmans Foundation, Dallas TX Fresno H.O.P.E. Animal Foundation, Fresno CA Friends of the Library, Preston ID Friends of the Waller County Library - Brookshire Branch, Brookshire TX Friends of Weiser River Trail, Inc., Eagle ID Garland Hispanic Business Resource and Community Center, Garland TX Gerlena Griffin Foundation, Inc., St. Mary’s GA Gift to the World Ministries, Inc., Houston TX Giving Stage, Inc., Boulder CO Golden Triangle First Priority, Inc., Ogden UT Greater Houston Sports Association, Inc., Houston TX Greenbucks Foundation, Inc., Denver CO Hackmaster Foundation, Clovis CA Heal the Earth Celebration, Tucson AZ Higher Ground Ministries, Inc., Monte Vista CO His Mother Servants of the Holy Spirit, The Colony TX His Way Community Development Organization, Los Angeles CA Hispanic Education Scholarship, Inc., Fort Worth TX Hispanic Firefighter of the Year Awards, Houston TX Hispanic Nurses Association Houston Chapter - HNA Houston, Houston TX Hmong Youth Foundation, Fresno CA Holy Shroud Institute, Inc., Corvallis OR Homeless Employment Resource Operation, Ventura CA Hope Ward Scholarship Fund and Educational Assistance Program, Inc., Houston TX House by the Side of the Road, Windsor CO Houston Area Leadership Scholarship Fund, Inc., Houston TX Houston Serving Needy Families, Houston TX Howard County D-Fy-It, Inc., Big Spring TX Hughson Police Department Reserve Fund, Hughson CA Idaho Justice Center, Inc., Boise ID Institute for Salubrious Living, Inc., Mabank TX International Association of Geomagnetism and Aeronomy, Boulder CO International Elephant Survival Foundation, Kountze TX JIVA Institute for Vaisnava Studies, Inc., Visalia CA Johnson County Emu Association, Cleburne TX Josh the Cat Foundation, Boulder Creek CA Journey Home, Seaside CA Juventus F C, Inc., Spring TX Kelly Village Resident Council, Inc., Houston TX Khalsa Religious & Cultural Corporation, Turlock CA Kidswish Foundation, Humble TX Kingsburg Community Educational Foundation, Kingsburg CA Korea Liberation Association of San Francisco, Inc., Dublin CA KRV Friends of the Animals A Human Society, Weldon CA Lakewood Foundation, Dallas TX LAO Community Cultural Center of Fresno, Clovis CA Lasu Community Development, Inc., Houston TX Laura Lynn Graef Swimming and Diving Scholarship Foundation, Houston TX Lee Guardianship Services, Inc., Fort Myers FL Lewis-Toran Retirement Community, Inc., Lufkin TX Liberty Ministries, Inc., Agoura Hills CA Lifework, Inc., Denver CO Light of the Word Ministries, Inc., Houston TX Lincoln Park Resident Council, Inc., Houston TX Lion of Judah Ministries International, Fort Worth TX Local Organizing Committee, Fresno CA Lone Star Search and Rescue Dog Association, Houston TX Loving Life Cancer Recovery, Inc., Irving TX Marantha Ministries, Hollidaysburg PA Matland Foundation, Houston TX Matthew J. Dovey Difference Education Foundation, Englewood CO Mayor Lee Duggan Scholarship, Sugar Land TX Mentor Program, Aurora CO Metro Foundation, Inc., San Jose CA Mikes Place, Inc., Hurst TX Mind & Spirit Counseling Center, Milpitas CA Mindmender, Inc., Douglasville GA Minh Van Foundation, Houston TX Ministerio Evangelistico Revelacion, Porterville CA Mission for Children Foundation, Ltd., West Sacramento CA Moomoo Productions, Inc., Theatre for a New Day, Dallas TX Mooney Grove Amphitheater Corporation, Hanford CA My Father’s House of Erie, Erie PA Naomi’s House, Inc., Dallas TX National Aids Foundation, San Diego CA Nautic Scepter, Gibraltar MI No Pro Housing, Jackson WY Noetic Center, Inc., Grand Junction CO North Texas Families for Adoption, Dallas TX Nursenet Community Medical Services, Inc., Dallas TX Oduduwa of Houston, Inc., Houston TX On His Way, Inc., Otis MA One Hope, Fort Worth TX Operation Hes My Brother, Memphis TN Operation Second Choice, Newport Beach CA Oriki Theater, Mountain View CA Our Savior’s Business, Inc., Baltimore MD Outreached Hands, Inc., Houston TX Palo Pinto Area Wildland Strike Team, Santo TX Panhandle Military Veterans Awareness Association, Inc., Amarillo TX Park Creek Housing, Inc., Wheat Ridge CO PBL Institute for Innovative Learning, Marina CA Pebaseman Development Agency, Lake Dallas TX Peoples Help Institute, Melrose PA Pet Psyc Youth Programs, Inc., Monterey CA Plasticare of Kids, Inc., Engelwood CO Playtime, Houston TX Prairie House Home Agency, Plainview TX Prairie House Retirement Living, Plainview TX Pre-Admission Association, Honolulu HI Pure Land Learning Center, Inc., Cupertino CA Radian Water Polo Club, Santa Cruz CA R A I N Team, Inc., Arlington TX Recycled Technology for Education Foundation, Pueblo CO Renewed Life, Irving TX Resource Centers for the Insured, Arvada CO Respite Services of Texas, Richmond TX Roanoke Sports Association, Roanoke TX Rockwall Jazz Softball Organization, Heath TX Ruach Haaretz, Inc., Carmel CA Safari Run, Anahuac TX Safe View, Inc., Houston TX Samurai Foundation, Santa Cruz CA San Juan Performing Arts Foundation, Ridgway CO Santa Barbara Flash Girls Basketball, Santa Barbara CA Santa Cruz Athletic Training Support Program, Inc., Soquel CA Santa Cruz Sailing Foundation, Santa Cruz CA Save-Our-Sign Foundation, Bakersfield CA Save Our Strays SOS, Galveston TX Sereno W. & Doris L. Johnson Memorial Scholarship Foundation, Marco Island FL Set for Life, Inc., Portland OR Shanna Zerpoli Foundation, Clovis CA Shepherds Hand, Bayfield CO Silver Cross Ministries, Sunnyvale CA Sisters of Shangrala WA, Rosser TX Sobriety Awareness Fellowship, San Jose CA Society of Iranian Boy Scouts, Inc., Houston TX Soda Creek Open Space Association, Inc., Dillon CO South Central Association for Southern Reenacting & Living History, Inc., The Colony TX South Texas Youth Sports Association, Katy TX Southeast Texas Canine Officers Association, Inc., Spring TX Spirit at Work, Inc., Louisville CO St. Thomas More Society of Santa Clara County, Santa Clara CA Star Jasmine Foundation, Santa Barbara CA Summer Incentive Program Foundation, Cincinnati OH Suncreek Films, Inc., Billings MT Susie Kay Ministries, Inc., Humble TX Tactical Police Foundation, Inc., Dallas TX Team Health Empowerment Endeavor, Inc., Angleton TX Teclab, Inc., Houston TX Teen Intervention Prevention Services, Inc., Houston TX Tehachapi Help and Hope, Tehachapi CA Texas Amateur Golfers Against Abuse, Colleyville TX Texas Federation of Parents, Houston TX Texas Humanitarian Services Group, Inc./Cultural Music Society, Houston TX Texas Incorporated Citizens Property Rights Organization, Houston TX Texas Steinway Society, Dallas TX Third Coast Historic Preservations, Inc., Friendswood TX Thomas E. Keel Ministries, Silsbee TX Thyme Square Charities, Spring TX Tonglen Foundation, Los Angeles CA Touch’e Manufacturing Community Development Foundation, San Jose CA United Black Family, Inc., Ft. Worth TX United Faith, Houston TX University Committee of Merced Foundation, Inc., Merced CA Victims of Violence, Littleton CO Villa Pines Living Center, Inc., Orlando FL Visions of Light Ministries, Houston TX Vocational Opportunities in Aquaculture for Persons With Disabilities, Inc., Bay City TX Voice of an Angel Ministries, Conifer CO Volunteer Corps Community Resource Center, Inc., Ventura CA Waking Spirit Foundation, Louisville CO We Can Recover, Inc., Houston TX Welcome House, Sandpoint ID Wellness Foundation, Hugo CO Wellness Institute International, Phoenix AZ West Texas Old Fighter Pilots for Highway Safety, Midland TX Western Hills Counseling and Family Enrichment Center, Fort Worth TX Willow Creek II Swim Team, Englewood CO Wilmington House Apts Resident Council, Inc., Houston TX World of Challenge All Inclusive Daycare Center, Houston TX WS Senior Care Foundation, Bakersfield CA Youth Education Sponsors, Ventura CA Youthbuild Fort Worth, Fort Worth TX If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)-7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin. Deletions From Cumulative List of Organizations Contributions to Which are Deductible Under Section 170 of the Code The name of an organization that no longer qualifies as an organization described in section 170(c)(2) of the Internal Revenue Code of 1986 is listed below. Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation. If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on January 24, 2005, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation. Harlem Agencies for Neighborhood Development, Inc. New York NY Section 7428(c) Validation of Certain Contributions Made During Pendency of Declaratory Judgment Proceedings This announcement serves notice to potential donors that the organization listed below has recently filed a timely declaratory judgment suit under section 7428 of the Code, challenging revocation of its status as an eligible donee under section 170(c)(2). Protection under section 7428(c) of the Code begins on the date that the notice of revocation is published in the Internal Revenue Bulletin and ends on the date on which a court first determines that an organization is not described in section 170(c)(2), as more particularly set forth in section 7428(c)(1). In the case of individual contributors, the maximum amount of contributions protected during this period is limited to $1,000.00, with a husband and wife being treated as one contributor. This protection is not extended to any individual who was responsible, in whole or in part, for the acts or omissions of the organization that were the basis for the revocation. This protection also applies (but without limitation as to amount) to organizations described in section 170(c)(2) which are exempt from tax under section 501(a). If the organization ultimately prevails in its declaratory judgment suit, deductibility of contributions would be subject to the normal limitations set forth under section 170. Rameses School of San Antonio, Texas San Antonio TX Amplified describes a situation where no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the fact situation set forth therein. Thus, if an earlier ruling held that a principle applied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare with modified, below). Clarified is used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguished describes a situation where a ruling mentions a previously published ruling and points out an essential difference between them. Modified is used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare with amplified and clarified, above). Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revoked describes situations where the position in the previously published ruling is not correct and the correct position is being stated in a new ruling. Superseded describes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example, modified and superseded describes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously published ruling is first modified and then, as modified, is superseded. Supplemented is used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series. Suspended is used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the effect: The following abbreviations in current use and formerly used will appear in material published in the Bulletin. A—Individual. Acq.—Acquiescence. B—Individual. BE—Beneficiary. BK—Bank. B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cumulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Cooperative. Ct.D.—Court Decision. CY—County. D—Decedent. DC—Dummy Corporation. DE—Donee. Del. Order—Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Employer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduciary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Foreign International Sales Company. FPH—Foreign Personal Holding Company. F.R.—Federal Register. FUTA—Federal Unemployment Tax Act. FX—Foreign corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grantee. GP—General Partner. GR—Grantor. IC—Insurance Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—Nonacquiescence. O—Organization. P—Parent Corporation. PHC—Personal Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Partnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Real Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsidiary. S.P.R.—Statement of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D. —Treasury Decision. TFE—Transferee. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpayer. TR—Trust. TT—Trustee. U.S.C.—United States Code. X—Corporation. Y—Corporation. Z —Corporation. A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004-27 through 2004-52 is in Internal Revenue Bulletin 2004-52, dated December 27, 2004. Bulletins 2005-1 through 2005-4 2005-1 2005-1 I.R.B. 2005-1 257 2005-6 2005-4 I.R.B. 2005-4 Proposed Regulations 129709-03 2005-3 I.R.B. 2005-3 351 139683-04 2005-4 I.R.B. 2005-4 Revenue Procedures 2005-1 2005-1 I.R.B. 2005-1 1 2005-2 2005-1 I.R.B. 2005-1 86 2005-10 2005-3 I.R.B. 2005-3 341 Revenue Rulings Tax Conventions Treasury Decisions 9164 2005-3 I.R.B. 2005-3 320 9165 2005-4 I.R.B. 2005-4 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004-27 through 2004-52 is in Internal Revenue Bulletin 2004-52, dated December 27, 2004. Old Article 88-30 Obsoleted by Notice 2005-4 2005-2 I.R.B. 2005-2 289 88-132 Obsoleted by Notice 2005-4 2005-2 I.R.B. 2005-2 289 98-16 Modified and superseded by Rev. Proc. 2005-11 2005-2 I.R.B. 2005-2 307 2001-22 Superseded by Rev. Proc. 2005-12 2005-2 I.R.B. 2005-2 311 2002-9 Modified and amplified by Rev. Proc. 2005-9 2005-2 I.R.B. 2005-2 303 2004-1 Superseded by Rev. Proc. 2005-1 2005-1 I.R.B. 2005-1 1 2004-2 Superseded by Rev. Proc. 2005-2 2005-1 I.R.B. 2005-1 86 2004-3 Superseded by Rev. Proc. 2005-3 2005-1 I.R.B. 2005-1 118 2004-35 Corrected by Ann. 2005-4 2005-2 I.R.B. 2005-2 319 92-63 Modified and superseded by Rev. Rul. 2005-3 2005-3 I.R.B. 2005-3 334 2004-103 Superseded by Rev. Rul. 2005-3 2005-3 I.R.B. 2005-3 334 The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of Documents when their subscriptions must be renewed. The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the Superintendent of Documents. You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under related topics, select More Topics. Then select Internal Revenue Bulletins. Internal Revenue Bulletins are available annually as part of Publication 1976 (Tax Products CD-ROM). The CD-ROM can be purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders) or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January. Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance, detach entire page, and mail to the P.O. Box 371954, Pittsburgh PA, 15250-7954. Please allow two to six weeks, plus mailing time, for delivery. If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page (www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224 Page Last Reviewed or Updated: 23-Sep-2017

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professional_accounting

Prices and Returns on Coupon Bonds (17:17) Fundamentals of Finance Course 1 of 4 in the Introduction to Finance and Accounting Specialization In this course, you’ll learn the basic fundamentals of corporate finance. Based on the pre-term qualifying courses for Wharton MBA students, Professor Jessica Wachter has designed this course for learners who need a refresher in financial concepts, or for those who are learning about corporate finance for the first time. You’ll identify foundational concepts in corporate finance, such as NPV, Compound and Simple Interest, and Annuities versus Perpetuities. You’ll also learn how to apply the NPV framework to calculating fixed-income valuation and Equity, using hypothetical examples of corporate projects. By the end of this course, you’ll have honed your skills in calculating risk and returns to optimize investments, and be able to assess the right set of financial information to achieve better returns for your firm. Quote comprehensive but the solution to quiz questions should be provided in order to know the correct way of solving and approaching the question Some exercises could use a few hints, aside from that looks very good. The notes are good even for someone who is very rusty in algebra. Module 2 - Fixed Income Valuation In this module, you’ll examine fixed income valuation and delve deeper into the yield curve. Using the basic definition of bonds, you’ll be able to identify zero coupon bonds and calculate the return on those bonds. You’ll also discuss the differences between Yield to Maturity and Holding Period Returns, evaluate your investments, and be able to answer the question: “What does return on investment mean?” Through analyzing the Yield Curve, you’ll assess the opportunity cost of receiving money at various events in the future and accurately value investments. By the end of this module, you’ll be able to describe what a bond and zero coupon bond is, calculate the return on those bonds, and calculate a Yield Curve to better assess the value of your investments. Introduction to Fixed Income Valuation (4:53)4:53 Valuation of Pure Discount Bonds (6:06)6:06 Yield to Maturity vs. Holding Period Return (13:11)13:11 Prices and Returns on Coupon Bonds (17:17)17:17 Semi-Annual Bonds (6:27)6:27 The Yield Curve (16:50)16:50 Jessica Wachter Dr. Bruce I. Jacobs Professor in Quantitative Finance So in the previous clip we talked about valuing zero-coupon bonds, the basic building blocks. It so happens that governments and corporations issue coupon bonds, and so do individuals actually mortgages being a form of coupon bonds. So we need to know how to value coupon bonds. So let's start by writing out the cash flows on a coupon bond that might be issued by a corporation or by a sovereign government. So time zero, you don't get anything. When we're valuing the security, we always assume that the cash flows start one year later, so you get in the first year a coupon of C. You get in the second year, a coupon of C. In the third year, you get a coupon of C, in the fourth year you get a coupon of C, and so on and so forth until the maturity of the bond, when you get another coupon and the face or par value. So there we have the cash flows for a coupon bond, and we know how to value them. The price on this coupon bond is C over 1 plus r plus C over 1 plus r squared plus dot dot dot plus C plus F over 1 plus r to the t. So there are two distinct rates associated with coupon bonds. The first, is the coupon rate, which is the coupon payment divided by the face value. The next, is our old friend, yield to maturity. What's the yield to maturity? It's got the same definition as for a zero-coupon bond, but the formula for the zero-coupon bond isn't going to apply anymore. The yield to maturity is the rate such that the present value of the bonds payments equals the price. That's it. So I'm going to write out again the formula for the price of the bond. This r, and of course same r here and same r here, this r, that is my yield to maturity, because we're discounting the payments and making them equal to the price. So here's a good result for coupon bonds. The bond sells for its face value, sometimes called its par value, if and only if, YTM equals C over F. So bond sells for its face value, that means, the price equals the face value, that is true if and only if the yield to maturity equals the coupon rate. Why? Let's look at an example. I think you'll understand why it's true intuitively. So we're going to consider a bond with a four percent coupon rate and the face value of $100. So let's look at the cash flows of this bond. So you get four dollars, four dollars, four dollars, and then $104. So the price is equal to 4 over 1 plus r plus 4 over 1 plus r squared plus 4 over 1 plus r cubed plus 104 over 1 plus r to the fourth. Now, here's my claim. When this r is four percent, this price equals $100. You can prove that algebraically. But think about it for a moment intuitively. Suppose the interest rate is four percent, now somebody wants to borrow money from you and this person is going to pay you the interest every year, and then the principal back at the end. I think it makes sense that the value of that asset to you would be $100. Namely, you're getting your interest payment in the form of the coupons. So the coupons here, exactly offset the time value of money, and so in the end, you're willing to pay the face value of $100. So if P equals F, YTM equals the coupon rate. Basic results about bonds. Now in general, we can look at the present value formula and see that the price is a decreasing function of r. Makes sense, r is in the denominator. We know for the r equal to the coupon rate, the price is equal to the face value. But yields on bonds fluctuate. Sometimes, we're going to be over here, when we're over in this part of the graph, the bond is going to be here. The bond sells at a discount, or we could be over here, and then we're in this part of the graph, the bond sells at a premium. To recap, when r, which is the yield to maturity by the way, when the yield to maturity exceeds the coupon rate, the price is less than the face value, bond sells at a discount. When the yield to maturity is less than the coupon rate, price is greater than the face value, bond sells at a premium. When the yield to maturity is equal to the coupon rate, the price equals the face value, and the bond sells at par. Coupon rate face value. When do bonds sell at par? When they are first issued. Bonds are typically issued at par. So the government or the corporation will choose the coupon rate equal to the prevailing yield to maturity. Then over the course of the bonds lifetime, yields will fluctuate, and sometimes bonds will sell at a discount and sometimes they will sell at a premium. So we define the yield to maturity for a coupon bond as the rate that makes the present value of the payments equal to the price. Now, in the previous clip, we asked, is the yield to maturity a good measure of holding period return, for zero coupon bond, the answer is yes, as long as you hold the bond to maturity. What about for a coupon bond? Let's think a little bit about the holding period return on a coupon bond. So let's go back to the case where our maturity of the bond is four years, the yield to maturity is a percent let's say, the face value is $1,000. Let's make life simple for ourselves and say that the coupon rate is $80, which by the way means, or I should say the coupon payment is $80, which means the coupon rate is eight percent, and so the bond sells at par. Let's say we hold the bond to maturity. What's the holding period return? So that means we're holding this bond for four years. We're looking for V_4 over V_0_1 over t minus 1. So that's what's V_4. Well, V_0, we bought it for $1,000, t is four. So what's question mark? What's V_4? Well, wait a second. Let's think about this. What should be V_4 be? Is V_4 $1,000? No, because you've got the coupons. Well, let's put in the coupon payments. There's four of them. Well, wait a second, this is not right either. After all, some of these coupon payments were received at different times. I mean, isn't there something like the time value of money? Couldn't we have reinvested the coupon payments? So this is not as bad as this, but it's still wrong because it assumes we did not reinvest the coupons. What is the right answer? Well, it depends on what we reinvested the coupons at. Now, here's a reasonable assumption. Now, notice I said reasonable, not perfect. A reasonable assumption is that we reinvested the coupons at the yield to maturity. So the coupon that we received in year 3, we reinvested at eight percent, and that became not $80, but $86.40, the coupon we received in year 2. Well now, we have two years to reinvest this at eight percent. So this becomes $93.31. The coupon we receives in year 1, that becomes $100.78. Adding it all up, we get $1,360.49. Reinvesting at eight percent, our holding period return equals 1360.49 over 1,000_1 over 4 minus 1, we recover a percent, which was a yield to maturity. This is a general result for a coupon bond. YTM equals holding period return, if the bond is held to maturity and the coupons are reinvested at the yield to maturity. You may not be able to reinvest the coupons at the yield to maturity because yields might change. So for coupon bond, unless your need for cash exactly matches the coupons, you face reinvestment risk. If you reinvest at less than the yield to maturity, it will be no surprise, and the notes have some calculations that the holding period return is less than the yield to maturity. If you get lucky, greater than the yield to maturity, then of course the holding period return will be greater than the yield to maturity. So in the case of a coupon bond, the yield to maturity is a flawed yardstick because there's no way to guarantee that you're going to get this. This concept doesn't only apply to coupon bonds, it applies in another scenario where the yield to maturity reappears in a somewhat unexpected way. So the yield to maturity is in fact similar to the notion of the internal rate of return, and the main problem with the internal rate of return is actually the same as the problem that we see for the yield to maturity for coupon bonds.

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professional_accounting

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Drake warrants that the Software shall operate substantially in accordance with the specifications contained in the user manual or other specifications provided by Drake (the “Specifications”) until October 15, 2014 (the “Warranty Period”). DRAKE MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ALL SUCH WARRANTIES BEING EXPRESSLY EXCLUDED. If during the Warranty Period the Software does not operate in accordance with this warranty, Licensee shall promptly notify Drake in writing of any claimed deficiency and provide information sufficient to permit Drake to recreate the deficiency. If a deficiency exists which breaches the warranty, Drake shall, at its sole discretion and within thirty (30) days: (i) correct the deficiency so that the Software operates substantially in accordance with the Specifications; (ii) provide Licensee with a plan acceptable to Licensee for so correcting the deficiency; or (iii) with Drake’s prior written authorization and upon Licensee's de-installation of the Software and return of all copies of the Software to Drake, refund any License Fee paid to Drake, whereupon this Agreement shall terminate. The warranty shall not apply if the Software was not used in accordance with the specifications, the Software was altered, modified or converted by Licensee, the Licensee’s equipment malfunctioned and the malfunction caused the defect, or if the deficiency resulted from any other cause within the control of Licensee. Drake will exercise due care in conforming the Software to the requirements of the Federal and State authorities; however, the Licensee acknowledges that income tax preparation is subject to change and is of such complexity that the Software may have inherent defects. THE REMEDIES SET FORTH ABOVE ARE LICENSEE’S SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF THE WARRANTIES CONTAINED IN THIS AGREEMENT. DRAKE SHALL HAVE NO OTHER LIABILITY OR RESPONSIBILITY TO LICENSEE FOR DAMAGES OF ANY KIND, INCLUDING SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OR RESULTING FROM THE USE OF THE SOFTWARE OR ANY PROGRAMS, SERVICES OR MATERIALS MADE AVAILABLE HEREUNDER OR THE USE OR MODIFICATION THEREOF. LICENSEE SHALL INDEMNIFY AND HOLD DRAKE HARMLESS AGAINST ANY CLAIM BY A THIRD PARTY RELATING TO LICENSEE’S USE OF THE SOFTWARE OR THE RESULTS THEREOF. Amendment, Modification and Waiver. This Agreement may be modified, amended or supplemented by Drake without prior written notice or consent of Licensee. Drake reserves the right to change, modify or update this Agreement with NO PRIOR NOTICE by posting the revised agreement on its website located at www.drakesoftware.com . Governing Law. This Agreement shall be construed under the laws of the State of North Carolina. Arbitration. Any controversy or claim arising out of, or relating to, this Agreement, or the making, performance, or interpretation thereof, other than a claim by Drake for injunctive or other equitable relief, shall be settled by a single arbitrator in the City of Franklin, North Carolina, in accordance with the Rules of the American Arbitration Association then existing. Any judgment on the arbitration award may be entered in any court having jurisdiction over the subject matter of the controversy. The arbitrator shall be experienced in software-related issues. Other Products Provided by Drake. . Licensee understands that Drake may provide to Licensee other products and services other than Software, such as a preparer web site, on-line filing through www.1040.com, on-line research, Drake user forum, etc. Drake makes no guarantee as to delivery time or availability of such products and services. Licensee agrees to hold Drake harmless for any failure in providing or delivering these products and services, and Drake shall have no liability or responsibility to Licensee for damages of any kind, including special, indirect or consequential damages, arising out of or resulting from such other products or services provided to Licensee by Drake. Use of the forum and editorial control of content is at Drake’s discretion. All Drake website content is controlled by Drake, including but not limited to the Drake Forums, Facebook, or other sites and Drake reserves the right to edit, delete, or withdraw access to support and public media websites at its sole discretion. Other Terms. Supported systems are available in documentation and User manual for each Product. All Web Based Products require internet access.

{'timestamp': '2019-04-23T00:22:41Z', 'url': 'https://cloud.drakezero.com/taxty13/web/155355/', 'language': 'en', 'source': 'c4'}

professional_accounting

This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more. AICPA Resources: AICPA.org Tax Section Specialized Issues PASSTHROUGHS Partnerships & LLCs Contributions, Distributions & Basis Reporting & Filing Requirements Formation & Reorganizations Collections & Liens Representations & Examinations Tax Planning & Minimization The Proposed Statement on Standards in Personal Financial Planning: What Does It Mean for You? By Dirk L. Edwards, CPA/PFS, J.D., MBA {:else} {timeSince} {/if} {@if cond="{isCGMA}"} {articleTitle} Editor: Theodore J. Sarenski, CPA/PFS, CFP, AEP Over the past 30 years CPAs have ex panded the planning advice they provide to individuals and families regarding personal finances. As a natural extension of the CPA’s position as the trusted adviser whom individuals call upon for tax advice, personal financial planning (PFP) services have grown to encompass a broad array of services and expertise. To adapt to this rapidly evolving area of practice, the AICPA released this spring an exposure draft of the Proposed Statement on Standards in Personal Financial Planning Practice. Between 1992 and 1996, the AICPA Personal Financial Planning Executive Committee (PFP EC) issued five Statements on Responsibilities in Personal Financial Planning Practice (SORs) to provide guidance to CPA financial planners and ensure that the highest standards of integrity, professionalism, and competence were being applied in the delivery of PFP services. These practice aids were originally published following a public exposure, with a revision, that included merging the five statements into one, the SOR, which was published in December 2010. As a practice aid reflecting best practices, the SOR was intended to provide CPAs with a conceptual framework in their PFP work, versus a prescriptive listing of “must-do” steps or activities. This framework was designed to capture best practice in such PFP areas as: Cash flow planning and budgeting; Income tax planning; Risk management and insurance planning; Retirement planning; Investment planning; and Wealth transfer planning. While it was issued as a practice aid, the SOR over time became the de facto standard for CPAs practicing in the PFP area. In addition, seven state boards of accountancy (Colorado, Florida, Indiana, Kentucky, Michigan, Washington, and Wyoming) adopted the provisions as the required standard, thereby raising the SOR to an authoritative level in those states. With this background, in October 2012 the AICPA Council designated the PFP EC, a senior committee authorized to make statements without clearance with the Council or the AICPA board of directors in matters related to PFP, as the standards-setting body in PFP for Institute members. The Council’s action was based on the goals of establishing definitive standards (versus practice aids) for CPAs providing PFP services, to protect both them and the public and to recognize the growing importance of PFP services. In addition, the Council saw the need for clear, enforceable standards, given the environment of potential regulation of advisers in the wake of financial scandals. Having clear standards for CPAs was also seen as mitigating the risk that courts would hold CPAs to another organization’s standards, even if the CPA was not a member of that outside group or did not hold its credential. This spring, following a two-year drafting process involving practitioners from across the AICPA, including representatives from both the Tax Division and the Private Companies Practice Section, the PFP EC issued an exposure draft for public comment on the Proposed Statement on Standards in Personal Financial Planning Practice. The proposed statement begins with its scope and nature, followed by application material to further describe and interpret it, and is accompanied by a list of frequently asked questions to provide greater clarity. When Does the Statement Apply? The proposed statement addresses the responsibilities of AICPA members when providing PFP services, which are defined as including: Cash flow planning; Risk management/insurance planning; Investment planning; Estate/gift/wealth transfer planning; Elder planning; Charitable planning; Education planning; and Tax planning. The statement would apply when the member provides one or more PFP services and either: Represents to the public or clients that he or she provides PFP services; Would be required to register as an investment adviser; or Sells a product as a result of the engagement. It is not intended to apply to services, whether or not provided as part of a PFP engagement, that are already subject to other AICPA professional standards, such as: Tax services subject to the Statements on Standards for Tax Services; Compilation of personal financial statements subject to Statement on Standards for Accounting and Review Services No. 6, Reporting on Personal Financial Statements Included in Written Financial Plans; or Valuation services subject to the Statement on Standards for Valuation Services No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset. When the statement does apply, it is intended to apply only to the PFP services provided and not to services, such as tax services, covered by other professional standards. What Are the Member’s Responsibilities? The proposed statement outlines the responsibility of the member in PFP engagements. This includes: Complying with all relevant ethical requirements; Having a knowledge of PFP principles and theory and a level of skill to competently identify client goals and objectives, gather and analyze data, consider and apply appropriate planning approaches and methods, and use professional judgment in developing financial recommendations; Evaluating conflicts of interest, determining if the engagement can be performed objectively, and disclosing known conflicts of interest; Complying with federal, state, and other laws and regulations; and Disclosing in writing all compensation to be received. In planning the PFP engagement, the member should document and communicate to the client the scope and nature of the services to be provided, including: The engagement objectives; The scope of the services to be provided; The role and responsibilities of the member, the client, and any other service providers; The timing of the engagement; Scope limitations or other constraints; The responsibility, if any, for helping the client implement planning decisions; The responsibility, if any, for monitoring the client’s progress toward achieving goals; The responsibility, if any, for updating the plan and proposing new action. The proposed statement calls for the use of professional judgment in obtaining and evaluating personal financial information necessary to develop recommendations, including evaluating the reasonableness, appropriateness, and consistency of material assumptions. PFP recommendations should be based on relevant information, the client’s goals, and the client’s overall financial circumstances. Even when an engagement addresses a limited number of personal goals, the member should consider the client’s overall known financial circumstances. Analyses and procedures performed in developing a basis for recommendations should be documented. The member should communicate to the client: A summary of the client’s goals; Significant assumptions; Estimates; Recommendations; A description of any limitations on the work performed; Qualifications to the recommendations, if the effects of planning areas on the client’s overall financial situation were not considered; and Requirements of IRS Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), if recommendations contain tax advice. The proposed statement also addresses the responsibilities of the member when undertaking an implementation, monitoring, or updating engagement. In addition, it addresses working with other service providers and using the advice of other service providers. Practitioners will note that the proposed statement’s provisions are based on the CPA’s exercising professional judgment throughout a PFP services engagement. The statement is not intended to be a prescriptive listing of mechanical actions, but rather a supporting framework for the due diligence and professional expertise of the CPA in the PFP area. With the exposure period on the proposed standard running through Sept. 9, feedback and comments are invited to be submitted to the PFP EC. It is hoped that a final version of the standard, taking into account comments received during the exposure period, will be issued and available for use by members prior to the end of 2013. The exposure draft with supplemental materials is available online. Questions can be posed in advance of submitting comments by contacting PFP staff and the PFP EC at [email protected]. FAQs on the Proposed Statement on Standards in Personal Financial Planning Q: What services are encompassed within personal financial planning? A: See the list here. Q: When does the proposed statement apply to me? A: The statement applies when an AICPA member provides personal financial planning services and represents to the public or clients that he or she provides personal financial planning services; engages in activities that would require registration as an investment adviser under federal or state law; or sells a product as a result of the engagement. See the list here. Q: Are there exceptions to the statement’s applicability? A: The statement does not apply to professional services, whether or not provided as part of a PFP engagement, subject to other professional standards. See the list here. Q: Does the statement apply to a CPA who works for a non-CPA firm that engages in personal financial planning or family office work? A: The statement applies to a member, not a firm or organization. Therefore, the application of the statement must be considered at an individual member level. It does not matter in what form or organization the member practices. Q: How do I determine if I am engaging in activities that would require me to register as an investment adviser under federal or state law? A: See The CPA’s Guide to Investment Advisory Business Models to determine when you are deemed to be providing investment advice. Q: What constitutes representing to the public (or to a client) that I provide personal financial planning services? A: This takes place when you take an action that a client or the public could reasonably rely on to conclude that you provide personal financial planning services. Examples include: Advertising that you provide personal financial planning services; Referring on your business card to personal financial planning services; Placing brochures or other client educational materials in your office describing personal financial planning services; Including a description of personal financial planning services in an engagement letter; Advertising in telephone Yellow Pages under personal financial planning categories; Orally representing to a client or prospective client that you personally provide financial planning services; Soliciting financial planning engagements in any marketing materials used by you; or Indicating you provide personal financial planning services in client proposals executed by you. EditorNotes Theodore J. Sarenski is president and CEO of Blue Ocean Strategic Capital LLC in Syracuse, N.Y. Dirk Edwards practices as the firm Edwards Consulting LLC in Lake Oswego, Ore. Mr. Edwards is a past chairman of the AICPA Personal Financial Planning Executive Committee and current chairman of the Responsibilities in PFP Practice Task Force. Mr. Sarenski is chairman of the AICPA Personal Financial Planning Executive Committee’s Elder Planning Task Force and is a member of the AICPA Advanced Personal Financial Planning Conference Committee and Financial Literacy Commission. For more information about this column, contact Mr. Edwards at [email protected]. Latest Document Summaries Tax Clinic Donations to charities in exchange for SALT credits IRS finalizes rules on eligible terminated S corporations Recent changes to the rehabilitation tax credit Some paper forms can temporarily be e-signed 50 years of The Tax Adviser The January 2020 issue marks the 50th anniversary of The Tax Adviser, which was first published in January 1970. Over the coming year, we will be looking back at early issues of the magazine, highlighting interesting tidbits. Quirks spurred by COVID-19 tax relief This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. {/ne} {#issueCover.renditions.breakpoints} {/issueCover.renditions.breakpoints} Tax Insider newsletter Get important tax news, insightful articles, document summaries and more delivered to your inbox every Thursday. Subscribe for free. AICPA Tax Section Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. Tax Section membership will help you stay up to date and make your practice more efficient. The Tax Adviser on Twitter AICPA Tax Practitioners on Linkedin Document summaries Journal of Accountancy news alerts CPE Direct CPA Letter Daily About The Tax Adviser AICPA Sites AICPA Member Service Center AICPA Store Journal of Accountancy FM magazine © Association of International Certified Professional Accountants. All rights reserved.

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professional_accounting

Substance Over Form Concept of Accounting Definition of Substance Over Form Concept (Convention, Principle) of Accounting: Under Substance over form concept (convention, principle) of accounting, “transactions should be dealt with reference to their economic reality rather than their legal form”. This means that while maintaining accounting records, substance of the transaction should take precedence over its legal form. Explanation, Use and Application: Usually the legal form of a transaction is frequently descriptive of its economic substance, so no problem arises. In some cases when the two differ and both give different results. Examples include assets held on finance lease and hire purchase which are treated as non-current assets, although they are not in the legal ownership of the business. A sells a machine to B for $20000 and at the same time agrees to buy it back in 1 year’s time for $21800. The machine remains on A’s premises and A continues to use and to insure the machine. These related transactions are likely to arouse some suspicion. What is actually going on here? In legal terms, following the first transaction, B is clearly the owner of the machine. However, the substance of the transaction is that A retains the risks and rewards of ownership, and effectively, has taken out a loan for a year at an interest rate of 9%. Applying the substance over form concept of accounting, A should continue to carry the asset in its statement of financial position, with a corresponding liability to B. B would record the loan as a receivable in its own statement of financial position. Why might this distinction between substance and form matter? What is the motivation for A to keep the loan off the statement of financial position? Let us extend the example a little further. A is financed partly by long-term borrowing of $30000. One of the conditions under which the loan was made (the ‘covenant’) was that A’s total liabilities, both long- and short-term should not exceed $80000. Extracts from two versions of A’s statement of financial position, one drawn up to show substance over form and the other to show legal form after the transaction are as follows: The statement of financial position prepared adopting the principle of substance over form shown total liabilities of $30000 + $65000 = $95000. This clearly breached the terms of the covenant. The statement of financial position prepared according to strict legal form, on the other hand, shown total liabilities of $30000 + $45000 = $75000. The terms of the covenant, technically, have not been breached. The business has purchased a machine on hire purchase business as this does not legally belong to the business so is not shown as a non-current asset in the balance sheet. The substance over form concept allows that transactions and other events are accounted for and presented in accordance with their economic and commercial reality rather than their legal form so machinery should be recorded as non-current asset. Basic Accounting Concepts and Conventions Accrual Concept of Accounting Materiality Concept of Accounting Business Entity Concept of Accounting Going Concern Concept of Accounting Historical Cost Concept of Accounting Financial Accounting Topics Absorption Costing Approach or Total Costing Accounting Concepts and Conventions Accounting for Assets, Liabilities and Capital Accounting for Incomes and Expenses Accounting for Inventories Accounting for Non-Current Asset Bad Debts and Provision for Doubtful Debts Bank Reconciliation Statements Books of Original Entry and Division of Ledger Capital and Revenue Financial Statements-An Introduction Inventory Valuation Management of Cash Budgets Marginal Costing Home - Contact us - About us - Privacy policy

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professional_accounting

George Bernard Shaw’s friend: “I have been invited to address the Royal Academy and they have given me 15 minutes. How can I tell them everything that I know in 15 minutes?” Shaw replied, “If I were you, I would speak v-e-r-y s-l-o-w-l-y.” Last month’s column told you half of what I know about the tax consequences of charitable contributions. Here’s the rest of the story. Qualified appraisal and substantiation requirements must be met to qualify for the income tax charitable deduction. For a discussion of those rules for artworks and other gifts, see “Substantiating Charitable Gifts—Specimen Letter to Clients” at the end of this column. Art Advisory Panel. Charitable gifts of artworks almost always present valuation issues. An appraisal by a respected, unbiased expert is key to substantiating a charitable deduction for a donated work of art. The Internal Revenue Service has its own experts: the Art Advisory Panel. Valuations of artwork exceeding $50,000 must be sent to the panel, though smaller claims may be referred as well. Here is how the panel works: Art valuation questions arising from audits of income, gift or estate tax returns in the District Offices may be referred to the National Office for review. Appraisals involving art works valued at $50,000 or more must be so referred. The purpose of the panel meetings is to discuss and make recommendations regarding the acceptability of taxpayers’ appraisals of works-of-art. If the Panel recommends rejection of a taxpayer’s appraisal, it may also recommend a different valuation, the securing of additional information or consultation with a specialist. Prior to the meetings, National Office art appraisers send photographs and written materials to the panelists concerning the works of art they will be evaluating. The written materials incorporate information from the taxpayer’s appraisal reports, as well as the results of the staff’s own authentication and market research. On a number of items, one or more of the panelists or staff will have seen the property itself and may comment on the adequacy of the taxpayer’s photograph and description. The panelists are sent all available probative information on each work, such as: size, medium and support, physical condition, history of ownership, public exhibitions and citations in literature. In addition, panelists are provided information on public and private sales of apparently similar works by the same artists. They are also informed as to the valuation date and the value actually claimed on the taxpayer’s tax return. Other information, however, is not sent to the panelists, but may be orally introduced if and when necessary. For example, if a work’s physical condition or aesthetic quality is uncertain, its location may be disclosed to facilitate planning an inspection of the work by one or more current panelists. That location information would be introduced even though it would tend to reveal whether the work was involved in a contribution or estate tax situation. The effect and amount of the tax consequence of raising or lowering a valuation typically is not disclosed to the panelists. However, since charitable contribution items are virtually never valued conservatively, it's often obvious to the panelists as to whether the appraisal is for a contribution deduction or for estate tax purposes. The identity of the taxpayer’s appraisers is revealed to the panelists only after they have reached their consensus, unless, prior to that time, the panel recommends IRS consultation with an outside specialist whom the taxpayer has already utilized. Although taxpayers’ names are not sent out to the panelists, the prominence in the art world of many of the works being valued, or discussed as comparable sales, often results in the identities of taxpayers, and even other art buyers, being recognized by the panelists. This is the primary reason why panel meetings are closed to the public. To minimize recognition of taxpayers’ identities, the appraisal review discussion is held in alphabetical order by the artists’ last names. Appraisals of any one taxpayer’s collection are thereby interspersed with the appraisals of other taxpayers. The commingling of the collections minimizes the likelihood of recognition of a taxpayer’s entire collection as such. After a panel meeting, the National Office art appraisers prepare a valuation report on each rejected appraisal. The reports are sent to the District Office which initially referred the taxpayer’s valuation. The reports are then made available to the taxpayers whose appraisals have been rejected. The referring districts are notified by memorandum on those cases having acceptable appraisals. In some cases, a taxpayer may then secure additional information to better support the valuation. That information, if deemed substantive by the staff, is submitted to the panel for reconsideration at a subsequent meeting. The panel’s expertise originally focused on Western art, but trends in art donation prompted the establishment of an IRS Print Panel and the expansion of the panel from 12 to 23 members in order to provide expertise in Oriental, pre-Columbian and primitive art. The 2012 panel consisted of 19 members. The panel’s recently released 2012 annual report. The Fine Arts Panel met twice, reviewed 444 items with an aggregate taxpayer valuation of $281,859,200 on 43 taxpayer cases under consideration and recommended adjustments totaling $66,066,800. The panel recommended acceptance of 51 percent of the appraisals reviewed and adjustments on 49 percent. Two percent of the appraisals required additional staff development. On the adjusted items, the panel recommended a 52 percent reduction in the amount claimed by taxpayers for income tax charitable deductions and a 47 percent increase in appraisals for non-charitable gifts. This has been the immutable pattern year after year: the IRS views taxpayers’ valuations as high for charitable transfers (for which income tax deductions are claimed) and low for non-charitable transfers (on which the IRS wants estate and gift taxes). Not surprisingly, taxpayers see it just the other way around. The panel reconsidered 26 items in 3 taxpayer cases originally valued at $58 million by the taxpayers and $82,150,000 by the panel. After reviewing the additional information, the panel revised their recommendation to $82,650,000 on these items. Donors may see Art Advisory Panel notes. The Bernardos gave a 21-foot granite sculpture to the Massachusetts Bay Transit Authority, claiming a $593,000 income tax charitable deduction. The IRS disallowed the deduction after its Art Advisory Panel determined that the sculpture’s fair market value was substantially less than that claimed by the donors. The Bernardos sued the IRS, demanding to see the panel’s notes; the IRS wanted to see the Bernardos’ documents. The Tax Court ordered the IRS to hand over the panel’s notes, stating that those notes aren’t protected by executive privilege because the purpose of holding closed-panel meetings is to protect taxpayers’ confidential information, not to protect intra-governmental communications. Some of the Bernardos’ valuation documents were protected by the attorney-client privilege, but others had to be furnished to the IRS because the Bernardos had waived that privilege. The work product doctrine protected documents prepared after the IRS notified the Bernardos of the panel’s findings. Bernardo, 104 TC 677 (1995). Ruling—valuing art sold at auction. How do you value art works sold by an estate at auction? Sometimes, purchasers of art works pay a 10 percent “buyer’s premium” directly to the auction house. This payment is in addition to the “hammer price,” which is what the item sells for at auction. In Letter Ruling 9235005, in a case not dealing with a charitable gift, an estate received the net proceeds of the sale (the total paid by the buyers, less the commission paid to the auction house) and reported that amount as the fair market value for inclusion in the gross estate. The IRS ruled that the fair market value of works sold at a public auction is the sale price, including any premium paid by the buyer to the auction house on the purchase. Comment. This is a harsh result because the estate doesn’t receive the buyer’s premium; therefore, it isn’t available for distribution to the beneficiaries. Possible caveat. The fact that the premium may be included in the gross estate could be cause for concern, even though it may later be deducted as a sales expense. Elections that are available to reduce an estate tax liability (for example, special-use valuation, the ability to stretch out the period over which the tax on a closely held business is due) are keyed to the value of the gross and adjusted gross estates. Including the buyer’s premium in the gross (and hence also the adjusted gross) estate may affect those calculations. “Buyers premium” for unrelated art gift. Generally, a sale by the charity soon after the gift makes the use unrelated. So, the higher fair market value (the addition of the 10 percent buyer’s premium) would not increase a donor’s charitable deduction on a gift of appreciated art works. Instead, the deduction would be limited to the basis. Suppose, however, that the fair market value is less than the basis. In that case, the deduction is for the fair market value and if that value can be increased under the 10 percent “buyer’s premium” rule, the donor would have an argument that the higher fair market value should be allowed (as long as it's still lower than the basis). Post-contribution developments may affect valuation. The Dohertys donated a painting to a museum and claimed a $350,000 charitable deduction, believing that it had been painted by a famous artist. The IRS said the painting was a forgery worth $100. In computing the painting’s value, the Tax Court considered the doubts about the painting’s authenticity. The Dohertys appealed, arguing that the Tax Court shouldn’t have considered the dispute over authenticity because it didn’t arise until after the painting was donated. The Ninth Circuit affirmed. Doherty, 16 F.3d 338 (9th Cir. 1994). The facts forming the basis of the authenticity dispute existed when the painting was donated and would have affected the price a buyer was willing to pay for the painting. The appeals court also rejected the Dohertys’ claim that the Tax Court’s valuation was clearly erroneous, saying: [C]omplex factual inquiries such as valuation require the trial judge to evaluate a number of facts: whether an expert appraiser’s experience and testimony entitle his opinion to more or less weight; whether an alleged comparable sale fairly approximates the subject property’s fair market value; and the overall cogency of each expert’s analysis. Trial courts have particularly broad discretion with respect to questions of valuation. [Citing Sammons, 838 F.2d at 333-34 (9th Cir. 1988), quoting Ebben, 783 F.2d 906, 909 (9th Cir. 1986).] Advance valuation of artwork gifts. There’s a way for donors to pay the IRS a user fee and get a statement that could be used to substantiate the value of art gifts for income, gift and estate tax purposes. But the donor’s request for an IRS statement must be made before filing a tax return claiming the charitable deduction. And the donor must make the gift before trying to strike a valuation agreement with IRS. What is art? Like beauty, it may be in the eye of the beholder. But for purposes of the IRS’s procedure, art includes “paintings, sculpture, watercolors, prints, drawings, ceramics, antique furniture, decorative arts, textiles, carpets, silver, rare manuscripts, historical memorabilia and other similar objects.” Rev. Proc. 96-15, 1996-1 CB 627. What items are covered? Items that have been appraised at $50,000 or more and that have been transferred as a charitable gift during lifetime or at death. The IRS may issue a statement for lesser-valued items if: (1) at least one of the items is appraised at $50,000 or more; and (2) it determines that issuing a statement would be in the “best interest of efficient tax administration.” It may refuse to issue a statement “when appropriate in the interest of efficient tax administration.” In that case, the user fee will be refunded. Contents of the request. The request must include: (1) a copy of a “qualified appraisal” of the artwork; and (2) a $2,500 fee for a statement for up to three items, plus $250 for each additional item. The fee won’t be refunded if a donor withdraws the request. Further, the request must be accompanied by a declaration that the information contained in it is accurate under penalties of perjury. The qualified appraisal. Current appraisal requirements under Reg. Section 1.170A-13(c)(3) for gifts over $5,000 apply. And the following additional requirements must be satisfied: The appraisal in support of the statement must include: 1. A complete description of the artwork including: (a) the name of the artist or culture; (b) the title or subject matter; (c) the medium, such as oil on canvas, or watercolor on paper; (d) the date created; (e) the size; (f) any marks, signatures, or labels on the artwork, on the back or affixed to the frame; (g) the history of the item, including proof of authenticity, if such information is available; (h) a record of any exhibitions at which the item was displayed; (i) any reference source citing the item; and (j) the physical condition of the item; 2. A professional quality photograph of a size and quality fully showing the item, preferably an 8 x 10 inch color photograph or a color transparency not smaller than 4 x 5 inches; and 3. The specific basis for the valuation. A completed Section B, Donated Property Over $5,000 (formerly the appraisal summary) of Form 8283, Noncash Charitable Contributions, must also be included with the request. How long will it take? Requests received by January 15 will ordinarily result in a statement being issued by June 30, and those received by July 15 will ordinarily result in a statement being issued by December 31. When the IRS agrees with a donor’s appraisal. It will issue a statement approving the donor’s appraisal. When the IRS disagrees. It will issue a statement indicating the basis of its disagreement and its own determination of value. Whether or not there is an agreement. A copy of the IRS’s statement must be attached to and filed with the return on which the contribution was first reported. A donor who files a return before receiving the statement must indicate on the return that a statement has been requested and attach a copy of the request to the return. When the statement is received, the donor must then file an amended or supplemental return with the statement attached. More ifs, ands, buts. A donor can rely on the IRS’s statement. Exceptions. But, you can’t rely on a statement issued to someone else or on a statement based on inaccurate statements of material facts. Rev. Proc. 96-15, 1996-1 CB 627. Send requests to: Requests for Statement of Value, Internal Revenue Service, Attention: Art Appraisal (C:AP:ART), P.O. Box 27720, McPherson Station, Washington, DC 20038. Is the fee deductible? Apparently, a donor can deduct the cost of the IRS valuation statement as an Internal Revenue Code Section 212(3) deduction, not as a charitable deduction under IRC Section 170. IRC Section 212 allows a deduction for costs incurred in determining taxes due. That’s how the IRS ruled on the deductibility of the cost of an appraisal to back up a claimed charitable deduction. Rev. Rul. 67-461, 1967-2 CB 125. What’s the difference? A deduction is a deduction is a deduction. Right? An IRC Section 212(3) deduction is a “miscellaneous” deduction, only deductible above a 2 percent of adjusted gross income floor. IRC Section 67(a). And then, it is subject to the reduction rule of IRC Section 68 (Pease limitation). SUBSTANTIATING CHARITABLE GIFTS — SPECIMEN LETTER TO CLIENTS You have my permission to use this letter Dear [client’s name]: The federal government encourages your generosity by allowing you to deduct your gifts to charities on your income tax return if you itemize. However, you must follow the IRS’s reporting and substantiation rules to assure your charitable deduction. I hope that this letter highlighting the IRS’s requirements will be helpful to you when preparing your federal income tax return for the year 2012 (due by April 15, 2013). The rules are numerous — and overlapping. This letter tells about: (1) reporting requirements for noncash charitable contributions; (2) rules for hard-to-value property; and (3) receipts you need to substantiate cash and noncash contributions. For some noncash charitable gifts, Form 8283 (Noncash Charitable Contributions) must be filed. That form and its instructions are enclosed. The form is the latest available today. Before filing your income tax return, I suggest that you check the IRS’s latest forms and instructions for any last-minute changes. If your noncash gifts for the year total more than $500, you’ll have to include Form 8283 with your income tax return. Section A — the simpler part of the form — is used to report gifts valued at $5,000 or under. Section A can be completed by you or your tax return preparer. When the property’s value is more than $5,000 ($10,000 for closely held stock), you’ll generally need to have it appraised. The appraiser’s findings are reported in Section B of Form 8283. Those rules also apply if you give “similar items of property” with a total value above $5,000 — even if you gave the items to different charities. The IRS says that “similar items of property” are items of the same generic type, including stamps, coins, lithographs, paintings, books, nonpublicly traded stock, land and buildings. So, for example, if you have six paintings worth $1,000 each and contribute each one to six different charities, the appraisal rules would apply. Special rule for publicly traded securities. You don’t need an appraisal or Section B of Form 8283 for gifts of publicly traded securities, even if their total value exceeds $5,000. But you must report those gifts (when the value is more than $500) by completing Section A of Form 8283 and attaching it to your return. Closely held stock. For gifts of nonpublicly traded stock, an appraisal is not required as long as the value is not over $10,000, but part of Section B of Form 8283 must be completed if the value is over $5,000. And if the gift is valued at over $10,000, then both an appraisal and Section B of Form 8283 are required. If you need an appraisal, the gift must be made within 60 days after the date of the appraisal. The property can be appraised after the date of the gift (the appraisal to state the property’s value on the date of the gift). You must receive the appraisal by the due date (including extensions) of the return on which the deduction is first claimed. Section B of Form 8283. It must be signed by the appraiser and by the charity that received your gift. It’s essential to complete Section B of Form 8283 and to attach that form to your tax return. Qualified appraisal. A qualified appraisal is an appraisal document that is prepared by a qualified appraiser in accordance with generally accepted appraisal standards and otherwise complies with the qualified appraisal requirements. Qualified appraiser. The requirements to be a “qualified appraiser” are stringent. The definition is critically important: no qualified appraiser, no deduction for property gifts valued over $5,000 (over $10,000 for closely held stock). Under the current definition, a qualified appraiser is an individual who (1) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements (established by the IRS in regulations); (2) regularly performs appraisals for which he or she receives compensation; and (3) can demonstrate verifiable education and experience in valuing the type of property for which the appraisal is being performed. An individual has education and experience in valuing the relevant type of property, as of the date the individual signs the appraisal, if the individual has: successfully completed (for example, received a passing grade on a final examination) professional or college-level coursework in valuing the relevant type of property, and has two or more years of experience in valuing the relevant type of property; or earned a recognized appraisal designation for the relevant type of property. Ifs, ands, buts. A qualified appraiser may not be related to — or regularly employed by — you or the charitable donee and may not be a party to the transaction by which you acquired the property being appraised, unless the property being appraised is donated within two months of the date of acquisition and its appraised value does not exceed the purchase price. Appraisal fee. Generally, no part of the appraisal fee can be based on a percentage of the property’s appraised value. An appraisal fee isn’t a charitable gift. If you itemize, the appraisal fee is deductible on your income tax return as a miscellaneous deduction. But it’s only deductible if it — together with other miscellaneous deductions — exceeds a 2% of adjusted gross income floor. Special rule for art gifts. If you donate artworks with a total value of $20,000 or more, your return has to include a copy of the signed appraisal itself, not just Section B of Form 8283. If any single artwork is worth $20,000 or more, IRS may ask you for an 8 × 10 color photo (or a 4 × 5 color slide) of the donated property. You don’t have to send the photo with your tax return, just have one ready. Special rule for very large gifts. For gifts valued at over $500,000, the donor must attach the qualified appraisal — as well as Section B of Form 8283 — to his or her tax return. For purposes of the dollar thresholds, property and all similar items of property donated to one or more charitable donees are treated as one property. As noted above, a copy of the appraisal must be attached to the tax return when an artwork is worth $20,000 or more. Gifts of clothing or household items. No deduction is allowed for a contribution of clothing or a household item unless the item is in good condition or better at the time of the contribution and the donor meets the substantiation requirements. This rule doesn’t apply to a contribution of a single item of clothing or a household item for which a deduction of more than $500 is claimed if the donor submits with the return on which the deduction is claimed a qualified appraisal prepared by a qualified appraiser and a completed Form 8283 (Section B). The term household items includes furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry, gems, and collections are not household items. Used car donations. The deduction for charitable contributions of autos, other motor vehicles, boats and airplanes exceeding $500 depends on the use of the vehicle by the charity. A deduction is not allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment by the charity. If the charity sells the vehicle without any significant intervening use or material improvement of the vehicle, the deduction is the smaller of the gross proceeds from the sale or the vehicle’s fair market value on the date of the contribution. The acknowledgment, which is on IRS Form 1098-C (or a statement containing the same information), must contain the name and taxpayer identification number of the donor, and the vehicle identification (or similar) number. The acknowledgment must provide a certification that the vehicle was sold in an arm’s length transaction between unrelated parties, and state the gross proceeds from the sale. If the charity makes a significant intervening use or makes a material improvement to the vehicle, the deduction is the fair market value at the time of the contribution. The acknowledgment must contain a certification of the use or material improvement of the vehicle and the duration of that use, and a certification that the vehicle will not be transferred in exchange for money, other property, or services before completion of that use or improvement. If the charity gives or sells the vehicle to a needy individual at a price significantly below fair market value in direct furtherance of a charity’s charitable purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation, the deduction is the fair market value at the time of the contribution. You must obtain an acknowledgment from the charity and substantiate the fair market value. Contemporaneous written acknowledgment. The charity must provide a written acknowledgment within 30 days of sale of a vehicle that is not significantly improved or materially used by the donee, or, in all other cases, within 30 days of the contribution. Penalties. A charity will be penalized for knowingly furnishing a false or fraudulent acknowledgment, or knowingly failing to furnish a timely acknowledgment showing the required information. You might want an appraisal (even if your gift doesn’t require one) in case you have to convince the IRS of the property’s worth. And Form 8283 asks how you valued your gift. Generally, if a charity receives a gift that is subject to the appraisal rules (and it signed Form 8283), the charity must report on Form 8282 to both the IRS and the donor if it disposes of the gift within three years. However, the charity needn’t report its disposal of an item that you certify is worth $500 or less. Form 8283 has a section for that purpose (Section B, Part II). Bank record or written communication required. No income tax charitable deduction is allowed for a gift in the form of cash, check, or other monetary gift unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the donee’s name, the contribution date, and the gift amount. Monetary gift includes a transfer of a gift card redeemable for cash, and a payment made by credit card, electronic fund transfer, an online payment service, or payroll deduction. Bank record includes a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website, or a credit card statement. Written communication includes electronic mail correspondence. Substantiation of charitable contributions of less than $250. An income tax charitable deduction isn’t allowed for noncash charitable contributions of less than $250 unless the donor maintains for each contribution a receipt from the donee showing: (1) the name and address of the donee; (2) the date of the contribution; (3) a description of the property in sufficient detail under the circumstances (taking into account the value of the property) for a person who is not generally familiar with the type of property to ascertain that the described property is the contributed property; and (4) for securities, the name of the issuer, the type of security and whether the securities are publicly traded securities. Substantiation requirements for contributions of $250 or more. To deduct any gift of $250 or more, you must have a written receipt from the charity describing (but not valuing) the gift. If any goods or services were given to you in exchange for your gift, the receipt must describe them and contain a good faith estimate of their value. If the charity provided no goods or services in consideration of your gift, the written receipt must so state. The receipt need not contain your Social Security number. Generally, separate payments are considered separate contributions for purposes of the $250-or-more threshold unless the payments are made on the same day. Cash gifts. For cash gifts, regardless of the amount, recordkeeping requirements are satisfied only if the donor maintains as a record of the contribution, a bank record or a written communication from the donee showing the name of the donee and the date and amount of the contribution. A bank record includes canceled checks, bank or credit union statements and credit card statements. Bank or credit union statements should show the name of the charity and the date and amount paid. Credit card statements should show the name of the charity and the transaction posting date. The recordkeeping requirements will not be satisfied by maintaining other written records. Donations of money include those made in cash, by check, electronic funds transfer, credit card and payroll deduction. Contributions made by payroll deduction. For a charitable contribution made by payroll deduction, a donor is treated as meeting the substantiation requirements if no later than the date for receipt of substantiation the donor obtains: (1) a pay stub, Form W-2, “Wage and Tax Statement,” or other employer-furnished document that sets forth the amount withheld during the taxable year for payment to a donee; and (2) a pledge card or other document prepared by or at the direction of the donee that shows the name of the donee. Transfers to charitable remainder trusts. The above substantiation requirements don’t apply to a transfer of cash, check, or other monetary gift to a charitable remainder annuity trust or a charitable remainder unitrust. The requirements do apply, however, to a transfer to a pooled income fund. So it is necessary to get a timely receipt meeting the $250-or-more substantiation rules for a gift to a pooled income fund. Transfers to gift annuities. When the gift portion of a gift annuity or a deferred payment gift annuity is $250 or more, a donor must have an acknowledgment from the charity stating whether any goods or services — in addition to the annuity — were provided to the donor. If no additional goods or services were provided, the acknowledgment must so state. The acknowledgment need not include a good faith estimate of the annuity’s value. Charitable remainder gifts in personal residences and farms. Regulations don’t specifically deal with these gifts. However, to be safe, get a timely receipt meeting the $250-or-more substantiation rules. Grantor charitable lead trusts for which an income tax charitable deduction is allowable. The regulations don’t specifically deal with these gifts. Charitable remainder trusts, as stated above, aren’t subject to the substantiation rules. Charitable lead trusts may also be exempt. Nevertheless get a timely receipt meeting the $250-or-more rules. THE RECEIPT-IN-HAND RULE — THIS IS CRUCIAL: You must have the receipt in your possession before you file your income tax return. If you file your return after the due date (or after an extended due date), the receipt must nevertheless have been in your hand by the due date (plus any extensions). If you made a gift of $250 or more to a religious organization and received in return solely an intangible religious benefit that generally isn’t “sold in commercial transactions outside the donative context” (e.g., admission to a religious ceremony), the receipt must say so, but need not describe or value the benefit. But this exception doesn’t apply, for example, to tuition for education leading to a recognized degree, travel services, or consumer goods. If a charity receives a gift of over $75 from you for which you received or were entitled to a benefit (other than solely an intangible religious benefit). The charity must, in connection with the solicitation or receipt of the gift, give you a written statement that: (1) informs you that the gift deduction is limited to the excess of any money (and the value of any property other than money) contributed by you over the value of the goods or services provided by the charity; and (2) provides you with a good faith estimate of the value of the goods or services. However, both you and the charity may generally disregard token benefits you receive for a contribution. The IRS has ruled that a charitable gift is fully deductible if it is made in a fundraising campaign in which the charity informs its donors how much of their payment is a deductible contribution and: (1) the donor receives benefits having a fair market value of $99 or 2% of the payment, whichever is less; or (2) the donor gives the charity at least $49.50 and receives a low-cost or token item (e.g., a bookmark, mug or T-shirt). The item must bear the charity’s name or logo and cost the distributing charity — or the charity on whose behalf the item is distributed — no more than $9.90. Further, donors needn’t reduce their deductions when they receive unsolicited free items that cost the charity — or the charity on whose behalf the item is distributed — no more than $9.90. Those token benefit amounts are for 2012 charitable gifts. The dollar figures are adjusted annually for inflation. Please call if you have any questions — and the earlier the better so that last-minute problems can be avoided. enclosure: Form 8283 and instructions TAGS: Philanthropy

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Blue Apron Holdings, Inc. Reports Fourth Quarter and Full Year 2020 Results Net revenue for the fourth quarter of 2020 increased 22% year over year to $115.5 million driven, in part, by the continued execution of the company’s growth strategy, including through product innovation. Key customer metrics’ year-over-year growth continued in the fourth quarter as Average Order Value grew 6% to over $61, the highest reported level since prior to 2015; Orders per Customer rose 15% year over year to 5.3 and Average Revenue per Customer increased 22% to $327. Net loss improved $10.0 million, or 46%, year over year in the fourth quarter to $(11.9) million; adjusted EBITDA improved $6.7 million, or 80%, year over year to $(1.7) million. Strengthened executive team with the appointments of Randy Greben as Chief Financial Officer and Charlean Gmunder as Chief Operating Officer. First quarter 2021 outlook contemplates quarterly sequential and year over year Customer and net revenue growth. NEW YORK--(BUSINESS WIRE)--Blue Apron Holdings, Inc. (NYSE: APRN) announced today financial results for the quarter and full year ended December 31, 2020. “Fourth quarter operating results exceeded guidance as we grew net revenue year over year by 22% to $115.5 million. The fourth quarter marks the third consecutive quarter of double-digit year over year increase in net revenue and highlights our continued operating momentum,” said Linda Findley Kozlowski, Blue Apron’s President and Chief Executive Officer. “Product innovation remains central to our strategy and initiatives to drive customer attraction and engagement. We introduced more new products in 2020 than in any prior year, including the recent launch of our new recipe customization and additional ways for our customers to get more meals from us each week. Both product introductions were well received by our customers and contributed to growth in key customer metrics such as Orders per Customer and Average Order Value, as well as Average Revenue per Customer, which exceeded $300 for the third consecutive quarter. We continue to support our brand and entire range of offerings with more efficient marketing, which is helping us see faster payback periods on customer acquisition.” Key Customer Metrics Key customer metrics included in the chart below reflect the company’s deliberate marketing investments while executing on strategic priorities, as well as the ongoing impact of changes in consumer behavior and labor availability as a result of the COVID-19 pandemic, in addition to other trends of the business and seasonality. Three Months Ended, Orders (in thousands) Customers (in thousands) Average Order Value Orders per Customer Average Revenue per Customer For a description of how Blue Apron defines and uses these key customer metrics, please see “Use of Key Customer Metrics” below. Kozlowski continued, “We expect revenue growth to continue in 2021, as we benefit from the ongoing execution of our growth initiatives focused on driving demand, ongoing fulfillment center efficiency initiatives and capacity improvements. With our improved balance sheet and financial flexibility, we intend to leverage our operating momentum with plans for additional new product innovations this year. Importantly, we plan to offer additional variety, flexibility and choice that we believe will further differentiate Blue Apron while accelerating marketing investment to drive additional customer engagement and retention. We expect this work will result in a year-over-year first quarter net revenue growth of approximately 23% to 27%. In addition, for full year 2021, we expect to see year over year double-digit revenue growth, while we continue to invest to build our foundation to achieve our goal of consistent future annual positive adjusted EBITDA.” Fourth Quarter 2020 Financial Results Net revenue in the fourth quarter of 2020 increased 22% year over year to $115.5 million with continued improvement in Orders per Customer and Average Order Value which reflect, in part, the continued execution of the company’s growth strategy, including through product innovation, as well as changes in consumer behavior due to the pandemic as customers ordered more frequently and added more meals per order. Net revenue increased 3% sequentially quarter over quarter, largely due to higher than normal credits relating to an onion recall in the third quarter compared to lower refunds and credits in the fourth quarter, coupled with expanded product offerings and marketing initiatives in the fourth quarter. Cost of goods sold, excluding depreciation and amortization (COGS), as a percentage of net revenue, improved 40 basis points year over year from 61.0% to 60.6% primarily driven by efficiencies and scale in shipping, fulfillment packaging, and labor costs, partially offset by increased food costs relating to outsourcing certain functions to help increase fulfillment center capacity in response to increased customer demand during the COVID-19 pandemic. COGS improved by 580 basis points as a percentage of net revenue on a sequential basis largely due to decreases across all categories reflecting the expected seasonal trends in the business. Marketing expenses were $12.5 million, or 10.8% as a percentage of net revenue, in the fourth quarter of 2020, compared to $12.1 million, or 12.8% as a percentage of net revenue, in the fourth quarter of 2019 as the company was able to slightly increase its marketing efforts while continuing to balance marketing efforts with fulfillment center capacity. Product, technology, general and administrative (PTG&A) expenses increased 4% year-over year to $36.8 million in the fourth quarter of 2020 from $35.3 million in the fourth quarter of 2019 mainly impacted by investments in personnel to support the growth in the business. Net loss was $11.9 million and diluted loss per share was $0.67 in the fourth quarter of 2020, based on 17.8 million weighted-average common shares outstanding, compared to a net loss of $21.9 million and diluted loss per share of $1.66 in the fourth quarter of 2019, based on 13.2 million weighted-average common shares outstanding. Net loss decreased by $3.4 million quarter over quarter from a net loss of $15.3 million in the third quarter of 2020. Adjusted EBITDA improved 80% year-over-year to a loss of $1.7 million in the fourth quarter of 2020, compared to a loss of $8.3 million in the fourth quarter of 2019. Sequentially, adjusted EBITDA improved by $3.0 million quarter-over-quarter from a loss of $4.7 million in the third quarter of 2020. Full Year 2020 Financial Results Net revenue for 2020 increased 1% year over year to $460.6 million from $454.9 million in 2019, primarily due to improvements in key customer metrics such as Orders per Customer and Average Order Value which reflect changes in consumer behavior due to the pandemic as customers ordered more frequently and added more meals per order, as well as the continued execution of the company’s growth strategy which included the launch of more new products in 2020 than in any prior year. Net loss for 2020 was $46.2 million and diluted loss per share was $3.06, based on 15.1 million weighted-average common shares outstanding, compared to net loss of $61.1 million and diluted loss per share of $4.67, based on 13.1 million weighted-average shares outstanding for full year 2019. Adjusted EBITDA for 2020 was a loss of $1.0 million, compared to a loss of $8.4 million for 2019, reflecting the company’s continued focus on expense management and optimization of its cost structure. Cash and cash equivalents were $44.1 million as of December 31, 2020. Cash used in operating activities totaled $1.3 million for the fourth quarter of 2020 compared to cash used of $10.9 million in the fourth quarter of the prior year. The improvement in operating cash flow was driven by expense management and working capital management. Cash used in operating activities totaled $5.4 million in 2020, compared to cash used in operating activities of $16.5 million in the prior year. Capital expenditures totaled $1.2 million for the fourth quarter of 2020, representing a reduction of $0.1 million in capital expenditures from the fourth quarter of 2019. Capital expenditures in 2020 totaled $6.0 million, representing an increase of $0.8 million from the prior year. Free cash flow was $(2.5) million for the fourth quarter of 2020 compared to $(12.2) million in the fourth quarter of the prior year driven by improved operating cash flow and slightly reduced capital expenditures. Free cash flow for 2020 totaled $(11.4) million, representing an improvement of $10.3 million from the prior year. In the fourth quarter of 2020, the company entered into a $35.0 million senior secured term loan that matures in March 2023. The net proceeds of the senior secured term loan, together with cash on hand of approximately $10.3 million, were used to pay off the remaining outstanding balance on the revolving credit facility that was due to mature in August 2021. Blue Apron today provided an outlook for certain first quarter 2021 financial metrics, reflecting certain assumptions regarding the company’s business including the impact of its operational improvements, trends, historical seasonal factors, the continuing impact of COVID-19 on its business (including as a result of changes in consumer behavior), and plans to increase marketing investments. The following guidance assumes that the company will not experience any unforeseen significant disruptions in its fulfillment operations or supply chain as a result of the COVID-19 pandemic or otherwise. In addition, because the timing of the onion recall recovery remains uncertain, we are not assuming receipt of the up to $2.0 million of credits in our first quarter outlook. For the first quarter, the company expects net revenue will grow approximately 23% to 27% year over year to approximately $125 million to $129 million. The company also expects a quarterly sequential and year-over-year increase in Customers for the first quarter of 2021. Assuming similar historical seasonal demand and cost trends, the company expects to incur a net loss of no more than $16.0 million and an adjusted EBITDA loss of no more than $6.0 million. For the full year 2021, Blue Apron expects to generate double-digit net revenue growth. Impact of COVID-19 on Blue Apron’s Business Since late March 2020, Blue Apron has experienced increased demand for its meal kits reflecting, in part, changes to consumer behavior in response to the COVID-19 pandemic. In order to meet the increased demand, the company continued to focus on increasing capacity at its fulfillment centers, including hiring new employees, increasing wages for frontline workers, and temporarily reducing menu options, which limits the need to change production lines and allows for more time to pack meal kits. During the COVID-19 pandemic, Blue Apron has experienced hiring and attendance challenges similar to other companies. As a result, the company has, from time to time, closed some weekly offering cycles early and delayed the launch of certain new products. At the same time, the company has implemented a variety of safety measures following federal, state, and local guidelines at its fulfillment centers. Management continues to monitor the impact of the COVID-19 pandemic on the company’s business, including changes to consumer behavior relating to cooking at home. While the company believes that a portion of the increased demand it has experienced over the last few months can be sustained through the first half of 2021 and potentially beyond, this will likely occur at varying levels as the impact of the pandemic changes over time. Blue Apron will hold a conference call and webcast today at 8:30 a.m., Eastern Time to discuss its fourth quarter and full year 2020 results and business outlook. The conference call can be accessed by dialing (877) 883-0383 or (412) 902-6506, utilizing the conference ID 3502596. Alternatively, participants may access the live webcast on Blue Apron’s Investor Relations website at investors.blueapron.com. A recording of the webcast will also be available on Blue Apron’s Investor Relations website at investors.blueapron.com following the conference call. Additionally, a replay of the conference call can be accessed until Thursday, February 25, 2021 by dialing (877) 344-7529 or (412) 317-0088, utilizing the conference ID 10152088. About Blue Apron Blue Apron’s vision is “better living through better food.” Launched in 2012, Blue Apron offers fresh, chef-designed recipes that empower home cooks to embrace their culinary curiosity and challenge their abilities to see what a difference cooking quality food can make in their lives. Through its mission to spark discovery, connection and joy through cooking, Blue Apron continuously focuses on bringing incredible recipes to its customers, while minimizing its carbon footprint, reducing food waste, and promoting diversity and inclusion. This press release includes statements concerning Blue Apron Holdings, Inc. and its future expectations, plans and prospects that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "should," "expects," "plans," “forecasts,” "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of these terms or other similar expressions. Blue Apron has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its business, financial condition and results of operations. These forward-looking statements speak only as of the date of this press release and are subject to a number of risks, uncertainties and assumptions including, without limitation, the company achieving its expectations with regards to its expenses and net revenue and its ability to grow adjusted EBITDA and to achieve or maintain profitability, the continued sufficiency of the company’s cash resources, the company’s need for additional financing, its ability to effectively manage expenses and cash flows, and its ability to remain in compliance with the financial and other covenants under the company’s indebtedness; its ability to sustain the increased demand resulting from the COVID-19 pandemic and the company’s growth strategy, and to retain new customers; its ability, including the timing and extent, to sufficiently manage costs and to fund investments in operations from cash from operations or additional financings in amounts necessary to continue to support the execution of the company’s growth strategy; its ability, including the timing and extent, to successfully execute the company’s growth strategy, cost-effectively attract new customers and retain existing customers, continue to expand its direct-to-consumer product offerings and continue to benefit from the implementation of operational efficiency practices; changes in consumer behaviors that could lead to declines in demand, both as the COVID-19 pandemic’s impact on consumer behavior tapers, particularly as a result of fewer restrictions on dining options, and as a COVID-19 vaccine becomes widely available in the United States, and/or if consumer spending habits are negatively impacted by worsening economic conditions; any material and adverse impact of the COVID-19 pandemic on the company’s operations and results, including as a result of the company’s inability to meet demand due to loss of adequate labor, whether as a result of heightened absenteeism or challenges in recruiting and retention or otherwise, prolonged closures, or series of temporary closures, of one or more fulfillment centers and supply chain or carrier interruptions or delays; its ability to attract and retain qualified employees and key personnel in sufficient numbers; its ability to effectively compete; its ability to maintain and grow the value of the company’s brand and reputation; its expectations regarding, and the stability of, its supply chain, including potential shortages or interruptions in the supply or delivery of ingredients, as a result of COVID-19 or otherwise; its ability to maintain food safety and prevent food-borne illness incidents and its susceptibility to supplier-initiated recalls; its ability to accommodate general changes in consumer tastes and preferences or in consumer spending; its ability to comply with modified or new laws and regulations applying to its business; risks resulting from its vulnerability to adverse weather conditions, natural disasters and public health crises, including pandemics; its ability to obtain and maintain intellectual property protection; and other risks more fully described in the company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 filed with the Securities and Exchange Commission (“SEC”) on October 29, 2020, the company’s Annual Report on Form 10-K for the year ended December 31, 2020 to be filed with the SEC, and in other filings that the company may make with the SEC in the future. The company assumes no obligation to update any forward-looking statements contained in this press release as a result of new information, future events or otherwise. Use of Non-GAAP Financial Information This press release includes non-GAAP financial measures, adjusted EBITDA and free cash flow, that are not prepared in accordance with, nor an alternative to, financial measures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition, these non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly-titled measures presented by other companies. The company defines adjusted EBITDA as net earnings (loss) before interest income (expense), net, other operating expense, other income (expense), net, benefit (provision) for income taxes and depreciation and amortization, adjusted to eliminate share-based compensation expense. The company presents adjusted EBITDA because it is a key measure used by the company’s management and board of directors to understand and evaluate the company’s operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the company believes that the exclusion of certain items in calculating adjusted EBITDA can produce a useful measure for period-to-period comparisons of the company’s business. Further, Blue Apron uses adjusted EBITDA to evaluate its operating performance and trends and make planning decisions, and it believes that adjusted EBITDA helps identify underlying trends in its business that could otherwise be masked by the effect of the items that the company excludes. Accordingly, Blue Apron believes that adjusted EBITDA provides useful information to investors and others in understanding and evaluating its operating results, enhancing the overall understanding of the company’s past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by its management in its financial and operational decision-making. There are a number of limitations related to the use of adjusted EBITDA rather than net income (loss), which is the most directly comparable GAAP equivalent. Some of these limitations are: adjusted EBITDA excludes share-based compensation expense, as share-based compensation expense has recently been, and will continue to be for the foreseeable future, a significant recurring expense for the company’s business and an important part of its compensation strategy; adjusted EBITDA excludes depreciation and amortization expense and, although these are non-cash expenses, the assets being depreciated may have to be replaced in the future; adjusted EBITDA excludes other operating expense, as other operating expense represents non-cash impairment charges on long-lived assets, a non-cash gain, net of termination fee, on lease termination, a charge for an estimated legal settlement and restructuring costs; adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest, which reduces cash available to us; adjusted EBITDA does not reflect income tax payments that reduce cash available to us; and other companies, including companies in the company’s industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure. The company defines free cash flow as net cash from (used in) operating activities less purchases of property and equipment. The company presents free cash flow because it is used by the company’s management and board of directors as an indicator of the amount of cash the company generates or uses and to evaluate the company’s ability to satisfy current and future obligations and to fund future business opportunities. Accordingly, Blue Apron believes that free cash flow provides useful information to investors and others in understanding and evaluating its operating results, enhancing the overall understanding of the company’s ability to satisfy its financial obligations and pursue business opportunities, and allowing for greater transparency with respect to a key financial metric used by its management in its financial and operational decision making. There are a number of limitations related to the use of free cash flow rather than net cash from (used in) operating activities, which is the most directly comparable GAAP equivalent. Some of these limitations are: free cash flow is not a measure of cash available for discretionary expenditures since the company has certain non-discretionary obligations such as debt repayments or capital lease obligations that are not deducted from the measure; and other companies, including companies in the company’s industry, may calculate free cash flow differently, which reduces its usefulness as a comparative measure. Because of these limitations, adjusted EBITDA and free cash flow should be considered together with other financial information presented in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable measures calculated in accordance with GAAP is set forth below under the heading “Reconciliation of Non-GAAP Financial Measures”. Use of Key Customer Metrics This press release includes various key customer metrics that we use to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance, and make strategic decisions. You should read these metrics in conjunction with our financial statements. We define and determine our key customer metrics as follows: We define Orders as the number of paid orders by our Customers across our meal, wine and market products sold on our e-commerce platforms in any reporting period, inclusive of orders that may have eventually been refunded or credited to customers. We determine our number of Customers by counting the total number of individual customers who have paid for at least one Order from Blue Apron across our meal, wine or market products sold on our e-commerce platforms in a given reporting period. We define Average Order Value as our net revenue from our meal, wine and market products sold on our e-commerce platforms in a given reporting period divided by the number of Orders in that period. We define Orders per Customer as the number of Orders in a given reporting period divided by the number of Customers in that period. We define Average Revenue per Customer as our net revenue from our meal, wine and market products sold on our e-commerce platforms in a given reporting period divided by the number of Customers in that period. BLUE APRON HOLDINGS, INC. Other noncurrent assets LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current portion of long-term debt Facility financing obligation Other noncurrent liabilities TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Condensed Consolidated Statement of Operations (In thousands, except share and per-share data) Net revenue Cost of goods sold, excluding depreciation and amortization Product, technology, general, and administrative Income (loss) from operations Interest income (expense), net Income (loss) before income taxes Benefit (provision) for income taxes Net income (loss) per share – basic Net income (loss) per share – diluted Weighted average shares outstanding – basic Weighted average shares outstanding – diluted Adjustments to reconcile net income (loss) to net cash from (used in) operating activities: Depreciation and amortization of property and equipment Loss (gain) on disposal of property and equipment Loss (gain) on build-to-suit accounting derecognition Loss on impairment Changes in reserves and allowances Changes in operating assets and liabilities Net cash from (used in) operating activities Net cash from (used in) investing activities Proceeds from issuance of common stock, net of offering costs Net proceeds from debt issuance Payments of debt issuance costs Proceeds from exercise of stock options Principal payments on capital lease obligations Net cash from (used in) financing activities NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — End of period Reconciliation of net income (loss) to adjusted EBITDA Interest (income) expense, net Provision (benefit) for income taxes Reconciliation of net cash from (used in) operating activities to free cash flow First Quarter 2021 Outlook Muriel Lussier [email protected] [email protected] [email protected]

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professional_accounting

https://deloitte.wsj.com/riskandcompliance/2020/03/24/blockchain-may-prompt-new-control-queries/ AUDIT TECHNOLOGY Blockchain May Prompt New Control Queries As organizations leverage emerging technologies, particularly the distributed ledger environment of blockchain, they may face new questions from auditors in pursuit of sufficient evidence. A growing number of organizations are giving serious thought to how they can leverage blockchain in their businesses. According to Deloitte’s 2019 global blockchain survey, 53% of respondents say the technology has become a critical priority for their organizations, up 10 percentage points from the prior year, while 83% say they see compelling uses for it. Blockchain may have gotten its start as a means of transacting digital currency, but its potential to disrupt commerce is already playing out in several sectors. From financial services to pharmaceuticals and fashion, blockchain is transforming supply chains and providing transparency and visibility that change the way work is carried out. Uses are emerging to trace physical assets, manage diverse supply chains, and facilitate global finance, cross-border payments, and remittances. New ecosystems are springing up to develop blockchain solutions to create innovative business models. In addition to blockchain, analytics and artificial intelligence are driving new functionality and insight. Data is proliferating and populating tools and dashboards in ways that are transforming industries, making them more resilient, effective, and valuable. Within audit, these evolving technologies are driving new opportunities to harness data and generate insights that can facilitate improvements in audit quality. Auditors are obtaining vast datasets from many new sources, rapidly bypassing or accelerating many traditional methods of collecting, organizing, analyzing, preparing, and assessing information. Auditors are more equipped than ever to see the bigger picture, enabling them to leverage their professional skills to bring new value to audits. Blockchain Meets Audit Blockchains are decentralized, distributed ledgers that maintain a permanent and immutable record of transaction data. Each block in a chain contains cryptography to link and secure blocks chronologically, so data contained within the blockchain cannot be overwritten. From an audit perspective, blockchains offer a combination of efficiency and integrity, when data is input correctly and the blockchain is implemented and operates effectively, reducing the opportunity for human error and enabling auditors to obtain and assess data representing 100% of transactions rather than rely on sampling. Combined with analytics and AI, auditors can more readily identify anomalies, which facilitates more productive audits. As auditors gain new insights, they may also have new questions about business risks and internal controls. To the extent an organization is engaged with a blockchain that extends across multiple enterprises, audit teams may ask how internal controls contemplate shared risks. The design of such controls is likely to be of interest to auditors. To answer these kinds of questions, organizations may need to consider providing auditors with evidence of internal control design and effectiveness at their counterparties in a blockchain. This might be similar to reports organizations currently provide on service organization controls (SOC) when they rely on third parties for services that are material to financial statements. “Beyond internal controls, auditors may have any number of questions associated with blockchains as they seek to obtain sufficient evidence to support their audit opinions.” As an example, if an organization is a participant in a blockchain that is managing raw materials in a supply chain, it will contain critical information regarding inventory that will be important to a financial statement audit. The blockchain may be housed by a cloud service provider, so an auditor may have questions about the chain of assurance from the cloud service provider to the business network operator to the counterparty in the blockchain. Evolving Risk Profiles The auditor may seek to understand the specific risks to the organization as it participates in that blockchain and what controls are in place to mitigate those risks. While blockchains may address some inherent supply chain risk companies have managed historically, they represent a significant change to the risk profile that auditors may consider as part of their risk assessments, audit planning, and testing. Consider permissionless blockchains, such as those used by Bitcoin and other similar digital assets. These kinds of blockchains are not operated or controlled by a single enterprise, which may introduce new audit risks. In such an environment, auditors may have questions about how an organization assesses the security, stability, and reliability of a blockchain and the data it contains. That may necessitate an analysis of the blockchain’s mechanisms and cryptography. To the extent such a blockchain contains a small number of participants, auditors may also have questions about the risk of collusion within the blockchain to commit fraud. By contrast, a permissioned blockchain is one with a designated business network operator that is responsible for controlling and operating the blockchain. In the banking sector, for example, a permissioned settlement blockchain may be established by a consortium of participants who use it as a way to facilitate trade finance, letters of credit, and other types of commercial lending. With a designated operator, auditors can focus their questions on a single entity, evaluating their controls, business continuity planning, security measures, and other potential risks. This is one reason organizations are demonstrating a preference for permissioned blockchains. More Audit Questions Beyond internal controls, auditors may have any number of questions associated with blockchains as they seek to obtain sufficient evidence to support their audit opinions. Auditors may want to understand the business effects, such as whether obligations to all parties in a shared database are clearly defined and monitored. Auditors may also inquire about blockchain governance, including consensus mechanisms, participant input and control, and IP ownership and management. Tax considerations may arise, such as indirect taxes, income sourcing, reporting requirements, owners, substance, and jurisdiction planning. Cyber risks are also likely to be top of mind, whether they are assessing a permissionless or permissioned environment. Audit firms are beginning to unveil proprietary technologies that may assist auditors in efficiently analyzing different types of digital assets, and it may extend to supply chain tracking, digital rights management, real estate title transfer, and other forms of real-world asset digitization that would otherwise be difficult to audit. The technologies can combine with human talent to improve audit quality. The accounting profession is considering challenges that may arise in accounting for and auditing digital assets under current professional standards, and the American Institute of Certified Public Accountants has formed a working group to develop non-authoritative guidance for financial statement preparers and auditors on how to account for and audit digital assets. The first version of the practice aid provides nonauthoritative guidance on classification, recognition, measurement, and other issues related to digital assets. Given the continued evolution of blockchain and other advanced technology, audit evidence looks significantly different in a digital environment than it did a generation ago. Organizations may need to consider how they establish proper control and support their books and records as they digitize assets representing significant line items on their balance sheets. —by Jon Raphael, national managing partner, and Amy Steele, partner, Audit & Assurance, and Tim Davis, Principal, Deloitte Risk & Financial Advisory, all with Deloitte & Touche LLP PUBLISHED ON: March 24, 2020 3:00 pm ET No related articles have been found.

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professional_accounting

Carrie a. morgan | Business & Finance homework help PROVIDE ALL FORMS AND EXPLANATIONS REQUESTED. 1) Form 1040 2) Form 1040 Schedule A 3) Form 1040 Schedule B 4) Form 1040 Schedule C 5) Form 1040 Schedule D 6) Form 1040 Schedule SE 7) Form 8949 8) Form 4562 Carrie A. Morgan, age 45, is single and lives with her dependent mother atXXXXX Allentown, PA 18105. Her social security number isNNN-NN-NNNN 1. Carrie is a licensed hairstylist and operates her own business. Located atXXXXX Allentown, PA 18105, the business is conducted under the name of “Carrie’s Coiffures.” Carrie’s business activity code is 812112. In addition to 10 workstations (i.e., stylist chairs) and a small reception area, the shop has display and storage areas for the products Carrie sells (see item 2 below). During the year, Carrie leased nine of the stations to other hairstylists. As is common practice in similar businesses in the area, the other stylists are considered to be self-employed. In fact, the IRS sanctioned the self-employment classification for the stylists in an audit of one of Carrie’s prior tax returns. Each stylist pays Carrie a fixed rent for the use of a workstation, resulting in $68,000 of rents received during 2012. From her own station, Carrie earned $44,000 (including tips of $12,000) for the styling services she provided to her own clients. 2. Carrie’s Coiffures is the local distributor for several beauty products (e.g., conditioners, shampoos) that cannot be purchased anywhere else. Carrie buys these items from the manufacturers and sells them to regular patrons, walk-in customers, and other beauticians (including those who lease chairs from her). Carrie’s Coiffures is also known for the selection and quality of its hairpieces (i.e., wigs, toupees). Through the shop, Carrie made the following sales during the year: Hairpieces and wigs $69,000 Beauty products 48,000 3. Although Carrie operates her business on a cash basis, she maintains inventory accounts for the items she sells as required by law. Relevant information about the inventories (based on lower of cost or market) is summarized below. 4. 12/31/11 12/31/12 Hairpieces and wigs $10,700 $12,600 Beauty products 11,400 9,900 5. Carrie’s purchases for 2012 were $30,500 of hairpieces and wigs and $26,100 of beauty products. 6. Carrie’s Coiffures had the following operating expenses for 2012: Utilities (i.e., gas, electric, telephone) $12,900 Ad valorem property taxes: On realty (e.g., shop building and land) $4,200 On personalty (e.g., equipment, inventory) 1,800 6,000 Styling supplies (e.g., rinses, dyes, gels, hair spray) 5,700 Fire and casualty insurance 4,100 Liability insurance 4,000 Accounting services 3,800 Janitorial services 2,400 Sewer service, garbage pickup $ 2,300 Water 2,200 Occupation licenses (city and state) 1,500 Waiting room supplies (e.g., magazines, coffee) 1,300 7. As Carrie prefers to avoid employer-employee arrangements and the payroll tax complexities, she retains outside agencies to handle her accounting and janitorial needs. 8. In early 2012, Carrie decided to renovate the waiting room. On May 10, she spent $10,400 for new chairs, a sofa, various lamps, coffee bar, and other furnishings. Carrie follows a policy of claiming as much depreciation as soon as possible. The old furnishings were thrown away or given to customers. For tax purposes, the old furnishings had a zero basis. 9. Carrie’s Coiffures is located in a building Carrie had constructed atXXXXXin March 1998. The shop was built for a cost of $300,000 on a lot she purchased earlier for $35,000. Except for a down payment from savings, the cost was financed by a 20- year mortgage. For tax purposes, MACRS depreciation is claimed on the building. During 2012, the following expenses were attributable to the property: Repainting (both exterior and interior) $8,000 Repairs (plumbing and electrical) 1,900 10. In May (after her accident settlement discussed in item 11 below), Carrie paid the balance due on the business mortgage. To do so, she incurred a prepayment penalty of $4,400. Prior to paying it off, she paid regular interest on the mortgage in 2012 of $6,000. 11. In February 2012, Carrie’s Coiffures was cited by the city for improper disposal of certain waste chemicals. Carrie questioned the propriety of the proposed fine of $2,000 and retained an attorney to represent her at the hearing. By pleading nolo contendere, the attorney was able to get the fine reduced to $500. Carrie paid both the fine of $500 and the attorney’s fee of $600 in 2012. 12. In August 2012, Carrie saw an ad in a trade publication that attracted her attention. The owner of a well-respected styling salon in Reading (PA) had died, and his estate was offering the business for sale. Carrie traveled to Reading, spent several days looking over the business ((including books and financial results), and met with the executor. Carried treated the executor to dinner and a music concert. Immediately after the concert, Carrie made an offer for the business, but the executor rejected it. Her expenses in connection with this trip were as follows: Car rental $140 Entertainment of executor 280 Motel (August 6-7) 220 Meals 110 13. In March 2011, Joan Myers, one of Carrie’s best stylists, left town to get away from a troublesome ex-husband. In order to help Joan establish a business elsewhere, Carrie loaned her $7,000. Joan signed a note dated March 3, 2011, that was payable in one year with 6% interest. On December 30, 2012, Carrie learned that Joan had declared bankruptcy and was awaiting trial on felony theft charges. Carrie never received payment from Joan, nor did she receive any interest on the loan. 14. At Christmas, Carrie gave each of her 35 best customers a large bottle of body lotion. Each bottle had a wholesale cost to Carrie of $12 but a retail price of $24. Carrie also spent $3 to have each bottle gift wrapped. (Note: The lotion was special order merchandise and was not part of the business’s inventory or purchases for the year—see item 2 above.) She also gave each of the nine stylists who leased chairs from her a basket of fruit that cost $30 (not including $5 delivery cost). 15. In March 2012, the Pennsylvania Department of Revenue audited Carrie’s state income tax returns for 2009 and 2010. She was assessed additional state income tax of $340 for these years. Surprisingly, no interest was included in the assessment. Carrie paid the back taxes promptly. 16. On a morning walk in November 2011, Carrie was injured when she was sideswiped by a delivery truck. Carrie was hospitalized for several days, and the driver of the truck was ticketed and charged with DUI. The owner of the truck, a national parcel delivery service, was concerned that further adverse publicity might result if the matter went to court. Consequently, the owner offered Carrie a settlement if she would sign a release. Under the settlement, her medical expenses were paid and she would receive a cash award of $200,000. The award specified that the entire amount was for physical pain and suffering. Because she suffered no permanent injury as a result of the mishap, she signed the release in April 2012 and received the $200,000 settlement. 17. In January 2012, Carrie was contacted by the state of Pennsylvania regarding a tract of land she owned in York County. The state intended to convert the property into a district headquarters, barracks, and training center for its highway patrol. Carrie had inherited the property from her father when he died on August 11, 2011. The property had a value of $140,000 on that date and had been purchased by her father on March 3, 1980, for $30,000. On July 25, 2012, after considerable negotiation and after the state threatened to initiate condemnation proceedings, she sold the tract to the state for $158,000. Since Carrie is not comfortable with real estate investments, she does not plan to reinvest any of the proceeds received in another piece of realty. 18. When her father died in 2011, Carrie did not know that he had an insurance policy on his life (maturity value of $50,000) in which she was named as the beneficiary. When her mother told her about the policy in July 2012, Carrie filed a claim with the carrier, Falcon Life Insurance Company. In August 2012, she received a check from Falcon for $51,500 (including $1,500 interest). 19. Upon the advice of a client who is a respected broker, Carrie purchased 1,000 shares of common stock in Grosbeak Exploration for $40,000 on March 4, 2012. In the months following her purchase, the share value of Grosbeak plummeted. Disgusted with the unexpected erosion in the value of her investment, Carrie sold the stock for $28,000 on 20. While on her way to work in 2011, Carrie was rear-ended by a hit-and-run driver. The damage to her Lexus was covered by her insurance company, General Casualty, except for the $1,000 deductible she was required to pay. In 2012, the insurance company located the driver who caused the accident and was reimbursed by his insurer. Consequently, Carrie received a $1,000 refund check from General Casualty in May 2012 to reimburse her for her $1,000 deductible. 21. After her father’s death, Carrie’s mother (Mildred Morgan, Social Security number NNN-NN-NNNN moved in with her. Mildred’s persistent back trouble made it difficult for her to climb the stairs to the second-floor bedrooms in Carrie’s house. So Carrie had an elevator installed in her personal residence at a cost of $12,000 in January 2012. A qualified appraiser determined that the elevator increased the value of the personal residence by $7,000. The appraisal cost $400. The operation of the elevator during 2012 increased Carrie’s electric bill by $300. 22. As a favor to a long-time client who is a drama professor at a local state university, Carrie spent a weekend as a stylist preparing hairdos for the key actresses in the annual Theater Department fund-raising event. The drama professor supplied all of the resources that Carrie needed to provide her services. Carrie estimates that she would have charged $800 for the services she donated to this charitable event. 23. In addition to the items already mentioned, Carrie had the following receipts during CD at Scranton First National Bank $900 City of Lancaster general purpose bonds 490 Money market account at Allentown State Bank 340 $1,730 Qualified dividends on stock investments— General Motors $470 AT&T common 380 850 Federal income tax refund (for tax year 2011) 791 Pennsylvania state income tax refund (for tax year 2011) 205 24. Expenditures for 2012, not previously noted, are summarized below. Contribution to pension plan $10,000 Premiums on medical insurance $4,800 Dental bills 1,400 6,200 Property taxes on personal residence 3,800 Interest on home mortgage 3,200 Professional expenses— Subscriptions to trade journals $ 180 Dues to beautician groups 140 320 25. The $10,000 contribution to the pension plan is to a § 401(k) type of plan she established in 2011. Previously, she had contributed to an H.R. 10 (Keogh) plan but found that the § 401(k) retirement arrangement provides more flexibility and is less complex. The medical insurance policy covers Carrie and her dependents and was issued in the name of the business (i.e., “Carrie’s Coiffures”). It does not cover dental work or capital modifications to a residence (see item 16 above). 26. During 2012, Carrie made the following total estimated tax payments with respect to her 2012 tax returns: Federal estimated income tax payments $20,800 Pennsylvania estimated income tax payments 2,400 Allentown City estimated income tax payments 800 Prepare an income tax return (with appropriate schedules) for Carrie for 2012. In doing this, use the following guidelines: 1) Make necessary assumptions for information not given in the problem. 2) Carrie has itemized deductions ever since she became a homeowner many years ago. 3) The sales tax option was not chosen in 2011, and Carrie had no major purchases that qualify for the sales tax deduction in 2012. 4) Carrie has substantiation (e.g., records, receipts) to support the transactions involved. 5) If a refund results, Carrie wants it sent to her. 6) Carrie is preparing her own return (i.e., no preparer is involved). 7) Carrie does not wish to contribute to the Presidential Election Campaign Fund. Breaching experiment | English homework help It215 week 9 final bookstore project part 6 Who uses personal care products?m | MKT305 | Strayer University Planning | Operations Management homework help Honda, corporate social responsibility | Biology homework help Data analysis for managers | Statistics homework help Big data term paper questions and 2 research streams

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professional_accounting

AUDITING / ETHICS Madoff Auditor Charged with Securities Fraud Federal officials filed criminal and civil charges against Bernard Madoff’s auditor on Wednesday, and the AICPA expelled him from the Institute after concluding its own ethics investigation. In a civil complaint filed in federal court in Manhattan, the SEC alleges that from 1991 through 2008, David G. Friehling and his New York firm, Friehling & Horowitz CPAs PC (F&H), purported to audit financial statements and disclosures of Madoff’s firm. “Friehling essentially sold his license to Madoff for more than 17 years while Madoff’s Ponzi scheme went undetected,” James Clarkson, acting director of the SEC’s New York Regional Office, said in a press release. “For all those years, Friehling deceived investors and regulators by declaring that Madoff’s enterprise had a clean audit record,” Clarkson said. The civil complaint filed by the SEC is similar to federal criminal charges brought against Friehling and his firm in a six-count complaint alleging securities fraud, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with the SEC. On Wednesday, the AICPA concluded its ethics investigation into Friehling’s conduct as an auditor of a broker-dealer and expelled him from membership for failure to cooperate. The SEC charged Madoff and his firm, Bernard L. Madoff Investment Securities LLC, with committing securities fraud through a multibillion dollar Ponzi scheme. Madoff last week pleaded guilty to 11 felonies and admitted to, among other things, operating a Ponzi scheme, committing securities fraud and investment adviser fraud, and filing false audited financial statements with the SEC, according to the regulator. The SEC’s complaint alleges that Friehling “enabled” Madoff’s Ponzi scheme by falsely stating, in annual audit reports, that F&H audited Madoff’s firm’s financial statements pursuant to GAAS, including the requirements to maintain auditor independence and perform audit procedures regarding custody of securities. F&H also allegedly purported that the financial statements conformed to GAAP and that Friehling reviewed internal controls at Madoff’s firm. According to the SEC’s complaint, Friehling knew that the firm regularly distributed the annual audit reports to Madoff customers and that the reports were filed with the SEC and other regulators. The complaint alleges these statements were “materially false.” The SEC alleges that Friehling “merely pretended to conduct minimal audit procedures” of certain accounts to make it appear that he was conducting an audit, and then failed to document his purported findings and conclusions as required under GAAS. If properly stated, those financial statements, along with related disclosures regarding reserve requirements by Madoff’s firm, would have shown that the firm owed tens of billions of dollars in additional liabilities to its customers and was therefore insolvent, the SEC said. According to the SEC’s complaint, Friehling also failed to conduct any audit procedures with respect to internal controls at Madoff’s firm, and had no grounds to represent that the firm had no material inadequacies. Afraid that his work for the firm would be subject to peer review, as required of accountants who conduct such audits, Friehling lied to the AICPA for years and denied that he conducted any audit work, the SEC said. The SEC’s complaint specifically alleges that Friehling and F&H violated section 17(a) of the Securities Act, violated and aided and abetted violations of section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aided and abetted violations of sections 206(1) and 206(2) of the Advisers Act, section 15(c) of the Exchange Act and Rule 10b-3 thereunder, and section 17 of the Exchange Act and Rule 17a-5 thereunder. Among other things, the SEC’s complaint seeks financial penalties and a court order requiring both Friehling and F&H to surrender related gains.

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professional_accounting

Delaware Basin Midland Basin Annual Reports & Proxy Committee Composition & Governance Documents Managing Climate Risk Professional & Personal Development Owner/Vendor Relations Stock Quote Header Home»Investors»Investor News Financial Tear Sheet February 19, 2020 Q4 and Full-Year 2019 Earnings Call View Press Release () Stay up to speed on the latest investor news. Sign up to receive Concho email alerts and notifications. 12.22.11 Concho Resources Inc. Acquires Permian Basin Properties MIDLAND, Texas--(BUSINESS WIRE)--Dec. 22, 2011-- Concho Resources Inc. (NYSE: CXO) ("Concho" or the "Company") today announced that it has entered into a definitive agreement to acquire operated interests in certain producing and non-producing assets in the Wolfberry trend in the Permian Basin (the “Acquisition”) from Petroleum Development Corporation (NASDAQ: PETD) for approximately $175 million, subject to customary purchase price adjustments. The Acquisition adds approximately 10,800 gross (10,200 net) acres located in Andrews, Ector and Midland Counties, Texas. Highlights of the Acquisition: Adds over 170 identified Wolfberry drilling locations through 40-acre spacing Estimated proved reserves of approximately 13 million barrels of oil equivalent (“MMBoe”) as of November 1, 2011 Current net production of approximately 1,100 barrels of oil equivalent per day (“Boepd”) Increases the Company’s net acreage in the Wolfberry by 20% and raises the Company’s average working interest in the Wolfberry to 54% from 50% In connection with the Acquisition, the Company will increase its 2012 capital budget from $1.30 billion to $1.37 billion to develop the newly acquired assets. In addition, the Company currently estimates that its 2012 production will total between 27.5 MMBoe and 28.5 MMBoe, an increase of approximately 0.5 MMBoe due to the Acquisition. The Company estimates that its updated 2012 capital budget can be substantially funded out of its after-tax cash flow assuming (i) a NYMEX crude oil price of $85 per barrel and a NYMEX natural gas price of $4 per thousand cubic feet of natural gas for the Company's unhedged production and (ii) that the Company achieves the mid-point of its 2012 production guidance. The Acquisition, which is expected to close in the first quarter of 2012, will be funded with borrowings under the Company’s credit facility. About Concho Resources Inc. Concho Resources Inc. is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. The Company's operations are focused in the Permian Basin of Southeast New Mexico and West Texas. For more information, visit Concho's website at www.concho.com. Forward-Looking Statements and Cautionary Statements The foregoing contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this press release specifically include statements, estimates and projections regarding the Acquisition, the Company's future production and 2012 capital budget, oil and natural gas reserves and number of identified drilling locations. These statements are based on certain assumptions made by the Company based on management's experience, expectations and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Forward-looking statements are not guarantees of performance. Although the Company believes the expectations reflected in its forward-looking statements are reasonable and are based on reasonable assumptions, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all) or will prove to have been correct. Moreover, such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These include the factors discussed or referenced in the "Risk Factors" section of the Company's most recent Form 10-K and 10-Q filings and risks relating to declines in the prices we receive for our oil and natural gas; uncertainties about the estimated quantities of reserves; risks related to the integration of the acquired assets; the effects of government regulation, permitting and other legal requirements, including new legislation or regulation of hydraulic fracturing; drilling and operating risks; the adequacy of our capital resources and liquidity; risks related to the concentration of our operations in the Permian Basin; the results of our hedging program; weather; litigation; shortages of oilfield equipment, services and qualified personnel and increases in costs for such equipment, services and personnel; uncertainties about our ability to replace reserves and economically develop our current reserves; competition in the oil and natural gas industry; our existing indebtedness; and other important factors that could cause actual results to differ materially from those projected. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law. Source: Concho Resources Inc. Concho Resources Inc. Price Moncrief, 432-683-7443 Director, Corporate Development 12.16.11 Concho Resources Inc. Announces Participation in Upcoming Conference MIDLAND, Texas--(BUSINESS WIRE)--Dec. 16, 2011-- Concho Resources Inc. (NYSE: CXO) (the "Company") today announced its participation at the Goldman Sachs Global Energy Conference 2012 on Tuesday, January 10th at 1:30 PM ET. The presentation will be available on Concho's website, www.concho.com. Concho Resources Inc. is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. The Company's operations are focused in the Permian Basin of Southeast New Mexico and West Texas. For more information, visit Concho’s website at www.concho.com. Toffee McAlister, 432-683-7443 Director, Investor Relations & Corporate Communications 11.02.11 Concho Resources Inc. Reports Third Quarter 2011 Financial and Operating Results and Provides 2012 Capital Budget Detail and Guidance MIDLAND, Texas, Nov 02, 2011 (BUSINESS WIRE) -- Concho Resources Inc. (NYSE: CXO) ("Concho" or the "Company") today reported financial and operating results for the three and nine months ended September 30, 2011. Highlights for the three months ended September 30, 2011 include: Production of 6.3 million barrels of oil equivalent ("MMBoe") for the third quarter of 2011, an increase of 73% over the third quarter of 2010 and a 13% increase over the second quarter of 2011 Net income of $356.2 million, or $3.44 per diluted share, for the third quarter of 2011, as compared to net income of $20.8 million, or $0.22 per diluted share, in the third quarter of 2010 Adjusted net income1 (non-GAAP) of $117.8 million, or $1.14 per diluted share, for the third quarter of 2011, as compared to $71.4 million, or $0.77 per diluted share, for the third quarter of 2010 EBITDAX2 (non-GAAP) of $349.6 million for the third quarter of 2011, an increase of 90% over the third quarter of 2010 1 Adjusted net income (non-GAAP) is comparable to securities analyst estimates. For an explanation of how we calculate adjusted net income (non-GAAP) and a reconciliation of net income (GAAP) to adjusted net income (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. 2 For an explanation of how we calculate and use EBITDAX (non-GAAP) and a reconciliation of net income (GAAP) to EBITDAX (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. Third Quarter 2011 Financial Results Production for the third quarter of 2011 totaled 6.3 MMBoe (3.9 million barrels of oil ("MMBbls") and 14.7 billion cubic feet of natural gas ("Bcf")), an increase of 73% as compared to 3.6 MMBoe (2.5 MMBbls and 7.1 Bcf) produced in the third quarter of 2010 from continuing operations. The increase in production is due in part to the Marbob acquisition in the fourth quarter of 2010 and the Company's successful 2010 and 2011 drilling program. Timothy A. Leach, Concho's Chairman, CEO and President, commented, "Our third quarter results reflect outstanding execution by the entire Concho organization. Our team achieved record levels of production and cash flows while finishing the quarter in excellent financial position with a healthy balance sheet and significant liquidity. Looking forward to 2012, we expect to continue our trend of delivering substantial organic production growth while spending within cash flow and focusing on rate-of-return. We will allocate a greater proportion of our 2012 drilling budget to our Delaware Basin Bone Spring play, where we are expanding and testing the multiple horizons across our acreage. With our recent expansion efforts in the Delaware Basin Bone Spring play, I believe that we have assembled a premier acreage position that will enhance our future growth. Looking to the fourth quarter, we remain on track to meet our goals for 2011 and expect the momentum from our operational success to carry into 2012." For the third quarter of 2011, the Company reported net income of $356.2 million, or $3.44 per diluted share, as compared to net income of $20.8 million, or $0.22 per diluted share, for the third quarter of 2010. The Company's third quarter 2011 results were impacted by several non-cash items, including a $387.0 million unrealized mark-to-market gain on commodity derivatives and $0.6 million of leasehold abandonments. Excluding these items and their tax effects, the third quarter 2011 adjusted net income (non-GAAP) was $117.8 million, or $1.14 per diluted share. Excluding these similar items and an impairment of long-lived assets recorded in the third quarter of 2010, our adjusted net income (non-GAAP) for the third quarter of 2010 was $71.4 million, or $0.77 per diluted share. For a reconciliation of net income (GAAP) to adjusted net income (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. EBITDAX (defined as net income, plus (1) exploration and abandonments expense, (2) depreciation, depletion and amortization expense, (3) accretion expense, (4) impairments of long-lived assets, (5) non-cash stock-based compensation expense, (6) bad debt expense, (7) unrealized (gain) loss on derivatives not designated as hedges, (8) (gain) loss on sale of assets, net, (9) interest expense, (10) federal and state income taxes, and (11) similar items listed above that are presented in discontinued operations) increased to $349.6 million in the third quarter of 2011, as compared to $184.3 million in the third quarter of 2010. For a reconciliation of net income (GAAP) to EBITDAX (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. Operating revenues for the third quarter of 2011 increased 101% when compared to the third quarter of 2010. This increase is attributable to the 73% increase in production, the 19% increase in the Company's unhedged realized oil price and the 22% increase in the Company's unhedged realized natural gas price in the third quarter of 2011 compared to the same period in 2010. Oil and natural gas production expense for the third quarter of 2011, including taxes, totaled $84.1 million, or $13.32 per Boe, a 16% increase per Boe over the third quarter of 2010. This increase was primarily due to higher lease operating expenses and workover costs, in part due to higher third-party labor costs and a prior period underestimate of costs. Depreciation, depletion and amortization for the third quarter of 2011 totaled $115.7 million, or $18.34 per Boe, a 16% increase per Boe from $57.6 million, or $15.82 per Boe, in the third quarter of 2010. The increase in depletion expense was primarily due to capitalized costs associated with new wells that were successfully drilled and completed in 2010 and 2011 and the Marbob acquisition. General and administrative expense ("G&A") for the third quarter of 2011 totaled $22.9 million, or $3.62 per Boe, compared to $15.3 million, or $4.20 per Boe, in the third quarter of 2010. The decrease in per Boe expense in the third quarter of 2011 over the third quarter of 2010 was primarily due to increased production, offset by a 50% increase in absolute G&A costs due in part to increased staffing across the Company and the addition of employees from the Marbob acquisition. The Company's cash flows from operating activities (GAAP) for the nine months ended September 30, 2011 was $779.0 million, as compared to $402.8 million for the nine months ended September 30, 2010, an increase of 93%. Adjusted cash flows (non-GAAP), which are cash flows from operating activities adjusted for settlements paid on derivatives not designated as hedges, was $701.2 million for the nine months ended September 30, 2011, as compared to $397.5 million for the nine months ended September 30, 2010, an increase of 76%. For a description of the use of adjusted cash flows (non-GAAP) and for a reconciliation of cash flows from operating activities (GAAP) to adjusted cash flows (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. In the third quarter of 2011, the Company made net cash payments for settlements on derivatives contracts not designated as hedges of $1.8 million and the non-cash unrealized mark-to-market gain for the derivatives contracts not designated as hedges was $387.0 million. This is compared to net cash receipts of $4.1 million on derivatives contracts not designated as hedges and a $70.2 million non-cash unrealized mark-to-market loss on contracts not designated as hedges in the third quarter of 2010. To better understand the impact of the Company's derivatives positions and their impact on the statement of operations, please see the "Summary Production and Operating Data" and "Derivatives Information" tables at the end of this press release. For the quarter ended September 30, 2011, the Company commenced the drilling of or participated in a total of 223 gross wells (194 operated), 69 of which had been completed as producers and 154 of which were in progress at September 30, 2011. In addition, during the third quarter of 2011, the Company completed 170 wells that were drilled prior to the third quarter of 2011. Currently, the Company is operating 30 drilling rigs in the Permian Basin; 10 of these rigs are drilling Yeso wells in the New Mexico Shelf, 13 are drilling Wolfberry wells in the Texas Permian, 6 are drilling in the Delaware Basin Bone Spring play and 1 rig is drilling Lower Abo wells in the New Mexico Shelf. New Mexico Shelf During the third quarter of 2011, the Company drilled 122 wells (105 operated) on its New Mexico Shelf assets, which included both Yeso and Lower Abo wells, with a 100% success rate on the 55 wells that had been completed by September 30, 2011. In addition, during the third quarter of 2011, the Company completed 71 wells that were drilled prior to the third quarter of 2011. Texas Permian During the third quarter of 2011, the Company drilled 77 wells (74 operated) on its Texas Permian assets with a 100% success rate on the 12 wells that had been completed by September 30, 2011. In addition, during the third quarter of 2011, the Company completed 77 wells that were drilled prior to the third quarter of 2011. During the third quarter of 2011, the Company drilled 24 wells (15 operated) on its Delaware Basin assets with a 100% success rate on the 2 wells that had been completed by September 30, 2011. In addition, during the third quarter of 2011, the Company completed 22 wells that were drilled prior to the third quarter of 2011. The Company's net production in the third quarter of 2011 from the Bone Spring play, which includes the Avalon shale, the Bone Spring sands and the Wolfcamp shale, averaged approximately 8,900 Boepd, an increase of 59% over the second quarter of 2011. 2012 Capital Budget Concho's capital budget for 2012 is approximately $1.3 billion, which the Company believes will yield production in the range of 27.0 - 28.0 MMBoe. This budget contemplates operating an average of 35 drilling rigs for 2012. The Company estimates that its 2012 capital budget can be funded entirely out of its after-tax cash flow assuming (i) a NYMEX crude oil price of $85 per barrel and a NYMEX natural gas price of $4 per thousand cubic feet of natural gas ("Mcf") for the Company's unhedged production and (ii) that the Company achieves the mid-point of its 2012 production guidance. The Company intends to monitor both the direction of commodity prices and the costs of goods and services and may adjust its capital budget, and resultant estimated production and cash flows, as conditions warrant. Of the approximately $1.1 billion dedicated to the Company's core areas, approximately $500 million will be dedicated to drilling and recompletion projects on its New Mexico Shelf assets (primarily in the Yeso and Lower Abo plays), approximately $375 million will be dedicated to drilling projects on its Delaware Basin assets (primarily in the Bone Spring play) and approximately $260 million will be dedicated to drilling and recompletion projects on its Texas Permian assets (primarily in the Wolfberry play). The Company expects to drill or participate in a total of 850 gross wells (700 operated), which includes 359 Yeso wells, 13 Lower Abo wells, 113 Bone Spring play wells and 309 Wolfberry wells. The remaining $160 million of capital will be allocated between leasehold acquisition, geological and geophysical ("G&G"), exploratory costs and other ($110 million) and facilities ($50 million). Oil equivalent (MMBoe) Oil (MMBbls) Natural gas (Bcf) Price differentials to NYMEX: (excluding the effects of hedging) Oil (Bbl) Natural gas (Mcf) 140% - 160% Operating costs and expenses: Lease operating expense: Direct lease operating expense ($/Boe) Oil & natural gas taxes (% of oil and natural gas revenue) G&A expense: Cash G&A expense ($/Boe) Non-cash stock based compensation ($/Boe) DD&A expense ($/Boe) Exploration, abandonments and G&G ($/Boe) Cash interest rates: $300 million senior notes due 2017 Remainder of debt LIBOR + (150 - 250 bps) Income taxes: Percent deferred of total taxes Capital expenditures ($ in billions) Liquidity Update Lenders under Concho's revolving credit facility recently completed their semi-annual redetermination of the borrowing base, voting unanimously to reaffirm the $2.5 billion borrowing base and aggregate commitment of $2.0 billion. At September 30, 2011, Concho had $293.0 million outstanding on the credit facility. Derivative Update The Company maintains an active hedging program and continued to add to its derivative positions through October 2011. Please see the "Derivatives Information" tables at the end of this press release for more detailed information about the Company's current derivative positions. The Company will host a conference call on Thursday, November 3, 2011 at 9:00 a.m. Central Time to discuss the third quarter 2011 financial and operating results and the 2012 capital budget and guidance. Interested parties may listen to the conference call via the Company's website at http://www.concho.com or by dialing (800) 659-2032 (passcode: 39505486). A replay of the conference call will be available on the Company's website or by dialing (888) 286-8010 (passcode: 60178210). The foregoing contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this press release specifically include statements, estimates and projections regarding the Company's future financial position, liquidity and capital resources, operations, performance, production growth, acquisitions, returns, capital expenditure budgets, oil and natural gas reserves, number of identified drilling locations, drilling program, derivative activities, costs and other guidance included in this press release. These statements are based on certain assumptions made by the Company based on management's experience, expectations and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Forward-looking statements are not guarantees of performance. Although the Company believes the expectations reflected in its forward-looking statements are reasonable and are based on reasonable assumptions, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all) or will prove to have been correct. Moreover, such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These include the factors discussed or referenced in the "Risk Factors" section of the Company's most recent Form 10-K and 10-Q filings and risks relating to declines in the prices we receive for our oil and natural gas; uncertainties about the estimated quantities of reserves; risks related to the integration of acquired assets; the effects of government regulation, permitting and other legal requirements, including new legislation or regulation of hydraulic fracturing; drilling and operating risks; the adequacy of our capital resources and liquidity; risks related to the concentration of our operations in the Permian Basin; the results of our hedging program; weather; litigation; shortages of oilfield equipment, services and qualified personnel and increases in costs for such equipment, services and personnel; uncertainties about our ability to replace reserves and economically develop our current reserves; competition in the oil and natural gas industry; our existing indebtedness; and other important factors that could cause actual results to differ materially from those projected. Unaudited (in thousands, except share and per share data) Accounts receivable, net of allowance for doubtful accounts: Joint operations and other Related parties Prepaid costs and other Property and equipment: Oil and natural gas properties, successful efforts method Accumulated depletion and depreciation (995,261 ) Total oil and natural gas properties, net Other property and equipment, net Total property and equipment, net Deferred loan costs, net Intangible asset - operating rights, net Noncurrent derivative instruments Other current liabilities: Bank overdrafts Revenue payable Accrued and prepaid drilling costs Asset retirement obligations and other long-term liabilities Common stock, $0.001 par value; 300,000,000 authorized; 103,724,471 and 102,842,082 shares issued at September 30, 2011 and December 31, 2010, respectively Treasury stock, at cost; 51,499 and 31,963 shares at September 30, 2011 and December 31, 2010, (3,561 ) Nine Months Ended 2010(a) Oil sales Oil and natural gas production Exploration and abandonments Accretion of discount on asset retirement obligations Impairments of long-lived assets General and administrative (including non-cash stock-based compensation of $4,673 and $3,152 for the three months ended September 30, 2011 and 2010, respectively, and $13,866 and $8,854 for the nine months ended September 30, 2011 and 2010, respectively) (Gain) loss on derivatives not designated as hedges Total operating costs and expenses Income from operations Other income (expense): Other, net Income from continuing operations before income taxes Income from discontinued operations, net of tax Basic earnings per share: Net income per share Weighted average shares used in basic earnings per share Diluted earnings per share: Weighted average shares used in diluted earnings per share (a) Retrospectively adjusted for presentation of discontinued operations. Exploration and abandonments, including dry holes Non-cash compensation expense Gain on derivatives not designated as hedges (700 ) Capital expenditures on oil and natural gas properties Acquisition of oil and natural gas properties Additions to other property and equipment Proceeds from the sale of assets Settlements paid on derivatives not designated as hedges Proceeds from issuance of long-term debt Payments of long-term debt (1,949,500 ) Net proceeds from issuance of common stock Exercise of stock options Excess tax benefit related to stock-based compensation Payments for loan origination costs Purchase of treasury stock Net cash provided by financing activities Net decrease in cash and cash equivalents SUPPLEMENTAL CASH FLOWS: Cash paid for interest and fees, net of $73 and $119 capitalized interest Cash paid for income taxes Summary Production and Operating Data The following table sets forth summary information from our continuing operations concerning production and operating data for the periods indicated: Production and operating data: Net production volumes: Oil (MBbl) Natural gas (MMcf) Total (MBoe) Average daily production volumes: Total (Boe) Oil, without derivatives (Bbl) Oil, with derivatives (Bbl) (a) Natural gas, without derivatives (Mcf) Natural gas, with derivatives (Mcf) (a) Total, without derivatives (Boe) Total, with derivatives (Boe) (a) Operating costs and expenses per Boe: Lease operating expenses and workover costs Oil and natural gas taxes Includes the effect of the cash settlements received from (paid on) commodity derivatives not designated as hedges and reported in operating costs and expenses. The following table reflects the amounts of cash settlements received from (paid on) commodity derivatives not designated as hedges that were included in computing average prices with derivatives and reconciles to the amount in gain (loss) on derivatives not designated as hedges as reported in the consolidated statements of operations: Gain (loss) on derivatives not designated as hedges: Cash receipts from (payments on) oil derivatives $ (8,051 ) $ (88,679 ) Cash receipts from natural gas derivatives Cash payments on interest rate derivatives Unrealized mark-to-market gain (loss) on commodity and interest rate derivatives Gain (loss) on derivatives not designated as hedges The presentation of average prices with derivatives is a non-GAAP measure as a result of including the cash payments on/receipts from commodity derivatives that are presented in gain (loss) on derivatives not designated as hedges in the statements of operations. This presentation of average prices with derivatives is a means by which to reflect the actual cash performance of our commodity derivatives for the respective periods and presents oil and natural gas prices with derivatives in a manner consistent with the presentation generally used by the investment community. Supplemental Non-GAAP Financial Measures EBITDAX EBITDAX (as defined below) is presented herein, and reconciled from the generally accepted accounting principles ("GAAP") measure of net income because of its wide acceptance by the investment community as a financial indicator of a company's ability to internally fund exploration and development activities. We define EBITDAX as net income, plus (1) exploration and abandonments expense, (2) depreciation, depletion and amortization expense, (3) accretion expense, (4) impairments of long-lived assets, (5) non-cash stock-based compensation expense, (6) bad debt expense, (7) unrealized (gain) loss on derivatives not designated as hedges, (8) (gain) loss on sale of assets, net, (9) interest expense, (10) federal and state income taxes, and (11) similar items listed above that are presented in discontinued operations. EBITDAX is not a measure of net income or cash flows as determined by GAAP. Our EBITDAX measure (which includes continuing and discontinued operations) provides additional information which may be used to better understand our operations. EBITDAX is one of several metrics that we use as a supplemental financial measurement in the evaluation of our business and should not be considered as an alternative to, or more meaningful than, net income, as an indicator of our operating performance. Certain items excluded from EBITDAX are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historic cost of depreciable assets, none of which are components of EBITDAX. EBITDAX, as used by us, may not be comparable to similarly titled measures reported by other companies. We believe that EBITDAX is a widely followed measure of operating performance and is one of many metrics used by our management team, and by other users, of our consolidated financial statements. For example, EBITDAX can be used to assess our operating performance and return on capital in comparison to other independent exploration and production companies without regard to financial or capital structure, and to assess the financial performance of our assets and our company without regard to capital structure or historical cost basis. The following table provides a reconciliation of net income to EBITDAX: Non-cash stock-based compensation Unrealized (gain) loss on derivatives not designated as hedges Loss on sale of assets, net The following tables provide information that the Company believes may be useful to investors who follow the practice of some industry analysts who adjust reported company earnings and cash flows from operating activities to match realizations to production settlement months and make other adjustments to exclude certain non-cash items. The following table provides a reconciliation of net income (GAAP) to adjusted net income (non-GAAP). Net income - as reported Adjustments for certain non-cash items: Unrealized mark-to-market (gain) loss on commodity and interest rate derivatives Leasehold abandonments Discontinued operations: Gain on sale of assets Tax impact (a) Adjusted basic earnings per share: Adjusted net income per share Weighted average shares used in adjusted basic earnings per share Adjusted diluted earnings per share: Weighted average shares used in adjusted diluted earnings per share (a) The tax impact is computed utilizing the Company's statutory effective federal and state income tax rates. The income tax rates for the three months ended September 30, 2011 and 2010, were 38.3% and 32.7%, respectively, and 38.2% and 37.0% for the nine months ended September 30, 2011 and 2010, respectively. Adjusted Cash Flows The following table provides a reconciliation of cash flows from operating activities (GAAP) to adjusted cash flows (non-GAAP). Cash flows from operating activities (a) Settlements paid on derivatives not designated as hedges (b) (a) Cash flows from operating activities includes net reductions of $110.4 million and $55.1 million for the nine months ended September 30, 2011 and 2010, respectively, associated with changes in working capital items. Changes in working capital items adjust for the timing of receipts and payments of actual cash. (b) Amounts are presented in cash flows from investing activities for GAAP purposes. Costs Incurred The table below provides the costs incurred for the three and nine months ended September 30, 2011 and 2010. Costs incurred for oil and natural gas producing activities (a) Property acquisition costs: Proved Unproved Total costs incurred for oil and natural gas properties The costs incurred for oil and natural gas producing activities includes the following amounts of asset retirement obligations: Proved property acquisition costs Exploration costs $ (654 ) Derivatives Information at November 2, 2011 The table below provides data associated with our derivatives at November 2, 2011. Oil Swaps: Volume (Bbl) NYMEX price (Bbl) (a) Natural Gas Swaps: Volume (MMBtu) NYMEX price (MMBtu) (b) Natural Gas Basis Swaps: Price differential ($/MMBtu) (c) The index prices for the oil contracts are based on the NYMEX-West Texas Intermediate monthly average futures price. The index prices for the natural gas contracts are based on the NYMEX-Henry Hub last trading day of the month futures price. The basis differential between the El Paso Permian delivery point and NYMEX-Henry Hub delivery point. 11.02.11 Concho Resources Inc. Expands Its Acreage Position in the Delaware Basin Concho Resources Inc. (NYSE: CXO) ("Concho" or the "Company") today announced that it has entered into definitive agreements to acquire acreage in the Delaware Basin (the "Acquisitions") from multiple parties during the third and fourth quarters of 2011 for aggregate consideration of approximately $330 million. The Acquisitions add approximately 137,000 gross (114,000 net) acres that are strategically positioned in both the northern and southern portions of the Company's Delaware Basin Bone Spring play. The Acquisitions consist primarily of leasehold but include an estimated 6 million barrels of oil equivalent ("MMBoe") proven reserves at closing and net daily production of approximately 1,500 barrels of oil equivalent per day ("Boepd"). Highlights of the Acquisitions: Expands the Company's acreage position in the Delaware Basin to approximately 420,000 gross (270,000 net) acres from approximately 280,000 gross (160,000 net) acres as of June 30, 2011 Increases the Company's average working interest in the Delaware Basin to 64% from 56% as of June 30, 2011 Adds over 350 identified horizontal drilling locations with the potential to identify an additional 500 locations assuming 160-acre spacing Additionally, during the third quarter of 2011 Concho achieved record levels of production from its Delaware Basin Bone Spring play, which includes the Avalon shale, the Bone Spring sands and the Wolfcamp shale. The Company's average net daily production in the third quarter of 2011 from its Delaware Basin Bone Spring play was approximately 8,900 Boepd, a 59% increase over the second quarter of 2011. Timothy A. Leach, Concho's Chairman, CEO and President, commented, "We are pleased to announce a significant expansion of our acreage position in the Delaware Basin Bone Spring play at a very attractive acquisition price. Together with the Marbob acquisition and our leasing efforts, Concho has assembled a premier acreage position in the Delaware Basin targeting multiple horizons. As our operations team continues to deliver outstanding results in the Delaware Basin, we remain encouraged that this asset will be a significant driver of future growth." The Acquisitions, which are all expected to close by December 2011, will be funded with borrowings under the Company's credit facility and are subject to customary purchase price adjustments and other customary closing conditions. The foregoing contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this press release specifically include statements, estimates and projections regarding the Company's future production growth, acquisitions, oil and natural gas reserves and number of identified drilling locations. These statements are based on certain assumptions made by the Company based on management's experience, expectations and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Forward-looking statements are not guarantees of performance. Although the Company believes the expectations reflected in its forward-looking statements are reasonable and are based on reasonable assumptions, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all) or will prove to have been correct. Moreover, such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These include the factors discussed or referenced in the "Risk Factors" section of the Company's most recent Form 10-K and 10-Q filings and risks relating to declines in the prices we receive for our oil and natural gas; uncertainties about the estimated quantities of reserves; risks related to the integration of the acquired assets; the effects of government regulation, permitting and other legal requirements, including new legislation or regulation of hydraulic fracturing; drilling and operating risks; the adequacy of our capital resources and liquidity; risks related to the concentration of our operations in the Permian Basin; the results of our hedging program; weather; litigation; shortages of oilfield equipment, services and qualified personnel and increases in costs for such equipment, services and personnel; uncertainties about our ability to replace reserves and economically develop our current reserves; competition in the oil and natural gas industry; our existing indebtedness; and other important factors that could cause actual results to differ materially from those projected. 10.17.11 Concho Resources Inc. Announces Participation in Upcoming Conferences MIDLAND, Texas, Oct 17, 2011 (BUSINESS WIRE) -- Concho Resources Inc. (NYSE: CXO) (the "Company") today announced its participation at the Barclays Capital Second Annual Energy, Engineering and Construction One Day Forum on Thursday, November 10th, the Bank of America Merrill Lynch 2011 Global Energy Conference on Wednesday, November 16th at 8:10 AM ET, the Bank of America Merrill Lynch Leveraged Finance Conference on Thursday, December 1st at 3:30 PM ET, and the Capital One Southcoast 6th Annual Energy Conference on Tuesday, December 6th at 8:40 AM CT. The presentations will be available on Concho's website, www.concho.com. Additionally, all presentations will be webcast and can be accessed through the Company website. Director, Investor Relations & Corporate Communication 09.15.11 Concho Resources Inc. Schedules Third Quarter 2011 Conference Call for November 3, 2011 Concho Resources Inc. (NYSE: CXO) ("Concho" or the "Company") will host a conference call on Thursday, November 3, 2011, at 9:00 a.m. CT to discuss its third quarter financial and operating results. Earnings are expected to be released after the market closes on Wednesday, November 2, 2011. Individuals who would like to participate should call (800) 659-2032 (passcode: 39505486) approximately 15 minutes before the scheduled conference call time. To access the live audio webcast, please visit the investor relations section of the Company's website, www.concho.com. A replay of the call will also be available, by dialing (888) 286-8010 (passcode: 60178210) or via the Company's website, for approximately 30 days following the conference call. Concho Resources Inc. is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. The Company's operations are primarily focused in the Permian Basin of Southeast New Mexico and West Texas. For more information, visit Concho's website at www.concho.com. Director of Investor Relations & Corporate Communication 08.03.11 Concho Resources Inc. Reports Second Quarter 2011 Financial and Operating Results MIDLAND, Texas, Aug 03, 2011 (BUSINESS WIRE) -- Concho Resources Inc. (NYSE: CXO) ("Concho" or the "Company") today reported financial and operating results for the three and six months ended June 30, 2011. Highlights for the three and six months ended June 30, 2011 include: Production of 5.6 million barrels of oil equivalents ("MMBoe") for the second quarter of 2011, a 61% increase over the second quarter of 2010 and a 7% increase over the first quarter of 2011 Mid-year proved reserves increased to 342.6 MMBoe, up 6% from year-end 2010 Reserve replacement ratio1 of 354% for the first six months of 2011 Net income of $232.2 million, or $2.24 per diluted share, for the second quarter of 2011, as compared to net income of $124.2 million, or $1.35 per diluted share, in the second quarter of 2010 Adjusted net income2 (non-GAAP) of $113.2 million, or $1.09 per diluted share, for the second quarter of 2011, as compared to $57.9 million, or $0.63 per diluted share, for the second quarter of 2010 EBITDAX3 of $310.7 million for the second quarter of 2011, an increase of 92% over the second quarter of 2010 1 The Company uses the reserve replacement ratio as an indicator of the Company's ability to replenish annual production volumes and grow its reserves, thereby providing some information on the sources of future production. It should be noted that the reserve replacement ratio is a statistical indicator that has limitations. The ratio is limited because it typically varies widely based on the extent and timing of discoveries and property acquisitions. Its predictive and comparative value is also limited for the same reasons. In addition, since the ratio does not imbed the cost or timing of future production of new reserves, it cannot be used as a measure of value creation. The reserve replacement ratio of 354% was calculated by dividing net proved reserve additions of 38.2 MMBoe (the sum of extensions, discoveries, revisions and purchases) by production of 10.8 MMBoe. 2 Adjusted net income (non-GAAP) is comparable to securities analyst estimates. For an explanation of how the Company calculates adjusted net income (non-GAAP) and a reconciliation of net income (GAAP) to adjusted net income (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. 3 For an explanation of how the Company calculates and uses EBITDAX (non-GAAP) and a reconciliation of net income (GAAP) to EBITDAX (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. Second Quarter 2011 Financial Results Production for the second quarter of 2011 totaled 5.6 MMBoe (3.5 million barrels of oil ("MMBbls") and 12.3 billion cubic feet of natural gas ("Bcf")), an increase of 61% as compared to 3.5 MMBoe (2.3 MMBbls and 6.7 Bcf) produced in the second quarter of 2010. As of July 1, 2011, the Company estimated that its total proved reserves were 342.6 MMBoe (62% proved developed) utilizing SEC reserve recognition standards and pricing assumptions based on the trailing 12-month average first-day-of-the-month prices as of June 2011 of $86.60 per barrel ("Bbl") of oil and $4.21 per million British thermal unit ("MMBtu") of natural gas. The Company's estimate of its total proved reserves as of July 1, 2011 is based on the Company's internal reserve analysis and has not been prepared by, reviewed or audited by the Company's independent petroleum engineers. This total represents a 6% increase from year-end 2010 total proved reserves of 323.5 MMBoe (57% proved developed). The total proved reserves estimate as of July 1, 2011 would have been reduced by approximately 2.2 MMBoe had the Company utilized the average twelve month 2010 SEC pricing of $75.96 per Bbl of oil and $4.38 per MMBtu of gas. Timothy A. Leach, Concho's Chairman, CEO and President commented, "Our business delivered outstanding results in the first half of 2011. Despite the many factors that have challenged our operations, we remain on track to accomplish the goals we established for 2011. I am pleased with our reserve and production growth in the first six months of 2011 and the significant additions to our drilling inventory, particularly in our core Wolfberry and Delaware Basin assets. Finally, our results in the Delaware Basin are encouraging, and the significant quarter over quarter production growth from the Delaware Basin is indicative of the momentum we expect this area to carry into 2012." For the second quarter of 2011, the Company reported net income of $232.2 million, or $2.24 per diluted share, as compared to net income of $124.2 million, or $1.35 per diluted share, for the second quarter of 2010. The Company's second quarter 2011 results were impacted by several non-cash items including: (1) a $192.6 million unrealized mark-to-market gain on commodity and interest rate derivatives and (2) $0.1 million of impairments of long-lived assets and leasehold abandonments, combined. Excluding these items and their tax effects, the second quarter 2011 adjusted net income (non-GAAP) was $113.2 million, or $1.09 per diluted share. Excluding these similar items and an impairment of long-lived assets included in discontinued operations recorded in the second quarter of 2010, our adjusted net income (non-GAAP) for the second quarter of 2010 was $57.9 million, or $0.63 per diluted share. For a reconciliation of net income (GAAP) to adjusted net income (non-GAAP), please see "Supplemental Non-GAAP Financial Measures" below. EBITDAX (defined as net income, plus (1) exploration and abandonments expense, (2) depreciation, depletion and amortization expense, (3) accretion expense, (4) impairments of long-lived assets, (5) non-cash stock-based compensation expense, (6) bad debt expense, (7) unrealized (gain) loss on derivatives not designated as hedges, (8) (gain) loss on sale of assets, net, (9) interest expense, (10) federal and state income taxes, and (11) similar items listed above that are presented in discontinued operations) increased to $310.7 million in the second quarter of 2011, as compared to $161.7 million in the second quarter of 2010. For a reconciliation of net income (GAAP) to EBITDAX (non-GAAP), please "Supplemental Non-GAAP Financial Measures" below. Operating revenues for the second quarter of 2011 increased 124% when compared to the second quarter of 2010. This increase is attributable to the 76% increase in production and the 30% increase in the Company's unhedged realized oil price and the 32% increase in the Company's unhedged realized natural gas price in the second quarter of 2011 compared to the same period in 2010. Oil and natural gas production expense for the second quarter of 2011, including taxes, totaled $69.6 million, or $12.48 per Boe, an 8% increase per Boe over the second quarter of 2010. This increase was primarily due to higher commodity prices, which resulted in more oil and natural gas taxes (which averaged $6.51 per Boe in the second quarter of 2011 as compared to $4.99 per Boe in the second quarter of 2010). Depreciation, depletion and amortization for the second quarter of 2011 totaled $98.9 million, or $17.74 per Boe, a 13% increase per Boe from $49.6 million, or $15.66 per Boe, in the second quarter of 2010. General and administrative expense ("G&A") for the second quarter of 2011 totaled $22.6 million, or $4.06 per Boe, compared to $17.8 million, or $5.61 per Boe, in the second quarter of 2010. The decrease in per Boe expense in the second quarter of 2011 over the second quarter of 2010 was primarily due to increased production, offset by a 27% increase in absolute G&A costs due to increased staffing across the Company and the addition of employees from the Marbob acquisition. The Company's cash flows from operating activities (GAAP) for the six months ended June 30, 2011 was $485.8 million, as compared to $239.5 million for the six months ended June 30, 2010, an increase of 103%. Adjusted cash flows (non-GAAP), which are cash flows from operating activities adjusted for settlements paid on derivatives not designated as hedges, was $409.8 million for the six months ended June 30, 2011, as compared to $230.2 million for the six months ended June 30, 2010, an increase of 78%. For a description of the use of adjusted cash flows (non-GAAP) and for a reconciliation of cash flows from operating activities (GAAP) to adjusted cash flows (non-GAAP), please "Supplemental Non-GAAP Financial Measures" below. In the second quarter of 2011, the Company made cash payments for settlements on derivatives contracts not designated as hedges of $47.8 million and the non-cash unrealized mark-to-market gain for the derivatives contracts not designated as hedges was $192.6 million. This is compared to cash receipts of $1.5 million on derivatives contracts not designated as hedges and a $111.2 million non-cash unrealized mark-to-market gain on contracts not designated as hedges in the second quarter of 2010. To better understand the impact of the Company's derivatives positions and their impact on the statement of operations, please see the "Summary Production and Price Data" and "Derivatives Information" tables at the end of this press release. For the quarter ended June 30, 2011, the Company commenced the drilling of or participated in a total of 229 gross wells (196 operated), 72 of which had been completed as producers and 157 of which were in progress at June 30, 2011. In addition, during the second quarter of 2011, the Company completed 127 wells that were drilled prior to the second quarter of 2011. Currently, the Company is operating 36 drilling rigs, all in the Permian Basin; 12 of these rigs are drilling Yeso wells on the New Mexico Shelf, 16 are drilling Wolfberry wells in the Texas Permian, 6 are drilling Bone Spring wells in the Delaware Basin and 2 rigs are drilling Lower Abo wells on the New Mexico Shelf. During the second quarter of 2011, the Company drilled 131 wells (106 operated) on its New Mexico Shelf assets, which included both the Yeso and the Lower Abo, with a 100% success rate on the 60 wells that had been completed by June 30, 2011. In addition, during the second quarter of 2011, the Company completed 52 wells that were drilled prior to the second quarter of 2011. At June 30, 2011, on its New Mexico Shelf assets, the Company had identified 2,846 drilling locations, with proved undeveloped reserves attributable to 637 of such locations. Of these 2,846 drilling locations, 2,113 target the Yeso formation and 327 target the Lower Abo formation. During the second quarter of 2011, the Company drilled 73 wells (100% operated) on its Texas Permian assets with a 100% success rate on the 10 wells that had been completed by June 30, 2011. In addition, during the second quarter of 2011, the Company completed 58 wells that were drilled prior to the second quarter of 2011. At June 30, 2011, on its Texas Permian assets, the Company had identified 4,449 drilling locations, with proved undeveloped reserves attributable to 1,240 of such locations. Of these 4,449 drilling locations, 1,893 target the Wolfberry play through 40-acre spacing and 2,444 target the Wolfberry play on 20-acre spacing. During the second quarter of 2011, the Company drilled or participated in 25 wells (17 operated) with a 100% success rate on the 2 wells that had been completed by June 30, 2011. In addition, during the second quarter of 2011, the Company completed 17 wells that were drilled prior to the second quarter of 2011. The Company's net production from the Bone Spring in the second quarter of 2011 averaged approximately 5,600 Boepd, an increase of 40% over the first quarter of 2011. At June 30, 2011, on its Delaware Basin assets, the Company had identified 1,464 drilling locations, with proved undeveloped reserves attributable to 106 of such locations. Of these drilling locations, 1,039 target horizontal objectives and 332 target the vertical Wolfbone play. The Company maintains an active hedging program and continued to add to its derivative positions through July 2011. Please see the "Derivatives Information" tables at the end of this press release for more detailed information about the Company's current derivative positions. The Company will host a conference call on Thursday, August 4, 2011 at 9:00 a.m. Central Time to discuss the second quarter 2011 financial and operating results. Interested parties may listen to the conference call via the Company's website at http://www.concho.com or by dialing (866) 271-5140 (passcode: 82868431). A replay of the conference call will be available on the Company's website or by dialing (888) 286-8010 (passcode: 88954595). The foregoing contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this press release specifically include statements, estimates and projections regarding the Company's future financial position, liquidity and capital resources, operations, performance, production growth, acquisitions, returns, capital expenditure budgets, oil and natural gas reserves, number of identified drilling locations, drilling program, derivative activities, costs and other guidance included in this press release. These statements are based on certain assumptions made by the Company based on management's experience, expectations and perception of historical trends, current conditions, anticipated future developments and other factors believed to be appropriate. Forward-looking statements are not guarantees of performance. Although the Company believes the expectations reflected in its forward-looking statements are reasonable and are based on reasonable assumptions, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all) or will prove to have been correct. Moreover, such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. These include the factors discussed or referenced in the "Risk Factors" section of the Company's most recent Form 10-K filing and risks relating to declines in the prices we receive for our oil and natural gas; uncertainties about the estimated quantities of reserves; the effects of government regulation, permitting and other legal requirements, including new legislation or regulation of hydraulic fracturing; drilling and operating risks; the adequacy of our capital resources and liquidity; risks related to the concentration of our operations in the Permian Basin; the results of our hedging program; weather; litigation; shortages of oilfield equipment, services and qualified personnel and increases in costs for such equipment, services and personnel; uncertainties about our ability to replace reserves and economically develop our current reserves; competition in the oil and natural gas industry; our existing indebtedness; and other important factors that could cause actual results to differ materially from those projected. Property and equipment, at cost: Common stock, $0.001 par value; 300,000,000 authorized; 103,529,637 and 102,842,082 shares issued at June 30, 2011 and December 31, 2010, respectively Treasury stock, at cost; 48,849 and 31,963 shares at June 30, 2011 and December 31, 2010, respectively General and administrative (including non-cash stock-based compensation of $4,725 and $2,871 for the three months ended June 30, 2011 and 2010, respectively, and $9,193 and $5,702 for the six months ended June 30, 2011 and 2010, respectively) Cash paid for interest and fees, net of $73 and $56 capitalized interest Summary Production and Price Data The following table sets forth summary information from our continuing and discontinued operations concerning our production and operating data for the periods indicated: (a) Includes the cash payments/receipts from commodity derivatives not designated as hedges and reported in operating costs and expenses. The following table reflects the amounts of cash payments/receipts from commodity derivatives not designated as hedges that were included in computing average prices with derivatives and reconciles to the amount in gain (loss) on derivatives not designated as hedges as reported in the statements of operations: Cash payments on oil derivatives Unrealized mark-to-market gain (loss) on commodity and interest rate Includes the cash payments/receipts from commodity derivatives not designated as hedges and reported in operating costs and expenses. The following table reflects the amounts of cash payments/receipts from commodity derivatives not designated as hedges that were included in computing average prices with derivatives and reconciles to the amount in gain (loss) on derivatives not designated as hedges as reported in the statements of operations: (Gain) loss on sale of assets, net (a) The tax impact is computed utilizing the Company's statutory effective federal and state income tax rates. The income tax rates for the three months ended June 30, 2011 and 2010, were 38.2% and 37.6%, respectively, and 38.1% and 37.4% for the six months ended June 30, 2011 and 2010, respectively. (a) Cash flows from operating activities includes net reductions of $96.2 million and $49.8 million for the six months ended June 30, 2011 and 2010, respectively, associated with changes in working capital items. Changes in working capital items adjust for the timing of receipts and payments of actual cash. (b)Amounts are presented in cash flows from investing activities for GAAP purposes. The table below provides the costs incurred for the three and six months ended June 30, 2011 and 2010. (a) The costs incurred for oil and natural gas producing activities includes the following amounts of asset retirement obligations: Derivatives Information at August 3, 2011 The table below provides data associated with our derivatives at August 3, 2011.

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professional_accounting

Justia Forms Business Contracts Real Good Food Company, Inc. Form of Tax Receivable Agreement, by and among RGF, Inc., RGF Form of Tax Receivable Agreement, by and among RGF, Inc., RGF, LLC, and the Members, to be effective upon the consummation of this offering EX-10.1 4 d187927dex101.htm EX-10.1 EX-10.1 TAX RECEIVABLE AGREEMENT THE REAL GOOD FOOD COMPANY, INC., THE TRA HOLDERS, THE TRA HOLDER REPRESENTATIVE DEFINITIONS 2 DETERMINATION OF REALIZED TAX BENEFITS 8 Exchange Schedule 8 Tax Benefit Schedule 8 Procedures, Amendments, and Principles 8 TAX BENEFIT PAYMENTS 10 No Duplicative Payments 10 Pro Rata Payments 11 Early Termination 11 Early Termination Notice 12 Payment upon Early Termination 12 SUBORDINATION AND LATE PAYMENTS 13 Subordination 13 Late Payments by the Corporate Taxpayer 13 NO DISPUTES; CONSISTENCY; COOPERATION 13 No Participation in the Corporate Taxpayer’s and RGF, LLC’s Tax Matters 13 Consistency 13 Cooperation 14 Notices 14 Counterparts 15 Entire Agreement; No Third Party Beneficiaries 15 Governing Law 15 Severability 15 Successors; Assignment; Amendments; Waivers 15 Titles and Subtitles 16 Reconciliation 16 Withholding 17 Section 7.10 Admission of the Corporate Taxpayer into a Consolidated Group; Transfers of Corporate Assets 17 Confidentiality 17 LLC Agreement 18 TRA Holder Representative 18 This TAX RECEIVABLE AGREEMENT (this “Agreement”) is effective as of , 2021 by and among The Real Good Food Company, Inc., a Delaware corporation (the “Corporate Taxpayer”), the TRA Holder Representative, and each of the other Persons from time to time party hereto (the “TRA Holders”). WHEREAS, the TRA Holders hold membership interests designated as “Class B Units” (the “Class B Units”) in Real Good Foods, LLC, a Delaware limited liability company (“RGF, LLC”); WHEREAS, RGF, LLC is classified as a partnership for United States federal income tax purposes; WHEREAS, the Corporate Taxpayer will issue shares of its Class A common stock to purchasers in an initial public offering of such stock (the “IPO” and the date on which the IPO is consummated, the “IPO Date”); WHEREAS, on or about the IPO Date, the Corporate Taxpayer will acquire membership interests designated as “Class A Units” (the “Class A Units”) of RGF, LLC (the “Class A Unit Purchase”); WHEREAS, the Class B Units held by the TRA Holders may be exchanged for Class A common stock of the Corporate Taxpayer (the “Class A Shares”) or cash (each, an “Exchange”), subject to the provisions of the Exchange Agreement, dated as of , 2021, among the Corporate Taxpayer, RGF, LLC and the TRA Holders party thereto, as amended, restated, or otherwise modified from time to time (the “Exchange Agreement”) and the Fourth Amended and Restated Operating Agreement of RGF, LLC, as amended, restated, or otherwise modified from time to time (the “LLC Agreement”); WHEREAS, RGF, LLC and each of its direct and indirect Subsidiaries, if any, treated as a partnership for United States federal income tax purposes currently have and will have in effect an election under Section 754 of the United States Internal Revenue Code of 1986, as amended and including successor provisions thereto (the “Code”) and any corresponding provisions of state and local tax law, for each Taxable Year in which a taxable Exchange occurs; WHEREAS, the income, gain, loss, expense, deduction and other Income Tax items of the Corporate Taxpayer may be affected by Basis Adjustments and Imputed Interest resulting from the Exchanges (collectively, the “Tax Attributes”); WHEREAS, the parties to this Agreement desire to make certain arrangements with respect to the effect of the Tax Attributes on the liability for certain taxes of the Corporate Taxpayer; NOW, THEREFORE, in consideration of the foregoing and the respective covenants and agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows: Section 1.1 Definitions. As used in this Agreement, the terms set forth in this Article I have the following meanings and the capitalized terms defined elsewhere in this Agreement have such definitions throughout this Agreement (such meanings and definitions to be equally applicable to both the singular and plural forms of the terms defined). “Accrued Amount” has the meaning set forth in Section 3.1(b) of this Agreement. “Actual US Tax Liability” means, with respect to any Taxable Year, the actual liability for United States federal Income Taxes of (i) the Corporate Taxpayer and (ii) without duplication, RGF, LLC, but only with respect to United States federal Income Taxes imposed on RGF, LLC and allocable to the Corporate Taxpayer pursuant to the LLC Agreement and applicable United States federal Income Tax Law; provided that the liability described in clauses (i) and (ii) shall be calculated assuming (x) any Subsequently Acquired TRA Attributes do not exist, (y) so long as RGF, LLC (or any successor entity) is a partnership for United States federal Income Tax purposes, the “traditional method” of Treasury Regulations Section 1.704-3(b) is in effect for purposes of Section 704(c) of the Code as of the date of the closing of the Class A Unit Purchase and at all times thereafter and (z) SALT and resulting deductions are excluded. “Affiliate” means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first-mentioned Person. “Agreed Rate” means a per annum rate of SOFR plus 100 basis points. “Agreement” has the meaning set forth in the preamble of this Agreement. “Amended Schedule” has the meaning set forth in Section 2.3(b) of this Agreement. “Assumed SALT Liability” means, for a Taxable Year, the Actual US Tax Liability modified by using the Assumed SALT Rate instead of the United States federal Income Tax rates otherwise used for the determination of the Actual US Tax Liability. “Assumed SALT Rate” means the rate equal to the sum of the products of (x) RGF, LLC’s Income Tax apportionment rate for each state and local jurisdiction in which RGF, LLC files Tax Returns for the relevant Taxable Year and (y) the highest corporate Income Tax rate for each such state and local jurisdiction in which RGF, LLC files Tax Returns for each relevant Taxable Year; provided, that (i) the Assumed SALT Rate calculated pursuant to the foregoing shall be reduced by an assumed United States federal Income Tax benefit received by the Corporate Taxpayer with respect to SALT, which benefit shall be calculated as the product of (a) the Corporate Taxpayer’s marginal United States federal Income Tax rate for the relevant Taxable Year and (b) the Assumed SALT Rate (without regard to this proviso)) and (ii) on or prior to the first day of any relevant Taxable Year, the Corporate Taxpayer and the TRA Holder Representative may agree on an Assumed SALT Rate that will be used for the relevant Taxable Year (which rate shall be based on good faith estimates of expected apportionment rates for such Taxable Year and on the Income Tax rates in effect in relevant jurisdictions as of the first day of the relevant Taxable Year). “Attributable” has the meaning set forth in Section 3.1(b) of this Agreement. “Basis Adjustment” means the adjustment to the basis of a Reference Asset for Income Tax purposes under Section 1012, 754, 732, 734(b), and/or 743(b) of the Code, as a result of an Exchange or a payment made pursuant to this Agreement (to the extent permitted by applicable law). “Beneficial Owner” means, with respect to a security, a Person who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares: (i) voting power, which includes the power to vote, or to direct the voting of, such security and/or (ii) investment power, which includes the power to dispose of, or to direct the disposition of, such security. “Beneficially Own” and “Beneficial Ownership” shall have correlative meanings. “Board” means the Board of Directors of the Corporate Taxpayer. “Business Day” means a day, other than Saturday, Sunday or other day recognized as a legal holiday by the United States government or the State of New Jersey. “Change of Control” means the occurrence of any of the following events: (i) any “person” or “group” (within the meaning of Sections 13(d) of the Securities Exchange Act of 1934, as amended (excluding any “person” or “group” who, on the IPO Date, is the Beneficial Owner of securities of the Corporate Taxpayer representing more than 50% of the combined voting power of the Corporate Taxpayer’s then outstanding voting securities and excluding any “Permitted Transferee” (as defined in the LLC Agreement) and any group of Permitted Transferees)) becomes the Beneficial Owner of securities of the Corporate Taxpayer representing more than 50% of the combined voting power of the Corporate Taxpayer’s then outstanding voting securities; (ii) the shareholders of the Corporate Taxpayer approve a plan of complete liquidation or dissolution of Corporate Taxpayer or (B) there is consummated an agreement or series of related agreements for the sale or other disposition, directly or indirectly, by the Corporate Taxpayer of all or substantially all of the Corporate Taxpayer’s assets, other than such sale or other disposition by the Corporate Taxpayer of all or substantially all of the Corporate Taxpayer’s assets to an entity at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Corporate Taxpayer in substantially the same proportions as their ownership of the Corporate Taxpayer immediately prior to such sale or other disposition; (iii) there is consummated a merger or consolidation of the Corporate Taxpayer with any other corporation or other entity, and, immediately after the consummation of such merger or consolidation, either (A) the board of directors of the Corporate Taxpayer immediately prior to the merger or consolidation does not constitute at least a majority of the board of directors of the company surviving the merger or consolidation or, if the surviving company is a Subsidiary, the ultimate parent thereof, or (B) all of the Persons who were the respective Beneficial Owners of the voting securities of the Corporate Taxpayer immediately prior to such merger or consolidation do not Beneficially Own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities of the Person resulting from such merger or consolidation; or (iv) the following individuals cease for any reason to constitute a majority of the number of directors of the Corporate Taxpayer then serving: individuals who were directors of the Corporate Taxpayer on the IPO Date or any new director whose appointment or election to the Board or nomination for election by the Corporate Taxpayer’s shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors of the Corporate Taxpayer on the IPO Date or whose appointment, election or nomination for election was previously so approved or recommended by the directors referred to in this clause (iv). Notwithstanding the foregoing, a “Change of Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Class A Common Stock and Class B Common Stock of the Corporate Taxpayer immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in and voting control over, and own substantially all of the shares of, an entity which owns all or substantially all of the assets of the Corporate Taxpayer immediately following such transaction or series of transactions. “Class A Shares” has the meaning set forth in the recitals of this Agreement. “Class A Unit Purchase” has the meaning set forth in the recitals of this Agreement. “Class A Units” has the meaning set forth in the recitals of this Agreement. “Class B Units” has the meaning set forth in the recitals of this Agreement. “Code” has the meaning set forth in the recitals of this Agreement. “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. “Controlling” and “Controlled” have correlative meanings. “Corporate Taxpayer” has the meaning set forth in the preamble of this Agreement. “Corporate Taxpayer Return” means the United States federal Tax Return of the Corporate Taxpayer filed with respect to the applicable Taxable Year. “Cumulative Net Realized Tax Benefit” for a Taxable Year means the cumulative amount of Realized Tax Benefits for all Taxable Years of the Corporate Taxpayer, up to and including such Taxable Year, net of the cumulative amount of Realized Tax Detriments for the same period, in each case determined based on the most recent Schedules in existence at the time of such determination. “Default Rate” means a per annum rate of SOFR plus 500 basis points. “Determination” means “determination” as used in Section 1313(a) of the Code or similar provision of state or local Income Tax law (and includes terms with similar meanings in such provisions), as applicable, or any other event that finally and conclusively establishes the amount of any liability for Tax, including, without limitation, the execution of IRS Form 870-AD and any other acquiescence of the Corporate Taxpayer to the amount of any assessed liability for Tax. “Disputing Party” has the meaning set forth in Section 7.8 of this Agreement. “Early Termination Date” means, for purposes of determining the Early Termination Payment, the date of an Early Termination Notice. “Early Termination Notice” has the meaning set forth in Section 4.2 of this Agreement. “Early Termination Payment” has the meaning set forth in Section 4.3(b) of this Agreement. “Early Termination Rate” means a per annum rate of the lesser of (i) 5.5%, compounded annually, and (ii) SOFR plus 100 basis points. “Early Termination Schedule” has the meaning set forth in Section 4.2 of this Agreement. “Exchange” has the meaning set forth in the recitals of this Agreement. “Exchange Agreement” has the meaning set forth in the recitals of this Agreement. “Exchange Date” means the date of any Exchange. “Exchange Schedule” has the meaning set forth in Section 2.1 of this Agreement. “Expert” has the meaning set forth in Section 7.8 of this Agreement. “Hypothetical SALT Liability” means, for a Taxable Year, the Hypothetical US Tax Liability modified by using the Assumed SALT Rate instead of the United States federal Income Tax rates otherwise used for the determination of the Hypothetical US Tax Liability. “Hypothetical US Tax Liability” means, with respect to any Taxable Year, the Actual US Tax Liability modified by (i) using the Non-Stepped Up Tax Basis, instead of the otherwise applicable Income Tax basis, of the Reference Assets, (ii) excluding any deduction attributable to Imputed Interest for the Taxable Year, and (iii) excluding the carryover or carryback of any Income Tax item or attribute (or portions thereof) that is available for use because of any Tax Attribute. “Imputed Interest” in respect of a TRA Holder means any interest imputed under Section 1272, 1274 or 483 or other provision of the Code with respect to the Corporate Taxpayer’s payment obligations in respect of such TRA Holder under this Agreement. “Income Taxes” means any and all United States federal, state, and local taxes, assessments or similar charges that are based on or measured with respect to net income or profits, including, without limitation, such taxes which are franchise taxes, and any interest related to such tax. “IPO” has the meaning set forth in the preamble of this Agreement. “IPO Date” has the meaning set forth in the preamble of this Agreement. “IRS” means the United States Internal Revenue Service. “LLC Agreement” has the meaning set forth in the recitals of this Agreement. “Material Breach” has the meaning set forth in Section 4.1(b) of this Agreement. “Net Tax Benefit” has the meaning set forth in Section 3.1(b) of this Agreement. “Non-Stepped Up Tax Basis” means, with respect to any Reference Asset, the Income Tax basis that such asset would have had at such time if no Basis Adjustments had been made. “Objection Notice” has the meaning set forth in Section 2.3(a) of this Agreement. “Person” means any individual, corporation, firm, partnership, joint venture, limited liability company, estate, trust, business association, organization, governmental entity or other entity. “Realized Tax Benefit” means, for a Taxable Year, the excess, if any, of (i) the sum of the Hypothetical US Tax Liability and the Hypothetical SALT Liability over (ii) the sum of the Actual US Tax Liability and the Assumed SALT Liability; provided that, if all or a portion of the actual liability for applicable Income Taxes for the Taxable Year arises as a result of an audit by a Taxing Authority with respect to any Taxable Year, such liability shall not be included in determining the Realized Tax Benefit unless and until there has been a Determination. “Realized Tax Detriment” means, for a Taxable Year, the excess, if any, of (i) the sum of the Actual US Tax Liability and the Assumed SALT Liability over (ii) the sum of the Hypothetical US Tax Liability and the Hypothetical SALT Liability; provided that, if all or a portion of the actual liability for applicable Income Taxes for the Taxable Year arises as a result of an audit by a Taxing Authority with respect to any Taxable Year, such liability shall not be included in determining the Realized Tax Detriment unless and until there has been a Determination. “Receiving Party” has the meaning set forth in Section 7.11 of this Agreement. “Reconciliation Dispute” has the meaning set forth in Section 7.8 of this Agreement. “Reconciliation Procedures” has the meaning set forth in Section 2.3(a) of this Agreement. “Reference Asset” means an asset that is held by RGF, LLC, or by any of its direct or indirect Subsidiaries treated as a partnership or disregarded for purposes of the applicable Income Tax (but only if such indirect Subsidiaries are held only through Subsidiaries treated as partnerships or disregarded for purposes of such tax), at the time of an Exchange, and includes any asset that is “substituted basis property” under Section 7701(a)(42) of the Code with respect to any other Reference Asset. “Representative Provisions” has the meaning set forth in Section 7.13 of this Agreement. “Representative Losses” has the meaning set forth in Section 7.13 of this Agreement. “RGF, LLC” has the meaning set forth in the recitals of this Agreement. “SALT” means United States state and local Income Tax. “Schedule” means an Exchange Schedule, a Tax Benefit Schedule, or the Early Termination Schedule, in each case as amended pursuant to this Agreement. “Schedule Period” has the meaning set forth in Section 2.3(a) of this Agreement. “Schedule Recipient” has the meaning set forth in Section 2.3(a) of this Agreement. “Senior Obligations” has the meaning set forth in Section 5.1 of this Agreement. “SOFR” means, during any period, the greater of (a) 0.25% and (b) the Secured Overnight Financing Rate, as reported by the Wall Street Journal two Business Days prior to the commencement of the applicable period. Each determination by Corporate Taxpayer of SOFR shall be conclusive and binding in the absence of manifest error. “Subsequently Acquired TRA Attributes” means any net operating losses or other tax attributes to which any of the Corporate Taxpayer, RGF, LLC or any of their Subsidiaries become entitled as a result of a transaction (other than any Exchanges) after the date of this Agreement to the extent such net operating losses and other tax attributes are subject to a tax receivable agreement (or comparable agreement) entered into by the Corporate Taxpayer, RGF, LLC or any of their Subsidiaries pursuant to which the Corporate Taxpayer, RGF, LLC or any of their Subsidiaries are obligated to pay over amounts with respect to tax benefits resulting from such net operating losses or other tax attributes. “Subsidiaries” means, with respect to any Person, any other Person as to which such Person, as of the date of determination, owns, directly or indirectly, or otherwise Controls more than 50% of the voting power or other similar interests or the sole general partner, managing member, or similar interest of such Person. “Tax Attributes” has the meaning set forth in the recitals of this Agreement. “Tax Benefit Payment” has the meaning set forth in Section 3.1(b) of this Agreement. “Tax Benefit Schedule” has the meaning set forth in Section 2.2 of this Agreement. “Tax Return” means any return, declaration, report or similar statement required to be filed with respect to Income Taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return and declaration of estimated Tax. “Taxable Year” means a taxable year of the Corporate Taxpayer as defined in Section 441(b) of the Code or comparable provision of state or local tax law, as applicable, ending on or after the date hereof. “Taxing Authority” means any United States federal, state, county or municipal or other local government, any subdivision, agency, commission or authority thereof, or any quasi-governmental body exercising any taxing authority or any other authority exercising Income Tax regulatory authority. “TRA Holder” has the meaning set forth in the preamble of this Agreement. “TRA Holder Representative” has the meaning set forth in Section 7.13 of this Agreement. “Treasury Regulations” means the final, temporary and proposed regulations promulgated under the Code as in effect for the relevant taxable period. “Valuation Assumptions” means, as of an Early Termination Date, the assumptions that (i) in each Taxable Year ending on or after such Early Termination Date, the Corporate Taxpayer will have taxable income sufficient to fully utilize the deductions arising from all Tax Attributes during such Taxable Year (including, for the avoidance of doubt, Tax Attributes that would result from Tax Benefit Payments that would be paid in accordance with the Valuation Assumptions, further assuming such Tax Benefit Payments would be paid on the due date, without extensions, for filing the Corporate Taxpayer Return for the applicable Taxable Year) in which such deductions would become available; (ii) any loss, capital loss, disallowed interest expense, credit or similar carryovers generated by deductions or losses arising from any Tax Attributes that are available in the Taxable Year that includes the Early Termination Date will be fully utilized by the Corporate Taxpayer in the earliest possible Taxable Year permitted by the Code and the Treasury Regulations; (iii) the United States federal Income Tax rates that will be in effect for each Taxable Year ending on or after such Early Termination Date will be those specified for each such Taxable Year by the Code and the tax rates for SALT will be the Assumed SALT Rate, in each case as in effect on the Early Termination Date, except to the extent any change to such tax rates for such Taxable Years have already been enacted into law; (iv) any non-amortizable Reference Assets will be disposed of for cash at their fair market value, as determined by the Corporate Taxpayer in its reasonable discretion, in a fully taxable transaction on the fifteenth anniversary of the Early Termination Date; and (v) if, at the Early Termination Date, there are Exchangeable Units that have not been transferred in an Exchange, then all Exchangeable Units and, if applicable, shares of Class B Common Stock shall be deemed to be transferred in an Exchange effective on the Early Termination Date and otherwise on the terms set forth in the Exchange Agreement. DETERMINATION OF REALIZED TAX BENEFITS Section 2.1 Exchange Schedule. Within ninety (90) calendar days after the filing of the Corporate Taxpayer Return for each Taxable Year in which any Exchange has been effected by any TRA Holder, the Corporate Taxpayer shall deliver to the TRA Holder Representative a schedule (the “Exchange Schedule”) that shows, in reasonable detail, the information necessary to perform the calculations required by this Agreement, including (i) the Non-Stepped Up Tax Basis of the Reference Assets in respect of such TRA Holder as of each applicable Exchange Date, (ii) the Basis Adjustment with respect to the Reference Assets in respect of such TRA Holder as a result of the Exchanges effected in such Taxable Year by such TRA Holder, calculated in the aggregate, (iii) the period (or periods) over which the basis of the Reference Assets in respect of such TRA Holder are amortizable and/or depreciable, and (v) the period (or periods) over which each Basis Adjustment in respect of such TRA Holder is amortizable and/or depreciable. Section 2.2 Tax Benefit Schedule. Within ninety (90) calendar days after the filing of the Corporate Taxpayer Return for any Taxable Year in which any Exchange has been effected by a TRA Holder or which is subsequent to any such Taxable Year, the Corporate Taxpayer shall provide to the TRA Holder Representative a schedule showing, in reasonable detail, the calculation of the Tax Benefit Payment in respect of such TRA Holder for such Taxable Year and the calculation of the Realized Tax Benefit or Realized Tax Detriment and components thereof for such Taxable Year (a “Tax Benefit Schedule”). Section 2.3 Procedures, Amendments, and Principles. (a) Procedures. (i) Additional Information. In the event the Corporate Taxpayer is required to deliver a Schedule pursuant to this Agreement, the Corporate Taxpayer shall also (x) deliver to the required recipient of such Schedule (the “Schedule Recipient”) schedules, valuation reports, if any, and work papers reasonably requested by such Schedule Recipient, providing reasonable detail regarding the preparation of the Schedule and (y) allow such Schedule Recipient reasonable access at no cost to the appropriate representatives at the Corporate Taxpayer, as determined by the Corporate Taxpayer or reasonably requested by such Schedule Recipient, in connection with a review of such Schedule. Without limiting the foregoing, in the event the Corporate Taxpayer is required to deliver a Tax Benefit Schedule, the Corporate Taxpayer shall also deliver to the Schedule Recipient the Corporate Taxpayer Return and the reasonably detailed calculations by the Corporate Taxpayer of the applicable Actual US Tax Liability, Hypothetical US Tax Liability, and Assumed SALT Rate. Notwithstanding the foregoing provisions of this Section 2.3(a), the Corporate Taxpayer shall be entitled to redact any information that it reasonably believes is unnecessary for purposes of determining the items in the applicable Schedule. (ii) Finalization of Schedules. An applicable Schedule will become final and binding on all parties thirty (30) calendar days after the first date on which the Schedule Recipient has received the applicable Schedule (the “Schedule Period”) unless such Schedule Recipient, within the Schedule Period, (i) provides the Corporate Taxpayer with a written notice of any material objection to such Schedule (“Objection Notice”) made in good faith or (ii) provides a written waiver of such right of any Objection Notice, in which case such Schedule will become binding on the date the waiver is received by the Corporate Taxpayer. If the Corporate Taxpayer and the TRA Holder Representative are unable to successfully resolve the issues raised in the Objection Notice, the provisions of Section 7.9 shall apply. (b) Schedule Amendments. The applicable Schedule shall be amended from time to time by the Corporate Taxpayer (i) in connection with a Determination affecting such Schedule, (ii) to correct inaccuracies in the Schedule identified after the date the Schedule was provided to the Schedule Recipient, (iii) to comply with the Expert’s determination under Section 7.8, (iv) to reflect a change in the Realized Tax Benefit or Realized Tax Detriment for such Taxable Year attributable to a carryback or carryforward of a loss or other tax item to such Taxable Year, (v) to reflect a change in the Realized Tax Benefit or Realized Tax Detriment for such Taxable Year attributable to an amended Corporate Taxpayer Return filed for such Taxable Year, or (vi) to adjust an applicable Exchange Schedule to take into account payments made pursuant to this Agreement (any such Schedule, an “Amended Schedule”). The Corporate Taxpayer shall provide each Amended Schedule to the applicable Schedule Recipient within ninety (90) calendar days of the occurrence of an event referenced in the preceding sentence. (c) Principles. The parties agree that all Tax Benefit Payments and other payments under this Agreement (to the extent permitted by applicable law) attributable to the Basis Adjustments (other than amounts accounted for as interest under the Code) will be treated as subsequent positive purchase price adjustments that give rise to further Basis Adjustments to Reference Assets for the Corporate Taxpayer in the year of payment, and, as a result, such additional Basis Adjustments will be incorporated into the calculation of the Realized Tax Benefit or Realized Tax Detriment and resulting Tax Benefit Payment for the year of payment and subsequent years. TAX BENEFIT PAYMENTS Section 3.1 Payments. (a) In General. Within five (5) calendar days after a Tax Benefit Schedule or amendment thereto becomes final and binding in accordance with this Agreement, the Corporate Taxpayer shall pay each TRA Holder for such Taxable Year an amount equal to the Tax Benefit Payment in respect of such TRA Holder for such Taxable Year. Each such Tax Benefit Payment shall be made by wire transfer of immediately available funds to the bank account previously designated by the applicable TRA Holder to the Corporate Taxpayer or as otherwise agreed by the Corporate Taxpayer and such TRA Holder. (b) Determination. A “Tax Benefit Payment” in respect of a TRA Holder for a Taxable Year means an amount, not less than zero, equal to the sum of the portion of the Net Tax Benefit Attributable to such TRA Holder and the Accrued Amount with respect thereto. A Net Tax Benefit is “Attributable” to a TRA Holder to the extent that it is derived from any Tax Attribute that is attributable to the Class B Units acquired by Corporate Taxpayer in an Exchange undertaken by or with respect to such TRA Holder. The “Net Tax Benefit” for a Taxable Year shall be an amount equal to the excess, if any, of eighty-five percent (85%) of the Cumulative Net Realized Tax Benefit as of the end of such Taxable Year, over the sum of the total amount of payments previously made under Section 3.1(a) of this Agreement (excluding payments attributable to Accrued Amounts); provided, for the avoidance of doubt, that no TRA Holder shall be required to return any portion of any previously made Tax Benefit Payment. The “Accrued Amount” with respect to any portion of a Net Tax Benefit shall equal an amount determined in the same manner as interest on such portion of the Net Tax Benefit calculated at the Agreed Rate from the due date (without extensions) for filing the Corporation Return for such Taxable Year until the date such portion of the Net Tax Benefit is paid. For tax purposes, the parties agree that the Accrued Amount shall not be treated as interest but instead shall be treated as additional consideration for the acquisition of Class B Units in Exchanges, unless otherwise required by applicable law. (c) Change of Control. Notwithstanding Section 3.1(b), for each Taxable Year ending on or after the date of a Change of Control, all Tax Benefit Payments, whether paid with respect to the Class B Units that were Exchanged prior to the date of such Change of Control or on or after the date of such Change of Control, shall be calculated by utilizing Valuation Assumptions, substituting in each case the terms “the date of a Change of Control” for an “Early Termination Date.” (d) Early Termination Payment. Notwithstanding anything to the contrary in this Agreement, after any Early Termination Payment, the Tax Benefit Payment, Net Tax Benefit and components thereof shall be calculated without taking into account any tax attributes with respect to which such Early Termination Payment has been made or any such Early Termination Payment. Section 3.2 No Duplicative Payments. It is intended that the provisions of this Agreement will not result in duplicative payment of any amount (including interest) required under this Agreement. The provisions of this Agreement shall be construed in the appropriate manner to ensure such intentions are realized. Section 3.3 Pro Rata Payments. (a) If for any reason the Corporate Taxpayer does not fully satisfy its payment obligations to make all Tax Benefit Payments due under this Agreement in respect of a particular Taxable Year, then the Corporate Taxpayer and the TRA Holders agree that (i) the Corporate Taxpayer shall pay the same proportion of each Tax Benefit Payment due to each Person due a payment hereunder in respect of such Taxable Year, without favoring one obligation over the other, and (ii) no Tax Benefit Payment shall be made in respect of any Taxable Year until all Tax Benefit Payments in respect of prior Taxable Years have been made in full. (b) To the extent the Corporate Taxpayer makes a payment to a TRA Holder in respect of a particular Taxable Year under Section 3.1(a) of this Agreement (taking into account Section 3.3(b), but excluding payments attributable to Accrued Amounts) in an amount in excess of the amount of such payment that should have been made to such TRA Holder in respect of such Taxable Year, then (i) such TRA Holder shall not receive further payments under Section 3.1(a) until such TRA Holder has foregone an amount of payments equal to such excess and (ii) the Corporate Taxpayer shall pay the amount of such TRA Holder’s foregone payments to the other TRA Holders in a manner such that each of the other TRA Holders, to the maximum extent possible, shall have received aggregate payments under Section 3.1(a) of this Agreement (in each case, taking into account Section 3.3(b) of this Agreement, but excluding payments attributable to Accrued Amounts) in the amount it would have received if there had been no excess payment to such TRA Holder. Section 4.1 Early Termination. (a) Election by Corporate Taxpayer. The Corporate Taxpayer may terminate this Agreement with respect to all amounts payable to the TRA Holders and with respect to all of the Class B Units held by the TRA Holders at any time by paying to each TRA Holder the Early Termination Payment in respect of such TRA Holder; provided, however, that if the Corporate Taxpayer and the TRA Holder Representative agree, the Corporate Taxpayer may terminate this Agreement with respect to some or all of the amounts payable to less than all of the TRA Holders; provided, further that this Agreement shall only terminate pursuant to this Section 4.1(a) with respect to a TRA Holder upon the receipt of the Early Termination Payment by such TRA Holder, and the Corporate Taxpayer shall deliver an Early Termination Notice only if it is able to make all required Early Termination Payments under this Agreement at the time required by Section 4.3, and provided, further, that the Corporate Taxpayer may withdraw any notice to execute its termination rights under this Section 4.1(a) prior to the time at which any Early Termination Payment has been paid. Upon payment of the Early Termination Payment by the Corporate Taxpayer in accordance with this Section 4.1(a), the Corporate Taxpayer shall not have any further payment obligations under this Agreement with respect to the TRA Holders that have received their Early Termination Payment in accordance with this Section 4.1(a), other than for any (i) Tax Benefit Payment agreed to by the Corporate Taxpayer, on one hand, and the applicable TRA Holder, on the other, as due and payable but unpaid as of the Early Termination Notice and (ii) Tax Benefit Payment due for the Taxable Year ending with or including the date of the Early Termination Notice (except to the extent that the amount described in clause (ii) is included in the Early Termination Payment). Without limiting the foregoing, if an Exchange by a TRA Holder occurs after the Corporate Taxpayer makes the Early Termination Payment to such TRA Holder pursuant to this Section 4.1(a), the Corporate Taxpayer shall have no obligations under this Agreement with respect to such Exchange. (b) Material Breach. In the event that the Corporate Taxpayer breaches any of its material obligations under this Agreement (each such breach, a “Material Breach”), whether as a result of failure to make any payment when due, failure to honor any other material obligation required hereunder or by operation of law as a result of the rejection of this Agreement in a case commenced under The Bankruptcy Reform Act of 1978, codified as 11 U.S.C. Section 101 et seq., or otherwise, then all obligations hereunder shall be accelerated and such obligations shall be calculated as if an Early Termination Notice had been delivered on the date of such Material Breach and shall include (without duplication), but not be limited to, (1) the Early Termination Payments calculated as if an Early Termination Notice had been delivered on the date of such Material Breach, (2) any Tax Benefit Payment in respect of a TRA Holder agreed to by the Corporate Taxpayer and such TRA Holder as due and payable but unpaid as of the date of such Material Breach, and (3) any Tax Benefit Payment in respect of any TRA Holder due for the Taxable Year ending with or including the date of such Material Breach. Notwithstanding the foregoing, in the event of Material Breach, each TRA Holder shall be entitled to elect to receive the amounts set forth in clauses (1), (2) and (3) above or to seek specific performance of the terms hereof. The parties agree that the failure to make any payment due pursuant to this Agreement within three (3) months of the date such payment is due shall be deemed to be a Material Breach for all purposes of this Agreement, and that it will not be considered to be a Material Breach to make a payment due pursuant to this Agreement within three (3) months of the date such payment is due. Notwithstanding anything in this Agreement to the contrary, it shall not be a Material Breach or other breach of this Agreement if the Corporate Taxpayer fails to make any Tax Benefit Payment when due to the extent that the Corporate Taxpayer has insufficient funds to make such payment despite using reasonable best efforts to obtain funds to make such payment (including by causing RGF, LLC or any other Subsidiaries to distribute or lend funds for such payment and access any revolving credit facilities or other sources of available credit to fund any such amounts); provided that Section 5.2 shall apply to such late payment; provided further that, solely with respect to a Tax Benefit Payment, if the Corporate Taxpayer does not have sufficient cash to make such payment as a result of limitations imposed by existing credit agreements to which RGF, LLC is a party, which limitations are effective as of the date of this Agreement, Section 5.2 shall apply, but the Default Rate shall be replaced by the Agreed Rate. Section 4.2 Early Termination Notice. If the Corporate Taxpayer chooses to exercise its right of early termination under Section 4.1 above or upon request by the TRA Holder Representative in the event of Material Breach, the Corporate Taxpayer shall deliver to the TRA Holder Representative notice of such intention to exercise such right or such Material Breach, as applicable (“Early Termination Notice”), and a schedule (the “Early Termination Schedule”) showing in reasonable detail the calculation of the Early Termination Payment(s) due for each TRA Holder. Section 4.3 Payment upon Early Termination. (a) Within three (3) calendar days after an Early Termination Schedule becomes final and binding in accordance with this Agreement, the Corporate Taxpayer shall pay to each TRA Holder an amount equal to the Early Termination Payment determined in accordance with such Schedule in respect of such TRA Holder. Such payment shall be made by wire transfer of immediately available funds to a bank account or accounts designated by the TRA Holder or as otherwise agreed by the Corporate Taxpayer and such TRA Holder. (b) “Early Termination Payment” in respect of a TRA Holder shall equal the present value, discounted at the Early Termination Rate (using a mid-year convention) as of the applicable Early Termination Date, of all Tax Benefit Payments in respect of such TRA Holder that would be required to be paid by the Corporate Taxpayer beginning from the Early Termination Date and assuming that the Valuation Assumptions in respect of such TRA Holder are applied. SUBORDINATION AND LATE PAYMENTS Section 5.1 Subordination. Notwithstanding any other provision of this Agreement to the contrary, any Tax Benefit Payment, Early Termination Payment or any other payment required to be made by the Corporate Taxpayer to any TRA Holder under this Agreement shall be subordinate and junior in right of payment to any principal, interest or other amounts due and payable in respect of any obligations in respect of indebtedness for borrowed money of the Corporate Taxpayer and its Subsidiaries (such obligations, “Senior Obligations”) and shall be pari passu with all current or future unsecured obligations of the Corporate Taxpayer that are not Senior Obligations. For the avoidance of doubt, any amounts owed by the Corporate Taxpayer under this Agreement are not Senior Obligations. Section 5.2 Late Payments by the Corporate Taxpayer. The amount of all or any portion of any Tax Benefit Payment, Early Termination Payment or other payment under this Agreement not made to the TRA Holders when due under the terms of this Agreement shall be payable together with any interest thereon, computed at the Default Rate and commencing from the date on which such Tax Benefit Payment, Early Termination Payment or other payment was due and payable. NO DISPUTES; CONSISTENCY; COOPERATION Section 6.1 No Participation in the Corporate Taxpayer’s and RGF, LLC’s Tax Matters. Except as otherwise provided herein or in the LLC Agreement, the Corporate Taxpayer shall have full responsibility for, and sole discretion with respect to, all tax matters concerning the Corporate Taxpayer and RGF, LLC, including without limitation the preparation, filing or amending of any Tax Return and defending, contesting or settling any issue pertaining to Income Taxes. Notwithstanding the foregoing, the Corporate Taxpayer shall notify the TRA Holder Representative of, and keep such Person reasonably informed with respect to, the portion of any audit of the Corporate Taxpayer or RGF, LLC by a Taxing Authority the outcome of which is reasonably expected to affect the rights and obligations of any TRA Holder under this Agreement; provided, however, that neither the Corporate Taxpayer nor RGF, LLC shall be required to take any action that is inconsistent with any provision of the LLC Agreement. Section 6.2 Consistency. The Corporate Taxpayer and the TRA Holders agree to report and cause to be reported for all purposes, including federal, state and local tax purposes and financial reporting purposes, all Income Tax-related items (including, without limitation, the Tax Attributes and each Tax Benefit Payment) in a manner consistent with that set forth in any Schedule which has become final and binding unless otherwise required by applicable law. Section 6.3 Cooperation. (a) Each of the TRA Holders and the TRA Holder Representative shall (a) furnish to the Corporate Taxpayer in a timely manner such information, documents and other materials as such Person may reasonably request for purposes of making any determination or computation necessary or appropriate under this Agreement, preparing any Tax Return or contesting or defending any audit, examination or controversy with any Taxing Authority, (b) make itself available to the Corporate Taxpayer and its representatives to provide explanations of documents and materials and such other information as such Person may reasonably request in connection with any of the matters described in clause (a) above, and (c) reasonably cooperate in connection with any such matter. The Corporate Taxpayer shall reimburse the TRA Holder Representative and each such TRA Holder for any reasonable third-party costs and expenses incurred pursuant to this Section 6.3(a). (b) The Corporate Taxpayer shall furnish to the TRA Holder Representative in a timely manner such information, documents and other materials as such Person may reasonably request for purposes of making any determination or computation necessary or appropriate under this Agreement or for enabling any TRA Holder to prepare any Tax Return or to contest or defend any audit, examination or controversy with any Taxing Authority, (b) make itself available to the TRA Holder Representative and its representatives to provide explanations of documents and materials and such other information as such Person may reasonably request in connection with any of the matters described in clause (a) above, and (c) reasonably cooperate in connection with any such matter. Section 7.1 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed duly given and received (a) on the date of delivery if delivered personally, or by facsimile or e-mail with confirmation of transmission by the transmitting equipment or (b) on the first Business Day following the date of dispatch if delivered by a recognized next-day courier service. All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice: If to the Corporate Taxpayer, to: The Real Good Food Company, Inc. 3 Executive Campus, Suite 155 with a copy (which shall not constitute notice to the Corporate Taxpayer) to: Stradling Yocca Carlson & Rauth, P.C. Attn: Ryan Wilkins and Kyle Leingang 660 Newport Center Drive, Suite 1600 If to a TRA Holder, to: The address, fax number or e-mail address set forth in the records of RGF, LLC. If to the TRA Holder Representative, to: Bryan Freeman Any party may change its address, fax number or e-mail address by giving the Corporate Taxpayer and the TRA Holder Representative written notice of its new address, fax number or e-mail address in the manner set forth above. Section 7.2 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Delivery of an executed signature page to this Agreement by facsimile transmission or e-mail of a Portable Document Format (.pdf) document shall be as effective as delivery of a manually signed counterpart of this Agreement. Section 7.3 Entire Agreement; No Third Party Beneficiaries. This Agreement and the LLC Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and its respective successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. Section 7.4 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of Delaware, without regard to the conflicts of laws principles thereof or of any other jurisdiction that would mandate or permit the application of the laws of another jurisdiction. Section 7.5 Severability. If any term or other provision of this Agreement is invalid, illegal or unenforceable under applicable law, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. Section 7.6 Successors; Assignment; Amendments; Waivers. (a) Without the prior written consent of the Corporate Taxpayer, no TRA Holder may assign this Agreement to any Person, except (i) with respect to the rights and obligations under this Agreement allocable to Class B Units transferred by such TRA Holder in accordance with the LLC Agreement and the Exchange Agreement, the transferee of such Class B Units and (ii) upon or after an Exchange, any and all payments that may become payable to a TRA Holder pursuant to this Agreement with respect to such Exchange, provided, however, that in each case described in clause (i) or clause (ii), the assignee has executed and delivered to the Corporate Taxpayer and the TRA Holder Representative, a joinder to this Agreement, in the form of Exhibit A or such other form mutually agreed by the transferring TRA Holder, the assignee, the Corporate Taxpayer, and the TRA Holder Representative. (b) No provision of this Agreement may be amended unless such amendment is approved in writing by the Corporate Taxpayer and the TRA Holder Representative or waived other than by an instrument in writing signed by the party against whom such waiver is intended to be effective. (c) All of the terms and provisions of this Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the parties hereto and their respective permitted successors, assigns, heirs, executors, administrators and legal representatives. Section 7.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. Section 7.8 Reconciliation. In the event that the Corporate Taxpayer, on the one hand, and a TRA Holder, Required Recipient, or TRA Holder Representative (in such capacity, the “Disputing Party”), on the other hand, are unable to resolve a disagreement with respect to the matters governed by Section 2.3(a)(ii), the calculations required by Section 3.1 or Section 4.3(b), the matters governed by Section 6.2, or any other calculation required by this Agreement (a (“Reconciliation Dispute”) within the relevant period designated in this Agreement or, if no such period is designated, within thirty (30) days of the applicable dispute, the Corporate Taxpayer and the TRA Holder Representative, whether on its own behalf or on behalf of the applicable TRA Holder or Required Recipient, shall engage a nationally recognized expert (the “Expert”) in the particular area of disagreement mutually acceptable to all such parties, provided, that (i) the Expert must be a partner or principal in a nationally recognized accounting or law firm, and (ii) unless the Corporate Taxpayer and the TRA Holder Representative agree otherwise, the Expert must not, and the firm that employs the Expert must not, have any material relationship with the Corporate Taxpayer, the TRA Holder Representative, or any Disputing Party or other actual or potential conflict of interest. If the Corporate Taxpayer and the TRA Holder Representative are unable to agree on an Expert within fifteen (15) calendar days of receipt by the respondent(s) of written notice of a Reconciliation Dispute, the TRA Holder Representative and Corporate Taxpayer shall each name a representative meeting the above qualifications, and such representatives shall mutually appoint the Expert. The Corporate Taxpayer and the TRA Holder Representative shall submit the applicable Reconciliation Dispute to the Expert for resolution in accordance with this Agreement, including this Section 7.8, and shall instruct the Expert to resolve any matter relating to the Exchange Schedule or an amendment thereto or the Early Termination Schedule or an amendment thereto within thirty (30) calendar days and to resolve any other matter within fifteen (15) calendar days or, in each case, as soon thereafter as is reasonably practicable after such matter has been submitted to the Expert for resolution. Notwithstanding the preceding sentence, if the matter is not resolved before any payment that is the subject of a Reconciliation Dispute would be due (in the absence of such dispute) or any Tax Return reflecting the subject of a Reconciliation Dispute is due, the undisputed amount shall be paid on the date prescribed by this Agreement and such Tax Return may be filed as prepared by the Corporate Taxpayer, subject to adjustment or amendment upon resolution. The Corporate Taxpayer and the TRA Holder Representative shall instruct the Expert to apportion its fees and expenses for the applicable determinations and the costs of amending applicable Tax Returns between the Corporate Taxpayer and the Disputing Party so as to approximate the extent to which the Reconciliation Dispute was determined against each such party. Any dispute as to whether a dispute is a Reconciliation Dispute shall be submitted to the Expert for resolution. The Corporate Taxpayer and the TRA Holder Representative shall instruct the Expert to finally determine any Reconciliation Dispute or other dispute pursuant to or amount subject to this Section 7.8 and the determinations of the Expert pursuant to this Section 7.8 shall be binding on the Corporate Taxpayer and the Disputing Party and may be entered and enforced in any court having jurisdiction. Section 7.9 Withholding. The Corporate Taxpayer shall be entitled to deduct and withhold from any payment payable pursuant to this Agreement such amounts as the Corporate Taxpayer is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld and paid over to the appropriate Taxing Authority by the Corporate Taxpayer, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of whom such withholding was made. Section 7.10 Admission of the Corporate Taxpayer into a Consolidated Group; Transfers of Corporate Assets. (a) If the Corporate Taxpayer is or becomes a member of an affiliated or consolidated group of corporations that files a consolidated income tax return pursuant to Sections 1501 et seq. of the Code or any corresponding provisions of state or local law, then: (i) the provisions of this Agreement shall be applied with respect to such group as a whole; and (ii) Tax Benefit Payments, Early Termination Payments and other applicable items hereunder shall be computed with reference to the consolidated taxable income of the group as a whole. (b) If any entity that is obligated to make a Tax Benefit Payment or Early Termination Payment hereunder transfers one or more assets to a corporation (or a Person classified as a corporation for United States federal income tax purposes) with which such entity does not file a consolidated tax return as set forth above, such entity, for purposes of calculating the amount of any Tax Benefit Payment or Early Termination Payment (e.g., calculating the gross income of the entity and determining the Realized Tax Benefit of such entity) due hereunder, shall be treated as having disposed of such asset in a fully taxable transaction on the date of such contribution. The consideration deemed to be received by such entity shall be equal to the gross fair market value of the contributed asset, as determined by the Corporate Taxpayer in its reasonable discretion. For purposes of this Section 7.11, a transfer of a partnership interest shall be treated as a transfer of the transferring partner’s share of each of the assets and liabilities of that partnership allocated to such partner. Section 7.11 Confidentiality. (a) Each TRA Holder and the TRA Holder Representative (in each case, the “Receiving Party”) acknowledges and agrees that the information of the Corporate Taxpayer is confidential and, except in the course of performing any duties as necessary for the Corporate Taxpayer and its Affiliates, as required by law or legal process or to enforce the terms of this Agreement, such Receiving Party shall keep and retain in the strictest confidence and not disclose to any Person any confidential matters, acquired pursuant to this Agreement, of the Corporate Taxpayer and its Affiliates and successors, concerning RGF, LLC and its Affiliates and successors or the TRA Holders, learned by the Receiving Party heretofore or hereafter. This Section 7.12 shall not apply to (i) any information that has been made publicly available by the Corporate Taxpayer or any of its Affiliates, becomes public knowledge (except as a result of an act of the TRA Holder in violation of this Agreement) or is generally known to the business community and (ii) the disclosure of information (A) as may be proper in the course of performing such Receiving Party’s obligations, or monitoring or enforcing such Receiving Party’s rights, under this Agreement, (B) to such Receiving Party’s Affiliates, auditors, accountants, attorneys or other agents, (C) to any bona fide prospective assignee of or successor to such Receiving Party’s rights and obligations under this Agreement, provided that such assignee or successor agrees to be bound by the provisions of this Section 7.12. (D) as is required to be disclosed by order of a court, administrative body or governmental body, in each case of competent jurisdiction or by subpoena, summons or legal process, or by law, rule or regulation; provided that any Receiving Party required to make any such disclosure to the extent legally permissible shall provide the Corporate Taxpayer prompt notice of such disclosure, or to regulatory authorities or similar examiners conducting regulatory reviews or examinations, or (E) to the extent necessary for the Receiving Party to prepare and file its Tax Returns, to respond to any inquiries regarding such Tax Returns from any Taxing Authority, or to prosecute or defend any action, proceeding or audit by any Taxing Authority with respect to such Tax Returns. (b) If a Receiving Party breaches, or threatens to breach, of any of the provisions of this Section 7.12, the Corporate Taxpayer shall have the right and remedy to have the provisions of this Section 7.12 specifically enforced by injunctive relief or otherwise by any court of competent jurisdiction without the need to post any bond or other security, it being acknowledged and agreed that any such breach or threatened breach shall cause irreparable injury to the Corporate Taxpayer, its Subsidiaries, and/or the TRA Holders and that money damages alone shall not provide an adequate remedy to such Persons. Such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available at law or in equity. Section 7.12 LLC Agreement. This Agreement shall be treated as part of the partnership agreement of RGF, LLC as described in Section 761(c) of the Code and Sections 1.704-1(b)(2)(ii)(h) and 1.761-1(c) of the Treasury Regulations. Section 7.13 TRA Holder Representative. (a) For purposes of this Agreement, the TRA Holders hereby (i) designate Bryan Freeman to serve as the sole and exclusive representative of the TRA Holders (the “TRA Holder Representative”), as the agent and attorney-in-fact for and on behalf of each TRA Holder, with respect to those provisions of this Agreement that contemplate rights, obligations, or actions by the TRA Holder Representative (the “Representative Provisions”), (ii) agree to the taking by the TRA Holder Representative of any and all actions and the making of any decisions required or permitted to be taken by it under or contemplated by the Representative Provisions, and (iii) agree to be bound by all actions taken and documents executed by the TRA Holder Representative in connection with the Representative Provisions. The Corporate Taxpayer shall be entitled to rely on any action or decision of the TRA Holder Representative under the Representative Provisions as the full and final decision of each TRA Holder and shall be fully protected and indemnified for its reliance thereon. Each TRA Holder shall release and discharge the Corporate Taxpayer from and against any liability arising out of or in connection with any action or decision of the TRA Holder Representative under the Representative Provisions. (b) The TRA Holder Representative will not be deemed to be a trustee or other fiduciary on behalf of any TRA Holder, or any other Person, nor will the TRA Holder Representative have any liability in the nature of a trustee or other fiduciary. The TRA Holder Representative makes no representation or warranty as to, nor will the TRA Holder Representative be responsible for or have any duty to ascertain, inquire into or verify: (1) any statement, warranty or representation made in or in connection with this Agreement or any Schedule; (2) the performance or observance of any of the covenants or agreements of TRA Holders under this Agreement; or (3) the genuineness, legality, validity, binding effect, enforceability, value, sufficiency, effectiveness or genuineness of this Agreement or any Schedule. The TRA Holder Representative will not incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a bank wire, facsimile or similar writing) believed by it to be genuine and to be signed or sent by the proper party or parties. The TRA Holder Representative will incur no liability of any kind with respect to any action or omission by the TRA Holder Representative in connection with the TRA Holder Representative’s services pursuant to this Agreement, except in the event of liability directly resulting from the TRA Holder Representative’s fraud, gross negligence or willful misconduct. The TRA Holder Representative shall not be liable for any action or omission pursuant to the advice of counsel. The TRA Holders will indemnify, defend and hold harmless the TRA Holder Representative from and against any and all losses, liabilities, damages, claims, penalties, fines, forfeitures, actions, fees, costs and expenses (including the fees and expenses of counsel and experts and their staffs and all expense of document location, duplication and shipment) (collectively, “Representative Losses”) arising out of or in connection with the TRA Holder Representative’s execution and performance of this Agreement, in each case as such Representative Loss is suffered or incurred; provided, that in the event that any such Representative Loss is finally adjudicated to have been directly caused by the fraud, gross negligence or willful misconduct of the TRA Holder Representative, the TRA Holder Representative will reimburse the TRA Holders the amount of such indemnified Representative Loss to the extent attributable to such fraud, gross negligence or willful misconduct. The foregoing provisions of this Section 7.13(b) will survive the Closing, the resignation or removal of the TRA Holder Representative or the termination of this Agreement. (c) If any TRA Holder Representative is unable, as determined by the Corporate Taxpayer in its reasonable discretion, to serve as TRA Holder Representative or resigns as TRA Holder Representative, a successor TRA Holder Representative shall be appointed by the TRA Holders who held (or whose predecessors held), as of the IPO Date, the majority of the Class B Units then held by all TRA Holders (or their predecessors), excluding, in each case Class B Units with respect to which Early Termination Payments have been made. Each successor TRA Holder Representative shall sign an acknowledgment in writing agreeing to perform and be bound by all of the provisions of this Agreement applicable to the TRA Holder Representative and shall have all of the power, authority, rights and privileges conferred by this Agreement upon the original TRA Holder Representative. IN WITNESS WHEREOF, the Corporate Taxpayer and each TRA Holder have duly executed this Agreement as of the date first written above. Name: Gerard G. Law TRA HOLDERS: Josh Schreider, an individual PPZ, LLC, a Wyoming limited liability company Name: Rhea Lamia Slingshot Consumer, LLC, Name: Bryan Freeman Divario Ventures, LLC, a Delaware limited liability company Name: Jim Foltz Title: Vice President – Business Ventures Strand Equity Partners III, LLC, Signature Page to Tax Receivable Agreement CPG Solutions, LLC Name: Andrew Stiffelman Gerard G. Law Akshay Jagdale IN WITNESS WHEREOF, the TRA Representative has duly executed this Agreement as of the date first written above. TRA REPRESENTATIVE: Bryan Freeman, an individual Form of Joinder This JOINDER (this “Joinder”) by (the “Permitted Transferee”) to the Tax Receivable Agreement, dated as of , 2021, by and among the Corporate Taxpayer, the TRA Holder Representative, and each TRA Holder (as defined therein) (the “Tax Receivable Agreement”) is effective as of (the “Effective Date”). WHEREAS, Permitted Transferee acquired (the “Acquisition”) [Class B Units and the corresponding shares of Class B Common Stock of Corporate Transferor] [the right to receive any and all payments that may become due and payable under the Tax Receivable Agreement with respect to Class B Units that were previously Exchanged and are described in greater detail in Annex A to this Joinder] (collectively, “Interests” and, together with all other interests hereinafter acquired by the Permitted Transferee from Transferor, the “Acquired Interests”) from (“Transferor”); and WHEREAS, Transferor and Permitted Transferee desire, in connection with the Acquisition, for Permitted Transferee to execute and deliver this Joinder pursuant to Section 7.6(a) of the Tax Receivable Agreement; NOW, THEREFORE, in consideration of the foregoing and the respective covenants and agreements set forth herein, and intending to be legally bound hereby, the Permitted Transferee hereby agrees as follows: Section 1.01 Definitions. Capitalized words used but not defined in this Joinder have the respective meanings set forth in the Tax Receivable Agreement. Section 1.02 Joinder. As of the Effective Date, Permitted Transferee hereby becomes a “TRA Holder” (as defined in the Tax Receivable Agreement) for all purposes of the Tax Receivable Agreement. Section 1.03 Notice. Any notice, request, consent, claim, demand, approval, waiver or other communication hereunder to Permitted Transferee shall be delivered or sent to Permitted Transferee at the address set forth on the signature page hereto in accordance with Section 7.1 of the Tax Receivable Agreement. Section 1.04 Governing Law. This Joinder shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of laws principals thereof or of any other jurisdiction that would mandate or permit the application of the laws of another jurisdiction. IN WITNESS WHEREOF, this Joinder has been duly executed and delivered by Permitted Transferee as of the date first above written. [PERMITTED TRANSFEREE]

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professional_accounting

Accounting and AuditingSecurities SEC removes Duhnke as PCAOB Chair On Friday, the SEC announced that it had “removed” William D. Duhnke III from the PCAOB and designated Duane M. DesParte to serve as Acting Chair, effective Friday. Duhnke has been serving as Chair since January 2018. The SEC also announced that it intends to seek candidates to fill all five board positions on the PCAOB. In the press release, SEC Chair Gary Gensler said that the “PCAOB has an opportunity to live up to Congress’s vision in the Sarbanes-Oxley Act….I look forward to working with my fellow commissioners, Acting Chair DesParte, and the staff of the PCAOB to set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.” What’s it all about? Cydney Posner on June 7, 2021 While the vote tally was not released, in light of their joint statement, it’s evident that Commissioners Hester Peirce and Elad Roisman voted against the action. Their statement objected not just to the removal of Duhnke, but also to the intent expressed to replace all five PCAOB members, including members whose terms have not yet expired: “We have serious concerns about the hasty and truncated decision-making process underlying this action. Although the Commission has the authority to remove PCAOB members from their posts without cause, in all of our actions, we should act with fair process, fully-informed deliberation, and equanimity, none of which characterized the Commission’s actions here. Instead the Commission has proceeded in an unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future. We are unaware of any similar action by the Commission in connection with its oversight of the PCAOB. These actions set a troubling precedent for the Commission’s ongoing oversight of the PCAOB and for the appointment process, including with respect to attracting well-qualified people who want to serve. A future in which PCAOB members are replaced with every change in administration would run counter to the Sarbanes Oxley Act’s establishment of staggered terms for Board members, inject instability at the PCAOB, and undermine the PCAOB’s important mission by suggesting that it is subject to the vicissitudes of politics.” And the top Republican on the House Financial Services Committee, Patrick McHenry, released a statement characterizing the action as “unprecedented and a blatant politicization of an independent PCAOB….Chairman Gensler appears to be treating the PCAOB like a political football beholden to a left-wing Democrat Commission that panders to progressives like Elizabeth Warren. If this is the case, it’s unclear why the PCAOB should continue to exist as a separate entity from the SEC going forward. I have a lot of questions about how and why the Chair took this action, including whether or not Commissioner Lee recused herself from a Commission vote given her conflicts of interest, and I will be holding Mr. Gensler accountable for this decision.” Update: According to Bloomberg, McHenry has said he’s opening an investigation into the firing of Duhnke. There’s no official word on what happened here, but that hasn’t stopped anyone from speculating. Let’s put a big “allegedly” in front of the entire discussion below, but here’s what reporters are saying. Politico characterized the termination as “a victory” for progressives “after they called for the audit watchdog’s leadership to be fired…. The progressives warned that the PCAOB, which was established after the Enron and WorldCom accounting scandals, was failing to crack down on corporate wrongdoing and was captured by industry.” Reuters said that “Duhnke’s ouster is a warning shot by the new SEC chair Gary Gensler.” The PCAOB, Reuters continued, “has long been criticized by Democrats for being toothless,” adding that two Senators “last month pressed the SEC to immediately replace the board, which they said has fallen down on its job of overseeing audit firms meant to keep publicly-traded companies in check.” In addition, Reuters reported that the “PCAOB has also come under criticism by hawks who wanted it to take a tougher stance on Chinese auditors of U.S.-listed Chinese companies which have generally evaded U.S. oversight.” The WSJ also cited the letter from the two Senators, which contended that the prior administration had taken “deliberate steps to erode the PCAOB’s independence and expertise, leading the watchdog to, for example, weaken auditor-independence rules and exclude investors from participating in its policy-making process.” According to Bloomberg, “Duhnke’s critics argued that he had mismanaged the regulator and was too friendly to accounting firms…. Gensler’s decision will likely inflame partisan squabbling about the PCAOB.” Accounting Today agreed that the PCAOB has “come under criticism,” but attributed the criticism to “ending meetings of its Investor Advisory Group and Standing Advisory Group and holding few open meetings during Duhnke’s tenure. Duhnke became chairman in January 2018 and, over the next two years, the rest of the other board members and much of the top staff at the PCAOB were gone, including a board member who was replaced by a White House aide…. The PCAOB also overhauled its standard-setting agenda, strategic plan, and audit firm inspection process in keeping with the deregulatory agenda” of the prior administration and then-SEC Chair Jay Clayton. CFO.com similarly attributed the firing to complaints from advisors: “The move by Gensler is not a surprise. As CFO reported on May 20, former members of the PCAOB’s Investor Advisory Group (IAG) sent a letter to Gensler and several Democratic politicians in mid-April calling for Duhnke III’s removal. The letter accused the PCAOB of ‘drifting away’ from its ‘core mission of investor protection’ in the past four years and said urgent action was needed to ‘restore investor trust and confidence in the quality of public company audits in the United States.’ The letter also said, ‘Given their track record, we do not believe the current PCAOB Board members are up to the task of re-focusing the PCAOB on its core mission because they are responsible for the dramatic shift away from what investors expect.’” According to CFODive, “Duhnke has been the subject of criticism by investor advocates and others, including former PCAOB advisors, for taking steps they viewed as increasing risks. ‘These failures [by PCAOB] increase risks to our financial system and require immediate attention,’ the former advisors said in a letter to the SEC in April. Critics also took issue with a proposal last year to fold PCAOB into the SEC and make its function part of the SEC’s mission.” The WSJ reported that Duhnke had recently “faced criticism from investors who said the PCAOB didn’t adequately incorporate their feedback into its work. Under Mr. Duhnke, the watchdog in 2018 stopped holding meetings of two groups that consulted investors, citing what the board described as the meetings’ ineffectiveness. It still conducts other events with investors though.” The PCAOB has been plagued by troubles in the last few years, including the 2017 leaking scandal, which, in 2018, led the SEC to file charges against six CPAs, including former staffers at the PCAOB and former partners of KPMG, arising out of “their participation in a scheme to misappropriate and use confidential information relating to the PCAOB’s planned inspections of KPMG.” Essentially, the former PCAOB staffers were alleged to have leaked to KPMG the plans for PCAOB inspections of KPMG—“literally stealing the exam.” (See this PubCo post.) The same scheme led the U.S. Attorney’s Office for the SDNY to file criminal charges against the former staffers, and some have actually been sentenced to prison. Following that scandal, as reported by the WSJ in October 2019, the PCAOB “slowed its work amid board infighting, multiple senior staff departures, and allegations that the chairman has created a ‘sense of fear,’ according to a whistleblower letter and people familiar with the situation….The regulator has issued 27% fewer audit-inspection reports this year, board data show, as senior staff positions remain unfilled for months.” What’s more, that same whistleblower complaint— submitted by a group of employees to the board in May and to the SEC in August—precipitated the appointment of Harvey Pitt, former SEC Chair, to review “PCAOB corporate governance.” A PCAOB spokesperson told the WSJ that, following the eruption of the leaking scandal in 2017, the board “undertook a sweeping assessment in 2018 of its operations and has been working toward ‘a series of transformation initiatives to address systemic issues that exist across the organization.’” And, after the SEC became aware of the leak of confidential information, in December 2017, it replaced the PCAOB’s entire board. But, the WSJ reported, shortly after arriving, the new Chair “began pushing out longtime senior executives, according to the whistleblower letter and people familiar with the matter. The whistleblower letter said the regulator ‘is permeated by a sense of fear,’ due to ‘the numerous terminations … [some] driven by retaliation.’” The new Chair also “clashed with other board members over hiring choices, the people familiar with the matter said.” Then, although PCAOB members have historically been reappointed for new terms, one board member, Kathleen Hamm, wasn’t reappointed to the board, support from the Council of Institutional Investors notwithstanding. She was replaced on the PCAOB by a White House staffer. In addition, Clayton announced that Commissioner Hester Peirce would be leading the SEC’s “coordination efforts with the Board of the PCAOB, in coordination with the SEC’s Chief Accountant Sagar Teotia and the Office of the Chief Accountant.” While, at first glance, it all sounds fairly anodyne, reports surfaced that Hamm had had disagreements with the PCAOB Chair on policy matters. In addition, Bloomberg Financial Accounting News reported, in 2019, two Democrats on the Senate Banking Committee sent a letter to Clayton suggesting, in light of the problems cited by the whistleblower in the WSJ article, that SEC oversight of the PCAOB showed “questionable judgment and an alarming lack of transparency.” The Senators also questioned the appointment of Peirce and sought information on the role she would be playing. They characterized her appointment as “troubling” because it “raises the potential of undue influence,” given that the entire SEC is supposed to oversee the PCAOB, not a single coordinating commissioner, and that Peirce was a “longtime colleague” of the PCAOB Chair. And, if that weren’t enough, former SEC Chair Arthur Levitt penned an op-ed in the NYT in 2019, charging that “what is happening at the Public Company Accounting Oversight Board—the body tasked with auditing the auditors—should alarm the investing public and anyone who cares about objective and experienced oversight of the audit profession.” His concern was an outgrowth of the change in members of the board (which he appears to view as politically motivated), as well as the appointment of Peirce, whom he termed “a regulation skeptic, [to be] in charge of coordination efforts with the board—a signal that the S.E.C. is seeking to pull it into its efforts to weaken requirements for audits of internal controls at public companies.” (See this PubCo post.) The PCAOB has a critical role to play; yet, citing the WSJ article, he contended that it “ is doing less oversight and inspection work than it once did, and key positions at the agency are unfilled. Morale is reportedly low.” In his view, what is “at risk isn’t a specific regulatory function of the P.C.A.O.B.; it’s the independence and the credibility of the board and its staff as a whole.” (See this PubCo post.) Finally, as reported by Thomson-Reuters, a lawsuit was filed last month by a senior officer of the PCAOB against the regulator and Duhnke, charging unlawful termination on the basis of race. The litigation accused Duhnke of perpetrating “a xenophobic and racist campaign” against her, including allegations that he made racist comments in her presence, remarked about “her Chinese ancestry and birth overseas,” regularly referred “to the COVID-19 pandemic as ‘kung flu’ and the ‘Chinese flu’ in her presence,” and mocked her for wearing a mask in the office. The PCAOB has denied the allegations, according to Law.com, contending that the PCAOB officer was fired over “internal complaints about her conduct and for questions about the necessity of certain travel. ” Posted in: Accounting and Auditing, Securities Tagged in: PCAOB, PCAOB Chair William Duhnke III, SEC Commissioner Roisman suggests ways to reduce the costs of ESG disclosure Gensler plans to “freshen up” Rule 10b5-1

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professional_accounting

Government BondsMelanie James2020-12-08T18:47:29-08:00 A person who buys government bonds is lending the government money. “Government bonds” is a general term that encompasses a wide range of bonds issued by a variety of governmental entities, including: Federal Bonds Agency Bonds Emerging Market Bonds Tax-Exempt Municipal Bonds Municipal bonds (or “munis”) are debt obligations issued by states, cities, counties, school districts, public utility districts, redevelopment agencies, special districts, or other local governmental agencies. When an investor purchases a municipal bond, the investor is lending money to a state or local government entity, which in turn, promises to pay a specified interest rate (usually paid semiannually) and pay back the principal on a specific maturity date. Municipal securities consist of both short-term issues (“notes”), which typically mature in one year or less, and long-term issues (“bonds”), which mature in more than one year. Notes are used by an issuer to raise money for a variety of reasons, including: covering irregular cash flows; meeting unanticipated deficits; raising immediate capital for projects until long-term financing can be arranged; and in anticipation of future revenues such as taxes, state or federal aid payments, and future bond issuances. Bonds are usually sold to finance capital project, such as the construction of highways, schools, or sewer systems. In addition, bonds are often used to fund day-to-day operations. The two most common types of municipal bonds are: (1) general obligation bonds, backed by the credit and taxing power of the issuer; and (2) revenue bonds, backed by revenues from a specific project or source. In the United States, municipal bonds are attractive to many investors because the interest income is generally exempt from federal income taxes and may also be exempt from state and local taxes for residents who reside in the state where a bond is issued. Suppose a school district decides to construct a new high school for $10 million and would like to sell bonds with a 30-year term to fund the project. Depending on whether the issuer chooses to price the bonds using a public offering or private placement process, financing costs and interest rates may vary. Let’s assume that financing costs total $250,000 and a 5% coupon across all maturities. In addition, let’s also assume that the issuer is also required to deposit $750,000 into a reserve fund as additional security for the bonds. Including these costs, the total par amount for this bond issue will be $11 million. As a result, the issuer would sell 2,200 bonds to investors for $5,000 each (in general, municipal bonds carry a face value of $5,000). The issuer will make annual debt service payments (consisting of semi-annual interest payments and annual principal payments) of approximately $715,000 over the 30-year life of the bonds, at which point, no additional payments are required. Taxable Municipal Bonds There are situations in which the federal government will not subsidize the financing of certain activities that do not provide a significant benefit to the general public. As a result, not all municipal bonds are exempt from federal taxes. There is an entirely separate market of municipal issues that are taxable at the federal level, but maintain a tax-exempt status at the state (and often local) level for interest paid to residents of the state of issuance. As a result, federally taxable municipal bonds offer yields more comparable to those of other taxable sectors, such as corporate bonds, than to those of tax-exempt municipals. Bank Qualified Bonds Similar to other investors, banks purchase municipal bonds to earn interest that is exempt from Federal income taxes. Historically, banks were the major purchasers of tax-exempt bonds. All this changed with the passage of the Tax Reform Act of 1986 (the “Act”). Banks are now prohibited from deducting the interest costs of tax-exempt municipal bonds unless the bonds are designated as “qualified tax-exempt obligations.” In order for bonds to be qualified tax-exempt obligations, the bonds must be: (i) issued by a “qualified small issuer” (one who reasonably expects to issue no more than $10 million of bonds in a calendar year), (ii) issued for public purposes, and (iii) designated as qualified tax-exempt obligations. As a result, the Act effectively created two classes of municipal bonds: bank qualified (“BQ”) and non-bank qualified. Bonds that meet the above criteria are designated as “bank qualified” and allow for banks to deduct 80% of the interest costs. Non-bank qualified bonds are those that do not meet the above criteria and, therefore, are not exempt from Federal taxes for banks. As a result, bank qualified bonds are generally more desirable to banks and carry a lower interest rate than non-bank qualified bonds. Under the American Recovery and Reinvestment Act of 2009, the bank qualified bond limit was increased from $10 million to $30 million. In 2012, the U.S. Senate approved a transportation bill (S. 1813) that includes a provision to increase the bank qualified debt limit to $30 million between July 1, 2012, and June 30, 2013. Legislation has also been introduced to permanently increase the bank qualified bond limit to $30 million (S. 1016). The government bond sector is a broad category that includes federal (or “sovereign”) debt that is issued and backed by a central government. U.S. Treasuries, Canadian Bonds, U.K. Gilts, German Bunds, Japanese Government Bonds, and French OATs are all examples of sovereign government bonds. Sovereign bonds issued by these major industrialized countries are generally considered to have very low default risk and are among the safest investments available. In the United States, the U.S. Treasury issues three types of securities: bonds, bills, and notes. Each is distinguished by the amount of time from the initial sale of the bond to maturity. Treasury Bills (or “T-bills”) are short-term instruments with maturities of no more than one year. Treasury Notes are intermediate-term investments, typically issued in maturities of two, three, five, seven, and 10 years. Treasury Bonds cover terms of longer than 10 years, and are generally issued in maturities of 30 years. Treasury Bills, Notes, and Bonds are all issued in face values of $1,000; although, there are different purchase minimums for each security type. Inflation-Adjusted Securities A number of governments also issue bonds that are indexed to inflation. For an inflation-adjusted bond, the principal and/or interest is adjusted periodically to reflect changes in the inflation rate, thus providing a “real,” or inflation-adjusted return. These inflation-adjusted securities are known as “TIPS” (Treasury Inflation-Protected Securities) in the U.S. and “linkers” in Europe. In the case of TIPS, the principal amount of bonds is adjusted semi-annually by the Consumer Price Index. Treasury STRIPS In the U.S., “STRIPS” (Separate Trading of Registered Interest and Principal of Securities) are another type of debt issuance where a traditional Treasury bond’s principal has been separated (“stripped”) from its coupon. This type of security is otherwise known as a zero-coupon bond; that is, STRIPS make no periodic interest payments. Instead, investors buy them at a discount and receive the full face value of the bonds at maturity. Central governments pursue various goals (e.g., supporting the housing market, encouraging small business growth, providing student loans, etc.) through quasi-government agencies known as Government Sponsored Enterprises (“GSEs”). These government-sponsored and government-owned corporations are affiliated with, but technically separate from, the government. In the U.S., examples of GSEs include Fannie Mae, Freddie Mac, Sallie Mae, and the Federal Home Loan Banks. A number of these GSEs issue bonds to support their operations. Some agency bonds are explicitly backed by the “full faith and credit” of the central government, while others are not. For example, the U.S. government guarantees bonds issued by Ginnie Mae, a mortgage agency, but does not explicitly guarantee bonds issued by Fannie Mae and Freddie Mac, both of which buy mortgages from banks. Although, in September 2008, the Federal Housing Finance Agency took conservatorship of Fannie Mae and Freddie Mac in response to the mortgage meltdown. The U.S. Treasury has now committed to provide the necessary funding to backstop these GSEs. In addition to bonds issued by agencies of individual governments, supranational and international institutions, like The World Bank and the European Investment Bank, also issue bonds to finance public projects and/or development. Developing economies around the world, known as emerging markets, are quickly establishing themselves as key players in the global economy. Emerging market bonds are debts issued by these countries and corporations based in those nations. These countries include most of Africa, Asia (excluding Japan), Eastern Europe, Latin America, the Middle East, and Russia. While emerging market bonds can offer attractive yields, higher yields tend to be accompanied by greater risk. The risks of investing in emerging market bonds include the risks that accompany all debt issues (e.g., inflation risk, reinvestment risk, market risk, etc.). However, these risks are heightened due to the potential political and economic volatility found in most developing nations.

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;da k ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐ State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $841,543,090 as of November 30, 2021. As of July 31, 2022, the registrant had 810,720,424 shares of common stock outstanding. Parts Into Which Incorporated UNRESOLVED STAFF COMMENTS MINE SAFETY DISCLOSURES MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES [RESERVED] FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE PRINCIPAL ACCOUNTANT FEES AND SERVICES EXHIBITS AND FINANCIAL STATEMENT SCHEDULES FORM 10-K SUMMARY This annual report contains certain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Our forward-looking statements are not guarantees of performance, and actual results could vary materially from those contained in or expressed by such statements. In evaluating all such statements, we urge you to specifically consider various risk factors identified in this annual report, including the matters set forth under the heading Risk Factors, any of which could cause actual results to differ materially from those indicated by our forward-looking statements. Our forward-looking statements reflect our current views with respect to future events and are based on currently available financial, economic, scientific, and competitive data and information on current business plans. Forward-looking statements include, among others, statements about leronlimab, its ability to have positive health outcomes, the Company’s ability to resolve the clinical holds imposed by the U.S. Food and Drug Administration (the “FDA”) and information regarding future operations, future capital expenditures and future net cash flows. You should not place undue reliance on our forward-looking statements, which are subject to risks and uncertainties relating to, among other things: the regulatory determinations of leronlimab’s safety and effectiveness by the FDA and various drug regulatory agencies in other countries; the Company’s ability to raise additional capital to fund its operations; the Company’s ability to meet its debt and other payment obligations; the Company’s ability to enter into or maintain partnership or licensing arrangements with third-parties; the Company’s ability to retain key employees; the timely and sufficient development, through internal resources or third-party consultants, of analyses of the data generated from the Company’s clinical trials required by the FDA or other regulatory agencies in connection with the Company’s Biologic License Application (“BLA”) resubmission or other applications for approval of the Company’s drug product; the Company’s ability to achieve approval of a marketable product; the design, implementation and conduct of the Company’s clinical trials; the results of the Company’s clinical trials, including the possibility of unfavorable clinical trial results; the market for, and marketability of, any product that is approved; the existence or development of vaccines, drugs, or other treatments that are viewed by medical professionals or patients as superior to the Company’s products; regulatory initiatives, compliance with governmental regulations and the regulatory approval process; legal proceedings, investigations or inquiries affecting the Company or its products; general economic and business conditions; changes in foreign, political, and social conditions; stockholder actions or proposals with regard to the Company, its management, or its Board of Directors; and various other matters, many of which are beyond the Company’s control. Should one or more of these risks or uncertainties develop, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated, or otherwise indicated by our forward-looking statements. We intend that all forward-looking statements made in this annual report on Form 10-K will be subject to the safe harbor protection of the federal securities laws pursuant to Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to the extent applicable. Except as required by law, we do not undertake any responsibility to update these forward-looking statements to take into account events or circumstances that occur after the date of this annual report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events that may cause actual results to differ from those expressed or implied by these forward-looking statements. Item 1. BUSINESS Corporate History/Business Overview CytoDyn Inc. (together with its wholly owned subsidiaries, the “Company”, also referred to as “CytoDyn”, “we,” “our,” or “us” in this Form 10-K) was originally incorporated under the laws of Colorado on May 2, 2002, under the name RexRay Corporation and, effective August 27, 2015, reincorporated under the laws of Delaware. The Company is a clinical-stage biotechnology company focused on the clinical development of innovative treatments for multiple therapeutic indications based on its product candidate, leronlimab (also referred to as PRO 140 in this Form 10-K), a novel humanized monoclonal antibody targeting the CCR5 receptor. The pre-clinical and early clinical development of PRO 140 was led by Progenics Pharmaceuticals, Inc. (“Progenics”) through 2011. The Company acquired the asset from Progenics in October 2012; refer to Part II, Item 8, Note 10, Commitments and Contingencies - PRO 140 Acquisition and Licensing Arrangements of this Form 10-K for additional information. In November 2018, the United States Adopted Names Council adopted “leronlimab” as the official nonproprietary name for PRO 140. Leronlimab is being investigated as a viral entry inhibitor for Human Immunodeficiency Virus (“HIV”) and is believed to competitively bind to the N-terminus and second extracellular loop of the CCR5 receptor. For immunology, the CCR5 receptor is believed to be implicated in immune-mediated inflammation such as NASH. Leronlimab is also being studied in oncology, as well as other therapeutic indications, including COVID-19, where monoclonal antibody C-C chemokine receptor type 5 (“CCR5”) is believed to play a role. Our principal business office is located at 1111 Main Street, Suite 660, Vancouver, Washington 98660. Our website can be found at www.cytodyn.com. We make available on our website, free of charge, the proxy statements and reports on Forms 8-K, 10-K, and 10-Q that we file with the United States Securities and Exchange Commission (the “SEC”), as soon as reasonably practicable, after such materials are electronically filed with or furnished to the SEC. We do not intend to incorporate any content from our website into this Form 10-K. The consolidated financial statements include the accounts of CytoDyn Inc. and its wholly owned subsidiaries, CytoDyn Operations Inc. and Advanced Genetic Technologies, Inc. (“AGTI”), a dormant entity. CytoDyn’s core areas of clinical development are HIV, nonalcoholic steatohepatis (“NASH”), and solid tumors in oncology. The current areas of clinical focus in HIV are the multi-drug resistant HIV population, creating a long-acting formulation of leronlimab, and HIV cure using adenovirus vectors (“AAV”). In NASH, our focus will be on the general population of those affected by NASH, and the subpopulation of patients with NASH and HIV. Regarding oncology, our focus remains on combination therapy for solid tumors to explore the potential of leronlimab in the tumor microenvironment and the potential benefit for decreasing angiogenesis, potential macrophage repolarization, decreasing metastasis, and the potential to mitigate regulatory T-cells (“Tregs”) infiltration of the tumor microenvironment. The areas of clinical development and focus are under review by our executive management. In July 2020, the Company received a Refusal to File letter from the FDA regarding its BLA submission for leronlimab as a combination therapy with highly active antiretroviral therapy (“HAART”) for highly treatment-experienced HIV patients. The FDA informed us that the BLA did not contain certain information and data needed to complete a substantive review and, therefore, the FDA would not file the BLA. The deficiencies cited by the FDA included administrative deficiencies, omissions, corrections to data presentation and related analyses, and request for clarification regarding the manufacturing processes. The Company is working with consultants to cure the cited BLA deficiencies. In November 2021, the Company resubmitted the non-clinical and chemistry, manufacturing, and controls (“CMC”) sections of the BLA and is currently reevaluating the feasibility and timelines over which it expects to complete the clinical section. As of March 2022, the FDA had commenced its review of the CMC section. To facilitate our clinical research plans designed to accelerate and maximize the leverage of our multi-pathway approach to identifying and evaluating multiple opportunities for clinical indications, we engaged various contract research organizations (“CROs”) to provide comprehensive regulatory and clinical trial management services. The clinical trial programs required a significant amount of capital to complete. The Company is in dispute with one of its former CROs, and, in the context of litigation with it, we obtained an order requiring the CRO to release the Company’s clinical data related to the BLA, which the CRO had been withholding, further delaying our ability to complete the HIV BLA. Further, the order granted us the right to perform an audit of the CRO’s services. On March 31, 2022, the Company announced that the FDA had placed a full clinical hold on its COVID-19 program and a partial clinical hold on its HIV program in the United States. Under each of these clinical holds, no new clinical studies may be initiated until the clinical hold is resolved. The partial clinical hold on the HIV program allowed patients who were enrolled in the extension trials to transition to other available therapeutics. Under the full clinical hold on the COVID-19 program, no new clinical studies may be initiated until the clinical hold is resolved. The Company previously notified the FDA that it was pausing its COVID-19 trials in Brazil. We voluntarily withdrew the Investigational New Drug Application (“IND”) for COVID-19 in the United States. We are in the process of evaluating the data obtained from our former CRO, results of the audit, and implications of the HIV partial clinical hold. We will update the status and strategy of our anticipated resubmission of the clinical section of the BLA once we complete our evaluation. There are currently no approved therapies for NASH and current HAART regimens often contribute to hepatoxicity. Patients with HIV and NASH represent an unmet medical need, and we believe leronlimab may play a vital role in this population of patients to reduce HIV viral load, steatosis, and fibro-inflammation. We are currently focused on the following potential strategies: 1. Strengthening our pharmacovigilance program enabling us to remove the FDA clinical holds placed on our HIV and COVID-19 programs to allow us to conduct future clinical studies. 2. Advancing our NASH program to a Phase 2b or Phase 2b/3 trial for steatosis and liver fibrosis associated with NASH. 3. Exploring a study for patients with HIV and NASH. 4. Contining our Phase 2 program for metastatic triple-negative breast cancer with current standard of care, explore a Phase 2 colon cancer trial with current standard of care, and explore other solid tumor indications. 5. Continuing our work to evaluate the feasibility and timelines for the HIV BLA resubmission and explore other cancer and immunologic indications for leronlimab, continue our work on developing a long-acting version of leronlimab, and pursue proof of concept studies for HIV cure using leronlimab and AAV vectors. 6. Reviewing our strategy for our COVID-19 program. Background: Leronlimab as a CCR5 Antagonist We are focused on developing leronlimab, a CCR5 receptor antagonist, to be used as a platform drug for various indications. The CCR5 receptor is a protein located on the surface of various cells including white blood cells and cancer cells. On white blood cells, it serves as a receptor for chemical attractants called chemokines. Chemokines are the key orchestrators of leukocyte trafficking by attracting immune cells to the sites of inflammation. At the site of an inflammatory reaction, chemokines are released. These chemokines are specific for CCR5 and cause the migration of T-cells to these sites promoting further inflammation. The CCR5 receptor is also the co-receptor needed for certain strains of HIV to infect healthy T-cells. The mechanism of action (“MOA”) of leronlimab has the potential to orchestrate the movement of T-cells to inflammatory sites, which could be instrumental in diminishing the inflammatory responses. Leronlimab is a unique humanized monoclonal antibody. Leronlimab binds to the second extracellular loop and N-terminus of the CCR5 receptor, and due to its selectivity and target-specific mechanism of action, it does not appear to activate the immune function of the CCR5 receptor through agonist activity. This apparent target specificity differentiates leronlimab from other CCR5 antagonists. Leronlimab is a competitive rather than allosteric inhibitor of the CCR5 receptor. Other potential advantages of leronlimab are believed to include longer half-life and less frequent dosing requirements compared to current standard of care daily regimens. We believe leronlimab prevents CCR5 tropic strains of HIV, which are the majority of all cases, from using the CCR5 receptor as an entry gateway for healthy cells. Pre-clinical research has shown that leronlimab blocks calcium channel signaling of the CCR5 receptor when present on the cancer cell surface. Research also suggests calcium channel signaling of the CCR5 receptor is a crucial component to the spread of metastatic cancer. We view the CCR5 receptor as more than the door for HIV to enter T-cells; it may also be a crucial component in inflammatory responses. The CCR5 receptor has been identified as a potential target in HIV, graft-versus-host disease (“GvHD”), NASH, cancer metastasis, transplantation medicine, multiple sclerosis, traumatic brain injury, stroke recovery, and a variety of inflammatory conditions, including COVID-19. This could present the potential for multiple opportunities for leronlimab, such as NASH, cancers, and transplantation rejection, among other indications. Leronlimab and HIV We believe that leronlimab shows promise as a powerful antiviral agent with the potential advantage of lower toxicity and less frequent dosing requirements as compared to certain daily drug therapies currently in use for the treatment of HIV. Leronlimab belongs to a class of HIV therapies known as viral entry inhibitors that block HIV from entering and infecting specific cells. Leronlimab blocks HIV from entering a cell by binding to a receptor called CCR5, a normal cell surface receptor protein to which CCR5 tropic strains of HIV, referred to as “R5” strains, attach as part of HIV’s entry into a cell. Leronlimab binds to a precise site on CCR5 that R5 strains of HIV use to enter the cell and, in doing so, inhibits the ability of these strains of HIV to infect the cell. As a result, we believe leronlimab represents a distinct class of CCR5 inhibitors with advantageous virological and immunological properties and may provide a unique tool to treat HIV-infected patients. We plan to explore the potential for leronlimab to be used in HIV pre-exposure prophylaxis (“PrEP”) if a longer acting version of subcutaneous leronlimab is successfully developed. This longer acting version could also be potentially used in combination with standard of care therapies to treat HIV patients. We continue to believe leronlimab is uniquely positioned to address the HIV market, as an alternative, or in addition to current therapies, which are failing primarily due to patient non-compliance, which causes drug resistance. Several factors give rise to patient non-compliance issues, such as toxicity and side effects, coupled with the need for a strict daily dosing regimen. In twenty-six clinical studies previously conducted, leronlimab was generally well tolerated. In addition, there were no dose-limiting toxicities or patterns of drug-related toxicities observed during these trials. We believe the results of these trials establish that leronlimab’s antiviral activity is potent, rapid, prolonged, dose-dependent, and statistically significant. Because leronlimab’s MOA as a monoclonal antibody in HIV is a relatively new therapeutic approach, it provides a potentially advantageous method of suppressing the virus in treatment-experienced patients who have failed a prior HIV regimen and need new treatment options. To date, leronlimab has been tested and administered to patients predominantly as a subcutaneous injection once per week. We believe that if leronlimab is approved by the FDA for use as an injectable for HIV, it may be an attractive and marketable therapeutic option for patients, particularly in the following scenarios: • Patients experiencing difficulties with existing treatment regimens due to side effects or medical comorbidities; • Patients with difficulty adhering to daily drug regimens; • Patients who poorly tolerate existing therapies; and • Patients with compromised organ function, such as hepatoxicity or renal insufficiency. In 2016, we initiated a pivotal Phase 2b/3 trial for leronlimab as a combination therapy with existing HAART drug regimens for highly treatment-experienced HIV patients. The trial was completed in February 2018 and achieved its primary endpoint with a p-value of 0.0032. Most of the patients who completed this trial transitioned to an FDA-cleared rollover study, as requested by the treating physicians, to enable them to have continued access to leronlimab. This pivotal trial is the basis for our BLA submission with the FDA. We also commenced a rollover study for HIV, as combination therapy, designed for patients who successfully completed the Phase 2b/3 combination therapy trial and for whom the treating physicians requested a continuation of leronlimab therapy to maintain suppressed viral load. Some of the patients reached four years of treatment in this extension arm. As part of the partial clinical hold in March 2022, these patients were transitioned to current standard of care. Leronlimab and NASH As discussed earlier, we believe that the CCR5 receptor is also a crucial component in inflammatory responses. Some disease processes that could potentially benefit from CCR5 blockade include transplantation rejection, neuroinflammation, chronic inflammation, cancer, and NASH. Due to leronlimab’s MOA, we believe leronlimab may have the potential for reduced side effects over other CCR5 antagonists and may be able to prevent the progression of Non-Alcoholic Fatty Liver Disease (“NAFLD”) into NASH. NAFLD is an inflammatory disease caused by the build-up of fat in hepatocytes (steatosis). In severe cases, NAFLD progresses into NASH. It is estimated that 30% to 40% of adults in the United States have NAFLD, while 3% to 12% of adults in the United States have NASH. If left untreated, NASH may progress to hepatocellular carcinoma and is expected to become the leading cause of liver transplantation. In October 2019, the FDA allowed us to proceed with a Phase 2 study to evaluate whether leronlimab may control the effects of liver fibrosis associated with NASH. This trial was originally designed to be a 60 patient, multi-center, randomized, double-blind, placebo-controlled Phase 2 clinical study of the safety and efficacy of leronlimab in adult patients with NASH. It was converted to an exploratory trial with an open label 350mg arm. The first patient was enrolled in December 2020. Leronlimab 700mg did not reduce mean change in PDFF and cT1 from baseline to week 14 versus placebo and did not meet its primary or secondary endpoints. Leronlimab 350mg significantly reduced mean change in PDFF and cT1 from baseline to week 14 versus placebo. Despite increased fibro-inflammation, in patients with moderate and severe cT1 values at baseline, leronlimab 350mg still showed significantly reduced cT1 from baseline to week 14 versus placebo. Research indicates that the CCR5 receptor is a potential “GPS” system of a cancer cell that promotes metastatic disease. Pre-clinical studies have shown that leronlimab blocks the calcium channel signaling of the CCR5 receptor and has the potential to disable this GPS system. CCR5 inhibition may disrupt signaling and ultimately the spread of CCR5+ Circulating Tumor Cells (“CTCs”). Most current therapies are directed to the primary tumor rather than the movement or spread of cancer in the bloodstream. It is metastatic disease and not the primary tumor that is the cause of death in most cancer patients. Research has shown that most sampled breast cancer patients in certain studies had increased CCR5 expression in their tumors. Increased CCR5 expression is an indicator of disease status in several cancers. Research has shown multiple key properties of the CCR5’s role in cancer. The first is that the CCR5 receptor on cancer cells potentially plays a role in the migration and invasion of cells into the bloodstream, which may lead to metastasis of breast, prostate, and colon cancer. The second is that blocking the CCR5 receptor on Tregs also turns on anti-tumor fighting properties restoring immune function. The third key finding is that blockage of the CCR5/CCL5 interaction had a synergistic effect with chemotherapy and controlled cancer progression. Chemotherapy traditionally increased expression of CCR5, so blocking CCR5 is expected to reduce the levels of invasion and metastasis. Fourth, animal studies revealed a significant decrease in angiogenesis following administration of leronlimab. Lastly, we are currently studying the effect of leronlimab on macrophage repolarization due to macrophage plasticity. In late November 2018, we received FDA approval of our IND submission and subsequently initiated a Phase 1b/2 clinical trial for metastatic Triple-Negative Breast Cancer (“mTNBC”) patients. We reported that our pre-clinical research with leronlimab reduced the incidence of human breast cancer metastasis in a mouse xenograft model for cancer through six weeks with leronlimab by more than 98%. The temporal equivalency of this six-week study in mice may be up to six years in humans. In May 2019, the FDA granted Fast Track designation for leronlimab for use in combination with carboplatin to treat patients with CCR5-positive mTNBC. We have conducted the following trials: Phase 2 Trial for Triple-Negative Breast Cancer This trial evaluated the feasibility of leronlimab in combination with carboplatin in patients with CCR5+ mTNBC. This trial advanced from a Phase 1b/2 to Phase 2. The Phase 2 trial was a single arm study with 30 patients to test the hypothesis that the combination of carboplatin intravenously and maximum tolerated dose of leronlimab subcutaneously will increase progression free survival. The change in CTCs was evaluated every 21 days during treatment and will be used as an initial prognostic marker for efficacy. The first patient was treated in September 2019. Leronlimab, in combination with carboplatin was well-tolerated at all three dose levels of 350mg, 525mg, and 700mg. Leronlimab showed early signs of anti-tumor activity in patients with CCR5+ mTNBC. Compassionate Use Study of Leronlimab in Triple Negative Breast Cancer This was a single-arm, compassionate use study with 30 patients for leronlimab combined with a treatment of Physician’s Choice (“TPC”) in patients with CCR5+ mTNBC. Leronlimab was administered subcutaneously as a weekly dose of 350 mg until disease progression or intolerable toxicity. Based on our success in the Phase 1b/2 mTNBC trial with 350 mg dose, we were able to transition the compassionate use patients to 525 mg dose. TPC is defined as one of the following single-agent chemotherapy drugs administrated according to local practice: eribulin, gemcitabine, capecitabine, paclitaxel, nab-paclitaxel, vinorelbine, ixabepilone, or carboplatin. In this study, patients were evaluated for tumor response approximately every three (3) months or according to the institution’s standard practice by CT, PET/CT or MRI with contrast (per treating investigator’s discretion) using the same method as at baseline. This trial is no longer active. Emergency IND Use Study of Leronlimab in Breast Cancer One patient was administered leronlimab with stage 4 HER2+ breast cancer with metastasis to liver, lung, and brain. The patient received her first dose in November 2019 and remained on study drug until spring 2022. Basket Trial for CCR5+ Locally Advanced or Metastatic Solid Tumors This was a single arm phase 2 study of leronlimab in patients with CCR5+ locally advanced or metastatic solid tumors. Leronlimab was administered subcutaneously as a weekly dose of 350 mg and 525 mg until disease progression or intolerable toxicity. Subjects participating in this study were also allowed to receive/continue standard-of-care chemotherapy or radiotherapy. In this study, patients were evaluated for tumor response approximately every three months or according to the institution's standard practice by CT, PET/CT or MRI with contrast using the same method as at baseline. This trial is no longer active. Leronlimab and Other Immunological Applications SARS-CoV-2 was identified as the cause of an outbreak of respiratory illness first detected in Wuhan, China. The virus is highly contagious and has developed several variants. COVID-19 typically transmits person to person through respiratory droplets, commonly resulting from close personal contact. Coronaviruses are a large family of viruses, some causing illness in people and others that circulate among animals. For confirmed COVID-19 infections, symptoms have included fever, cough, and shortness of breath, amongst many others. The symptoms of COVID-19 may appear in as few as two days or as long as 14 days after exposure. Clinical manifestations in patients have ranged from non-symptomatic to severe and fatal. Based upon analyses of leronlimab’s potential effect on the immune system and the results from over 60 Emergency Investigation New Drug (“EIND”) authorizations provided by the FDA, the Company conducted clinical trials in the United States for COVID-19 starting in fiscal 2020 ending in fiscal 2022. Additionally, the Company paused two clinical trials in Brazil which commenced during fiscal 2022. If CytoDyn decides to continue to pursue the COVID-19 indication, we believe that subgroup analyses from our previous trials may inform the design of future clinical trials investigating leronlimab for the treatment of COVID-19. In calendar 2021, the Company initiated a Phase 2 investigative trial for post-acute sequelae of SARS COV-2 (“PASC”), also known as COVID-19 Long-Haulers, which was completed in July 2021. It is currently estimated that between 10%-30% of those infected with COVID-19 develop long-term sequelae. Common symptoms include fatigue, cognitive impairment, sleep disorders, and shortness of breath. This trial evaluated the effect of leronlimab on clinical symptoms and laboratory biomarkers to further understand the pathophysiology of PASC. This small investigative trial of 56 patients was not designed to show statistically significant differences due to the small sample size of the patients, but we believe potentially clinically meaningful improvements in the leronlimab-treated arm compared to the placebo-treated arm were observed for several symptoms. Preliminary results from the trial suggested leronlimab improved a majority of clinical symptoms. We observed increases in CCR5 expression from one expression in leronlimab responders but not placebo or leronlimab non-responders. These findings suggest an unexpected alternative mechanism of abnormal immune downmodulation, normalized by leronlimab. Plans to pursue additional clinical trials to evaluate leronlimab’s effect on immunological dysregulation in COVID-19 and other post-viral syndromes are under strategic review. Protection of the Company’s intellectual property rights is important to our business. We may file patent applications in the U.S., Canada, China, and Japan, European countries that are party to the European Patent Convention, and other countries on a selective basis, to protect inventions we consider to be important to the development of our business. Generally, patents issued in the U.S. are effective for 20 years from the earliest asserted filing date. A U.S. patent, to be selected by us upon receipt of FDA regulatory approval, may be subject to up to a five-year patent term extension in certain instances. While the duration of foreign patents varies in accordance with the provisions of applicable local law, most countries provide for a patent term of 20 years measured from the application filing date and some may also allow for patent term extension to compensate for regulatory approval delay. We pursue opportunities for seeking new meaningful patent protection on an ongoing basis. Absent patent protection, others may attempt to make and use the leronlimab antibody for uses not covered by later patent filings, such as attempts to produce and sell the leronlimab antibody as a research reagent and/or as a component for use in diagnostics. However, the formulation composition patent protection remains viable, and third parties face additional regulatory hurdles together with CytoDyn’s various method patents with respect to any contemplated attempts to commercialize leronlimab for therapeutic indications. We currently anticipate, absent patent term extension, that patent protection relating to the leronlimab antibody itself will start to expire in 2023, the leronlimab concentrated protein formulation will start to expire in 2031, certain methods of using leronlimab for treatment of HIV-1 will start to expire in 2026, certain methods of using small-molecule CCR5 antagonists for treatment of cancer metastasis will start to expire in 2032, certain methods of using leronlimab for treatment of COVID-19 will start to expire in 2040, and certain methods of using leronlimab for treatment of NASH will start to expire in 2042. Patents do not enable us to preclude competitors from commercializing drugs in direct competition with our products that are not covered by granted and enforceable patent claims. Consequently, patents may not provide us with any meaningful competitive advantage. Refer to Part I, Item 1A, Risk Factors of this Form 10-k for the related risks. We may also rely on data exclusivity, trade secrets and proprietary know-how to develop and attempt to achieve a competitive position with our product candidates. We require our employees, consultants and partners who have access to our proprietary information to sign confidentiality agreements to protect our intellectual property. Separate from and in addition to the patent rights noted above, we expect that leronlimab will be subject to at least a 12-year market and data exclusivity period measured from the first date of FDA licensure, during which period no other applications referencing leronlimab will be approved by FDA. Further, no other applications referencing leronlimab will be accepted by FDA for a 4-year period measured from the first date of FDA licensure. Accordingly, this period of regulatory exclusivity is expected to provide at least a 12-year term of protection against competing products shown to be biosimilar or interchangeable with leronlimab. Similar data exclusivity or data protection periods of between five (5) to ten (10) years are provided in at least Australia, Canada, Europe, Japan, and New Zealand. We note that data exclusivity is not an extension of patent rights, and it does not prevent the introduction of generic versions of the innovative drug during the data exclusivity period, as long as the marketing approval of the generic version does not use or rely upon the innovator’s test data. Patents and data exclusivity are different concepts, protect different subject matter, arise from different efforts, and have different legal effects over different time periods. Information with respect to our current patent portfolio as of May 31, 2022 is as follows. Number of Patent Number of Patents Expiration Dates(1) Leronlimab (PRO 140) product candidate(2) Methods of treatment by indication (e.g., HIV-1; COVID-19; GvHD) (2) Methods of treatment – Cancer involving leronlimab (PRO 140 and/or anti-CCR5 small molecules) (2) Mouse Model(2) (1) Patent term extensions and pending patent applications may extend periods of patent protection. (2) Leronlimab (PRO 140) patents and applications relate to the antibody and formulations. Research, development and commercialization of a biopharmaceutical product often requires choosing between alternative development and optimization routes at various stages in the development process. Preferred routes depend upon current, and may be affected by subsequent, discoveries and test results, availability of financial resources, and other factors, and cannot be identified with certainty. There are numerous third-party patents in fields in which we work, and we may need to obtain licenses under patents of others to pursue a preferred development route of one or more of our product candidates. The need to obtain a license would decrease the ultimate value and profitability of an affected product. If we cannot negotiate such a license, we might have to pursue a less desirable development route or terminate the program altogether. The research, development, testing, manufacture, quality control, packaging, labeling, storage, record-keeping, distribution, import, export, promotion, advertising, marketing, sale, pricing and reimbursement of pharmaceutical products are extensively regulated by governmental authorities in the United States and other countries. The processes for obtaining regulatory approvals in the United States and in foreign countries and jurisdictions, along with compliance with applicable statutes and regulations and other requirements, both pre-approval and post-approval, require the expenditure of substantial time and financial resources. The regulatory requirements applicable to product development, approval and marketing are subject to change, and regulations and administrative guidance often are revised or reinterpreted by the agencies in ways that may have a significant impact on our business. Licensure and Regulation of Biological Products in the United States In the United States, the FDA regulates human drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, and in the case of biological products, also under the Public Health Service Act, or the PHSA, and their implementing regulations. The failure to comply with the applicable U.S. requirements may result in FDA refusal to approve any pending applications or delays in development and may subject an applicant to administrative or judicial sanctions, such as issuance of warning letters, or the imposition of fines, civil penalties, product recalls, product seizures, total or partial suspension of production or distribution, and injunctions and/or civil or criminal prosecution brought by the FDA and the U.S. Department of Justice or other governmental entities. The FDA must approve product candidates for therapeutic indications before they may be marketed in the United States. For biological products, such as our product candidate, leronlimab, the FDA must approve a BLA. An applicant seeking approval to market and distribute a new biologic in the United States generally must satisfactorily complete each of the following steps: • completion of pre-clinical laboratory tests, animal studies and formulation studies according to good laboratory practices, or GLP, regulations or other applicable regulations; • submission to the FDA of an IND, which must become effective before human clinical trials may begin and must be updated when certain changes are made; • approval by an independent institutional review board, or IRB, or ethics committee representing each clinical trial site before each clinical trial may be initiated; • performance of adequate and well-controlled human clinical trials in accordance with applicable IND regulations, good clinical practices, or GCPs, and other clinical-trial related regulations to evaluate the safety and efficacy of the investigational product for each proposed indication; • preparation and submission to the FDA of a BLA requesting marketing approval for one or more proposed indications, including payment of application user fees; • review of the BLA by an FDA advisory committee, where applicable; • satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the biologic is produced to assess compliance with cGMP requirements to assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity; • satisfactory completion of any FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the clinical data submitted in support of the BLA; and • FDA review and approval of the BLA, which may be subject to additional post-approval requirements, including the potential requirement to implement a REMS, and any post-approval studies required by the FDA. Pre-clinical Studies Before an applicant begins testing a product candidate with potential therapeutic value in humans, the product candidate enters the pre-clinical testing stage. Pre-clinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as other studies to evaluate, among other things, the toxicity of the product candidate. The conduct of the pre-clinical tests and formulation of the compounds for testing must comply with federal regulations and requirements, including GLP regulations and standards. The results of the pre-clinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND. Some long-term pre-clinical testing, such as animal tests of reproductive adverse events and carcinogenicity, and long-term toxicity studies, may continue after the IND is submitted. The IND and IRB Processes An IND is an exemption from the premarket approval requirements of the FDCA allowing an unapproved product candidate to be shipped in interstate commerce for use in an investigational clinical trial. An IND must be in effect prior to interstate shipment and administration of any product candidate that is not the subject of an approved NDA or BLA. When submitting an IND to FDA, applicants must submit a protocol for each planned clinical trial, and any subsequent protocol amendments must be submitted to the FDA as part of the IND. The FDA requires a 30-day waiting period after the filing of each IND before clinical trials may begin. This waiting period is designed to allow the FDA to review the IND to determine whether human research subjects will be exposed to unreasonable health risks. At any time during this 30-day period, the FDA may raise concerns or questions about the conduct of the trials as outlined in the IND and impose a clinical hold or partial clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. At any time after the IND goes into effect, the FDA may also place a clinical hold or partial clinical hold on the IND or on any clinical trial that has commenced under the IND. A clinical hold is an order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspend an ongoing investigation. A partial clinical hold is a delay or suspension of only part of the clinical work requested under the IND. For example, a partial clinical hold might state that a specific protocol or part of a protocol may not proceed, while other parts of a protocol or other protocols may do so. No more than 30 days after the imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of the basis for the hold. Following the issuance of a clinical hold or partial clinical hold, a clinical investigation may only resume once the FDA has notified the sponsor that the investigation may proceed. The FDA will base that determination on information provided by the sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the investigation can proceed or recommence. For each foreign clinical study, a sponsor may choose, but is not required, to conduct it under an IND. When a foreign clinical study is conducted under an IND, all IND requirements must be met unless waived by the FDA. When a foreign clinical study is not conducted under an IND, the sponsor must ensure that the study complies with certain regulatory requirements of the FDA in order to use the study as support for an IND or application for marketing approval. Specifically, the studies must be conducted in accordance with GCP, including undergoing review and receiving approval by an independent ethics committee, or IEC, and seeking and receiving informed consent from subjects. The GCP requirements in the final rule encompass both ethical and data integrity standards for clinical studies. The FDA’s regulations are intended to help ensure the protection of human subjects enrolled in non-IND foreign clinical studies, as well as the quality and integrity of the resulting data. In addition to the foregoing IND requirements, an IRB must review and approve the plan for any clinical trial before it commences at each institution participating in the clinical trial, and the IRB must conduct continuing review and reapprove the study at least annually. The IRB, which must operate in compliance with FDA regulations, must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious harm to patients. Additionally, some trials are overseen by an independent group of qualified experts organized by the trial sponsor, known as a data safety monitoring board, or DSMB. This group provides authorization as to whether or not a trial may move forward at designated checkpoints based on review of available data from the study, to which only the DSMB maintains access. Suspension or termination of development during any phase of a clinical trial can occur if the DSMB determines that the participants or patients are being exposed to an unacceptable health risk. A sponsor may suspend or terminate development for other reasons, including evolving business objectives and/or competitive climate. Expanded access, sometimes called “compassionate use,” is the use of investigational new drug products outside of clinical trials to treat patients with serious or immediately life-threatening diseases or conditions when there are no comparable or satisfactory alternative treatment options. The rules and regulations related to expanded access are intended to improve access to investigational drugs for patients who may benefit from investigational therapies. FDA regulations allow access to investigational drugs under an IND by the company or the treating physician for treatment purposes on a case-by-case basis for: individual patients (single-patient IND applications for treatment in emergency settings and non-emergency settings); intermediate-size patient populations; and larger populations for use of the drug under a treatment protocol or Treatment IND Application. FDA’s regulations also provide for emergency procedures if there is a situation that requires the patient to be treated before a written submission can be made. When considering an IND application for expanded access to an investigational product with the purpose of treating a patient or a group of patients, the sponsor and treating physicians or investigators will determine suitability when all of the following criteria apply: patient(s) have a serious or immediately life-threatening disease or condition, and there is no comparable or satisfactory alternative therapy to diagnose, monitor, or treat the disease or condition; the potential patient benefit justifies the potential risks of the treatment and the potential risks are not unreasonable in the context or condition to be treated; and the expanded use of the investigational drug for the requested treatment will not interfere with the initiation, conduct or completion of clinical investigations that could support marketing approval of the product or otherwise compromise the potential development of the product. There is no obligation for a sponsor to make its drug products available for expanded access; however, as required by the 21st Century Cures Act, or Cures Act, passed in 2016, a sponsor must make its policy regarding how it evaluates and responds to expanded access requests public and readily available. Sponsors are required to make such policies publicly available upon the earlier of initiation of a Phase 2 or Phase 3 study; or 15 days after the investigational drug or biologic receives designation as a breakthrough therapy, fast track product, or regenerative medicine advanced therapy. In addition, on May 30, 2018, the Right to Try Act was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a manufacturer to make its products available to eligible patients as a result of the Right to Try Act, but the manufacturer must develop an internal policy and respond to patient requests according to that policy. Human Clinical Trials in Support of an NDA or BLA Clinical trials involve the administration of the investigational product candidate to human subjects under the supervision of a qualified investigator in accordance with GCP requirements which include, among other things, the requirement that all research subjects provide their informed consent in writing before they participate in any clinical trial. Clinical trials are conducted under written clinical trial protocols detailing, among other things, the objectives of the study, inclusion and exclusion criteria, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Human clinical trials are typically conducted in three sequential phases, but the phases may overlap or be combined. Additional studies may also be required after approval. As described in FDA’s regulations at 21 CFR 312.21, the three phases are as follows: Phase 1 includes the initial introduction of an investigational new drug into humans. Phase 1 studies are typically closely monitored and may be conducted in patients or normal volunteer subjects. These studies are designed to determine the metabolism and pharmacologic actions of the drug in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness. During Phase 1, sufficient information about the drug's pharmacokinetics and pharmacological effects should be obtained to permit the design of well-controlled, scientifically valid, Phase 2 studies. The total number of subjects and patients included in Phase 1 studies varies with the drug, but is generally in the range of 20 to 80. Phase 1 studies also include studies of drug metabolism, structure-activity relationships, and mechanism of action in humans, as well as studies in which investigational drugs are used as research tools to explore biological phenomena or disease processes. Phase 2 includes the controlled clinical studies conducted to evaluate the effectiveness of the drug for a particular indication or indications in patients with the disease or condition under study and to determine the common short-term side effects and risks associated with the drug. Phase 2 studies are typically well controlled, closely monitored, and conducted in a relatively small number of patients, usually involving no more than several hundred subjects. Phase 3 studies are expanded controlled and uncontrolled trials. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained, and are intended to gather the additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. Phase 3 studies usually include from several hundred to several thousand subjects. In some cases, the FDA may approve an NDA or BLA for a product candidate but require the sponsor to conduct additional clinical trials to further assess the product candidate’s safety and effectiveness after approval. Such post-approval trials are typically referred to as Phase 4 clinical trials. These trials are used to gain additional experience from the treatment of a larger number of patients in the intended treatment group and to further verify and describe clinical benefit in the case of products approved under FDA’s accelerated approval regulations. Failure to exhibit due diligence with regard to conducting Phase 4 clinical trials could result in withdrawal of FDA approval for products. Progress reports detailing the results of clinical trials must be submitted annually to the FDA. In addition, IND safety reports must be submitted to the FDA for any of the following: serious and unexpected suspected adverse reactions; findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the product; and any clinically important increase in the occurrence of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Expedited reporting is required for unexpected fatal or life-threatening suspected adverse reactions. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. The FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the clinical data submitted. Expedited Programs for Serious Conditions The FDA is authorized to expedite the development and review of new therapeutic products to address unmet need in the treatment of a serious or life-threatening condition. A product development program may qualify for one or more of FDA’s expedited programs for serious conditions: fast track designation, breakthrough therapy designation, accelerated approval, and priority review designation. Any product candidate submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as breakthrough therapy designation, priority review and accelerated approval. • Fast Track Designation. The sponsor of a product candidate may request the FDA to designate the product for a specific indication as a Fast Track product concurrent with or after the filing of the IND. Candidate products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and nonclinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product candidate and the specific indication for which it is being studied. In addition to other benefits, such as the ability to have greater interactions with the FDA, the FDA may initiate review of sections of a Fast Track application before the application is complete, a process known as rolling review. • Breakthrough therapy designation. To qualify for the breakthrough therapy designation, product candidates must be intended to treat a serious or life-threatening disease or condition and preliminary clinical evidence must indicate that such product candidates may demonstrate substantial improvement on one or more clinically significant endpoints over existing therapies. Features of breakthrough therapy designation include intensive guidance on an efficient development program, intensive involvement of senior managers and experienced staff on a proactive, collaborative and cross-disciplinary review, and rolling review. • Priority review. A product candidate is eligible for priority review if it treats a serious condition and, if approved, it would be a significant improvement in the safety or effectiveness of the treatment, diagnosis or prevention compared to marketed products. In addition, specific statutory provisions provide for priority review for various types of applications. FDA aims to complete its review of priority review applications within six months as opposed to 10 months for standard review. • Accelerated approval. FDA may grant accelerated approval to a product that treats a serious condition, generally provides a meaningful advantage over available therapies, and has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on an intermediate clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity and prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA may require that a sponsor of a drug or biological product candidate receiving accelerated approval perform adequate and well controlled post-marketing clinical trials. In addition, the FDA currently requires as a condition for accelerated approval pre-submission of promotional materials. None of these expedited programs change the standards for approval but they may help expedite the development or approval process of product candidates. Emergency Use Authorizations The FDA has the authority to permit the use of unapproved medical products following a determination of a public health emergency (“PHE”) by the Secretary of Health and Human Services (the “Secretary”) and a declaration by the Secretary that circumstances exist justifying the authorization of emergency use of particular types of medical products to respond to the PHE. Once the Secretary has made the requisite determination and declaration, the FDA may issue Emergency Use Authorizations, or EUAs, for specific unapproved medical products if the following statutory criteria have been met: (1) the pathogen that is the subject of the PHE can cause a serious or life-threatening condition; (2) based on the totality of the scientific evidence available, it is reasonable to believe that (i) the product may be effective in preventing or treating such condition, and (ii) the known and potential benefits of the product outweigh the known and potential risks; and (3) there is no adequate, approved and available alternative to the product. If an EUA is granted, it generally will remain in effect until the Secretary’s declaration that circumstances exist justifying the authorization of emergency use of the type of products at issue or the product is approved under one of FDA’s traditional approval pathways. The EUA also may be revoked or revised for other reasons, including a finding that the criteria for its issuance are no longer met or other circumstances make a revision or revocation appropriate to protect the public health or safety. On February 4, 2020, the Secretary determined that COVID-19 represents a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and, subsequently, declared on March 27, 2020, that circumstances exist to justify the authorization of emergency use of drugs and biological products during the COVID-19 pandemic, subject to the terms of specific EUAs as issued by the FDA. The declaration has been renewed to extend through October 13, 2022. Review and Approval of BLAs Assuming successful completion of the required clinical testing, the results of the pre-clinical studies and clinical trials, along with information relating to the product’s chemistry, manufacturing, and controls and proposed labeling, are submitted to the FDA as part of a BLA requesting approval to market the product for one or more indications. Data may come from company-sponsored clinical trials intended to test the safety and efficacy of a product’s use or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety, potency and purity of the investigational product to the satisfaction of the FDA. The fee required for the submission of an NDA or BLA under the Prescription Drug User Fee Act, or PDUFA, is substantial (for example, for FY2022 this application fee is approximately $3.1 million), and the sponsor of an approved BLA is also subject to an annual program fee, currently more than $350,000 per program. These fees are typically adjusted annually, but exemptions and waivers may be available under certain circumstances. The FDA conducts a preliminary review of all BLAs within 60 days of receipt and informs the sponsor by the 74th day after the FDA’s receipt of the submission whether an application is sufficiently complete to permit substantive review. In the event that FDA determines that a BLA does not satisfy this standard, it will issue a Refuse to File, or RTF, determination to the applicant. Typically, an RTF for a BLA will be based on administrative incompleteness, such as clear omission of information or sections of required information; scientific incompleteness, such as omission of critical data, information or analyses needed to evaluate safety, purity and potency or provide adequate directions for use; or inadequate content, presentation, or organization of information such that substantive and meaningful review is precluded. The FDA may request additional information rather than accept a BLA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. After the submission is accepted for filing, the FDA begins an in-depth substantive review of the application. Under the goals and policies agreed to by the FDA under PDUFA, the FDA aims to review and act on 90 percent of standard submissions within ten months of the filing date and 90 percent of priority review submissions within six months of the filing date. The review process may be extended by the FDA for three additional months to consider new information or, in the case of a clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission. Despite these review goals, it is not uncommon for FDA review of a BLA to extend beyond the PDUFA goal date. Before approving a BLA, the FDA will typically conduct a pre-approval inspection of the manufacturing facilities for the new product to determine whether the manufacturing processes and facilities comply with GMPs. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. The FDA also may inspect the sponsor and one or more clinical trial sites to assure compliance with GCP requirements and the integrity of the clinical data submitted to the FDA. Additionally, the FDA may refer a BLA, including applications for novel product candidates which present difficult questions of safety or efficacy, to an advisory committee for review, evaluation and recommendation as to whether the application should be approved and under what conditions. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts. The FDA is not bound by the recommendation of an advisory committee, but it considers such recommendations when making final decisions on approval. The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, if it determines that a REMS is necessary to ensure that the benefits of the product outweigh its risks and to assure the safe use of the biological product. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS and the FDA will not approve the BLA without a REMS. The FDA reviews a BLA to determine, among other things whether the product is safe, pure and potent and whether the facility in which it is manufactured, processed, packed or held meets standards designed to assure the product’s continued safety, purity and potency. The approval process is lengthy and often difficult, and the FDA may refuse to approve a BLA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data and information. After evaluating the application and all related information, including the advisory committee recommendations, if any, and inspection reports of manufacturing facilities and clinical trial sites, the FDA may issue either an approval letter or a Complete Response Letter, or CRL. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A CRL indicates that the review cycle of the application is complete, and the application will not be approved in its present form. A CRL generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. The CRL may require additional clinical or other data, additional pivotal Phase 3 clinical trial(s) and/or other significant and time-consuming requirements related to clinical trials, pre-clinical studies, or manufacturing. If a CRL is issued, the applicant may either resubmit the BLA addressing all the deficiencies identified in the letter or withdraw the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the BLA, the FDA will issue an approval letter. The FDA has committed to reviewing and acting on 90 percent of such resubmissions in response to an issued CRL in either two or six months depending on the type of information included. Even with the submission of this additional information, however, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If a product receives marketing approval from the FDA, the approval is limited to the conditions of use (e.g., patient population, indication) described in the FDA-approved labeling. Further, depending on the specific risk(s) to be addressed, the FDA may require that contraindications, warnings or precautions be included in the product labeling, require that post-approval trials, including Phase 4 clinical trials, be conducted to further assess a product’s safety after approval, require testing and surveillance programs to monitor the product after commercialization or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing trials or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval. Reference Product Exclusivity for Biological Products With approval of a BLA, a biological product is licensed for marketing by FDA, and the product may be entitled to certain types of market and data exclusivity barring FDA from approving competing products for certain periods of time. For example, in March 2010, the Patient Protection and Affordable Care Act was enacted in the United States and included the Biologics Price Competition and Innovation Act of 2009, or the BPCIA. The BPCIA amended the PHSA to create an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-licensed biological reference product. To date, the FDA has approved several biosimilars, and in 2021, the FDA approved the first interchangeable biologic. The FDA has also issued several guidance documents outlining its approach to reviewing and approving biosimilars and interchangeable biologics. Under the BPCIA, a manufacturer may submit an application for a product that is “biosimilar to” or “interchangeable with” a previously approved biological product or “reference product.” For the FDA to approve a biosimilar product, it must find that there are no clinically meaningful differences between the reference product and the proposed biosimilar product in terms of safety, purity and potency. For the FDA to approve an interchangeable biological product, the agency must find that the biological product is biosimilar to the reference product, can be expected to produce the same clinical results as the reference product and “for a biological product that is administered more than once to an individual, the risk in terms of safety or diminished efficacy of alternating or switching between use of the biological product and the reference product is not greater than the risk of using the reference product without such alternation or switch.” Upon licensure by the FDA, an interchangeable biosimilar may be substituted for the reference product without the intervention of the healthcare provider who prescribed the reference product, although the substitutability of drug and biological products are determined at the state level. The biosimilar applicant generally must demonstrate that the product is biosimilar based on data from analytical studies showing that the biosimilar product is highly similar to the reference product, data from animal studies (including toxicity) and data from one or more clinical studies to demonstrate safety, purity and potency in one or more appropriate conditions of use for which the reference product is approved. The FDA, however, may waive any of these data requirements upon a finding that the data are “unnecessary.” In addition, the applicant must show that the biosimilar and reference products have the same mechanism of action for the approved conditions of use, route of administration, dosage and strength, and the production facility must meet standards designed to assure product safety, purity, and potency. In the US, a reference biological product is granted 12 years of exclusivity from the time of first licensure of the product, and the first approved interchangeable biological product will be granted an exclusivity period of up to one year after it is first commercially marketed. The FDA will not accept an application for a biosimilar or interchangeable product until four years after the date of first licensure of the reference product. The BPCIA is complex, and there have been various legislative proposals to change certain aspects of the BPCIA. As a result, the ultimate impact, implementation and meaning of aspects of the BPCIA are subject to significant uncertainty. Orphan Drug Designation and Exclusivity Orphan drug designation in the United States is designed to encourage sponsors to develop products intended for treatment of rare diseases or conditions. In the United States, a rare disease or condition is statutorily defined as a condition that affects fewer than 200,000 individuals in the United States or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available the drug for the disease or condition will be recovered from sales of the product in the United States. Orphan drug designation may qualify a company for certain tax credits and market exclusivity for seven years following the date of the product’s marketing approval if granted by the FDA. An application for designation as an orphan product can be made any time prior to the filing of an application for approval to market the product. A product that has received orphan drug designation must go through the review and approval process like any other product. A sponsor may request orphan drug designation of a previously unapproved product or new orphan indication for an already marketed product. In addition, a sponsor of a product that is otherwise the same drug as an already approved orphan drug may seek and obtain orphan drug designation for the subsequent product for the same rare disease or condition if it can present a plausible hypothesis that its product may be clinically superior to the first drug. More than one sponsor may receive orphan drug designation for the same drug for the same rare disease or condition, but each sponsor seeking orphan drug designation must file a complete request for designation. If a product with orphan drug designation receives the first FDA approval for the rare disease or condition for which it has such designation, the product generally will receive orphan drug exclusivity. Orphan drug exclusivity means that the FDA may not approve another sponsor’s marketing application for the same drug for the same disease or condition for seven years, except in certain limited circumstances. The period of exclusivity begins on the date that the marketing application is approved by the FDA. Orphan drug exclusivity will not bar approval of another product under certain circumstances, including if the company with orphan drug exclusivity is not able to meet market demand or the subsequent product that is otherwise considered the same drug for the same disease or condition is shown to be clinically superior to the approved product based on greater efficacy or safety, or providing a major contribution to patient care. Additionally, the statute requires that a sponsor must demonstrate clinical superiority in order to receive orphan drug exclusivity for a product that is considered the same drug as a previously approved product for the same rare disease or condition. Patent Term Restoration and Extension In the United States, a patent claiming a new biological product, its method of use or its method of manufacture may be eligible for a limited patent term extension under the Hatch Waxman Act, which permits a patent extension of up to five years for patent term lost during product development and FDA regulatory review. Assuming grant of the patent for which the extension is sought, the restoration period for a patent covering a product is typically one half the time between the effective date of the IND involving human beings and the submission date of the BLA, plus the time between the submission date of the BLA and the ultimate approval date. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date in the United States. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent for which extension is sought. A patent that covers multiple products for which approval is sought can only be extended in connection with one of the approvals. The USPTO reviews and approves the application for any patent term extension in consultation with the FDA. Post-approval Requirements Following approval of a new product, the manufacturer and the approved product are subject to pervasive and continuing regulation by the FDA, governing, among other things, monitoring, and recordkeeping activities, reporting of adverse experiences with the product and product problems to the FDA, product sampling and distribution, manufacturing, and promotion and advertising. Although physicians may prescribe legally available products for unapproved uses or patient populations (i.e., “off-label uses”), manufacturers may not market or promote such uses. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability. Specifically, if a company is found to have promoted off-label uses, it may become subject to adverse public relations and administrative and judicial enforcement by the FDA, the Department of Justice, or the Office of the Inspector General of the Department of Health and Human Services, as well as state authorities. This could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the way a company promotes or distributes drug products. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. Further, if there are any modifications to the product, including changes in indications, labeling or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new BLA or a BLA supplement, which may require the applicant to develop additional data or conduct additional pre-clinical studies and clinical trials. The FDA may also place other conditions on approvals including the requirement for a REMS to assure the safe use of the product, which may require substantial commitment of resources post-approval to ensure compliance. A REMS could include medication guides, physician communication plans or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn for non-compliance with regulatory standards or if problems occur following initial marketing. In addition, FDA regulations require that biological products be manufactured in specific approved facilities and in accordance with cGMPs. The cGMP regulations include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports and returned or salvaged products. The manufacturing facilities for our product candidates must meet cGMP requirements and satisfy the FDA or comparable foreign regulatory authorities’ satisfaction before any product is approved and our commercial products can be manufactured. We rely, and expect to continue to rely, on third parties to produce clinical (and, in the future, commercial) supplies of our product candidate in accordance with cGMP regulations. These manufacturers must comply with cGMP regulations, including requirements for quality control and quality assurance, the maintenance of records and documentation and the obligation to investigate and correct any deviations from cGMP. Manufacturers and other entities involved in the manufacture and distribution of approved drugs or biologics are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. Inspections by the FDA and other regulatory agencies may identify compliance issues at facilities that may disrupt production or distribution or require substantial resources to correct. In addition, the discovery of conditions that violate these rules, including failure to conform to cGMPs, could result in enforcement actions, and the discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved BLA, including voluntary recall and regulatory sanctions as described below. The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information, imposition of post-market clinical trials requirement to assess new safety risks or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things: • restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; • safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings or other safety information about a product • mandated modification of promotional materials and labeling and issuance of corrective information • fines, warning letters, untitled letters or other enforcement-related letters or clinical holds on post-approval clinical trials; • refusal of the FDA to approve pending NDAs/BLAs or supplements to approved NDAs/BLAs, or suspension or revocation of product approvals; • product seizure or detention, or refusal to permit the import or export of products; • injunctions or the imposition of civil or criminal penalties; and • consent decrees, corporate integrity agreements, debarment, or exclusion from federal health care programs; or mandated modification of promotional materials and labeling and the issuance of corrective information. In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates the distribution of samples at the federal level and sets minimum standards for the registration and regulation of drug distributors by the states. Additionally, the Drug Supply Chain Security Act, or DSCSA, imposes requirements related to identifying and tracing certain prescription products distributed in the United States, including most biological products. Other U.S. Healthcare Laws and Regulations In the United States, biopharmaceutical manufacturers and their products are subject to extensive regulation at the federal and state level, such as laws intended to prevent fraud and abuse in the healthcare industry. These laws, some of which apply only to approved products, include: • federal false claims, false statements and civil monetary penalties laws prohibiting, among other things, any person from knowingly presenting, or causing to be presented, a false claim for payment of government funds or knowingly making, or causing to be made, a false statement to get a false claim paid; • federal healthcare program anti-kickback law, which prohibits, among other things, persons from offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for, or the purchasing or ordering of, a good or service for which payment may be made under federal healthcare programs such as Medicare and Medicaid; • the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which, in addition to privacy protections applicable to healthcare providers and other entities, prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; • FDCA, which among other things, strictly regulates marketing, prohibits manufacturers from marketing such products prior to approval or for off-label use and regulates the distribution of samples; • federal laws that require pharmaceutical manufacturers to report certain calculated product prices to the government or provide certain discounts or rebates to government authorities or private entities, often as a condition of reimbursement under government healthcare programs; • federal transparency law, which requires pharmaceutical companies to report certain payments to healthcare providers; • state laws and regulations analogous to the above; and • laws and regulations prohibiting bribery and corruption such as the FCPA, which, among other things, prohibits U.S. companies and their employees and agents from authorizing, promising, offering, or providing, directly or indirectly, corrupt or improper payments or anything else of value to foreign government officials, employees of public international organizations or foreign government-owned or affiliated entities, candidates for foreign public office, and foreign political parties or officials thereof. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, exclusion from participation in federal and state health care programs, such as Medicare and Medicaid. Ensuring compliance is time consuming and costly. Similar healthcare laws and regulations exist in the European Union (the “EU”) and other jurisdictions, including reporting requirements detailing interactions with and payments to healthcare providers and laws governing the privacy and security of personal information U.S. Privacy Law In the U.S., there are numerous state and federal laws and regulations governing the security and privacy of personal information. Additionally, state and federal regulators have begun to pay more attention to companies’ data processing activities. At the state level, laws require companies to safeguard personal information and take action in the event of a data breach (e.g., notifying governmental authorities and data subjects). State attorneys general have been active in using their consumer protection authority to investigate companies’ data security practices. Additionally, the following states have passed laws governing data privacy specifically: California, Virginia, Colorado, Connecticut, and Utah. Each of these laws contain exceptions for certain health data, but these exceptions are not comprehensive. All of these laws give rights to residents in their states and require businesses to take certain actions with respect to those rights (similar to the General Data Protection Regulation in effect in the EU, but with notable differences). California and Colorado are conducting rulemaking proceedings to develop implementing regulations for their laws, which could affect the laws’ scope and the cost to comply with them. The laws in Virginia, Colorado, Connecticut, and Utah will take effect in 2023 and the respective attorneys general will enforce them. California’s law is already in effect but certain amendments to that law will take effect in 2023. Currently, the California Attorney General is charged with enforcing California’s data privacy law, but there is a limited private right of action in the event of certain data breaches, which gives plaintiffs the ability to seek statutory damages. In 2023, a new dedicated privacy regulator in California (the California Privacy Protection Agency) will take over enforcement. At the federal level, the Federal Trade Commission has been active in using its Section 5 authority to bring enforcement actions against companies for deceptive or unreasonable data processing activities. Described below is the traditional registrational drug development track. Phase 1 includes the initial introduction of an investigational new drug or biologic into humans. These studies are closely monitored and may be conducted in patients but are usually conducted in a small number of healthy volunteer patients. These studies are designed to determine the metabolic and pharmacologic actions of the investigational product in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness. During Phase 1, sufficient information about the investigational product’s pharmacokinetics and pharmacological effects are obtained to permit the design of well-controlled, scientifically valid, Phase 2 studies. Phase 1 studies of PRO 140 were conducted and completed by or on behalf of Progenics by certain principal investigators prior to our acquisition of PRO 140. Phase 2 includes the early controlled clinical studies conducted to obtain some preliminary data on the effectiveness of the drug for a particular indication or indications in patients with the disease or condition. This phase of testing also helps determine the common short-term side effects and risks associated with the drug. Phase 2 studies are typically well-controlled, closely monitored, and conducted in a relatively small number of patients, typically no more than several hundred people. In some cases, depending upon the need for a new drug, a particular drug candidate may be licensed for sale in interstate commerce after a “pivotal” Phase 2 trial. Phase 2 is often broken into Phase 2a, which can be used to refer to “pilot trials,” or more limited trials evaluating exposure response in patients, and Phase 2b trials that are designed to evaluate dosing efficacy and ranges. Phase 3 studies are expanded controlled clinical studies. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained in Phase 2 and are intended to gather the additional information about effectiveness and safety that is needed to evaluate the overall benefit/risk relationship of the drug. Phase 3 studies also provide an adequate basis for extrapolating the results to the general population and transmitting that information in the physician labeling. Phase 3 studies usually involve significantly larger groups of patients, and considerable additional expense. We were required to pay significant fees to third parties upon the first patient dosing in a Phase 3 trial of leronlimab, and we may be required to make additional fee payments to third parties upon the completion of additional milestones. Refer to Part II, Item 8, Note 10, Commitments and Contingencies - PRO 140 Acquisition and Licensing Arrangements of this Form 10-K for additional information. We do not own or operate manufacturing facilities to produce leronlimab. As such, we must depend on third-party manufacturing organizations and suppliers for all of our clinical trial quantities of leronlimab, in addition to previously manufactured supplies of commercial grade leronlimab. We continue to explore alternative manufacturing sources, to ensure that we have access to sufficient manufacturing capacity in order to meet potential demand for leronlimab in a cost-efficient manner. We engaged Samsung Biologics and AGC Biologics, two global contract manufacturing organizations (“CMOs”), to initiate the scale-up to commercial batch quantities of product and develop the necessary controls and specifications to manufacture product on a consistent and reproducible manner. We have also contracted with suitable CMOs to fill, finish, label, and package product into the final commercial package for commercial use. In order to commercialize product, this scaled-up material will need to be validated under best practices and demonstrated to meet approved specifications on an ongoing basis. GMP material will be produced as needed to support clinical trials for all therapeutic indications and until commercial product is approved by the FDA. We will rely on CMOs for all of our developmental and commercial needs. As discussed earlier, the Company received a Refusal to File letter from the FDA regarding its BLA submission for leronlimab, and also announced that the FDA placed a full clinical hold on its COVID-19 program and a partial clinical hold on its HIV program in the United States. All manufacturing and CMC activities have been paused until the Company addresses deficiencies to allow the clinical hold to be removed, and later BLA to be approved. Also refer to Part II, Item 8, Note 10, Commitments and Contingencies - Commitments with Samsung BioLogics Co., Ltd. (“Samsung”) for additional information. The Company’s research and development expenses totaled approximately $27.0 million, $53.4 million and $52.6 million for the fiscal years ended May 31, 2022, 2021 and 2020, respectively. Employees and Human Capital Resources As of August 15, 2022, we had 23 full-time employees, as well as several independent consultants assisting us with the Company’s regulatory matters. Our research and development team is geographically dispersed throughout the United States. CytoDyn is committed to pay equity regardless of gender or race/ethnicity. We invest in our workforce by offering competitive salaries, and benefits. We award stock options to selected employees under our stock incentive plan. We also offer various benefits to all eligible employees, including health care coverage and a 401(k) plan. None of our employees are subject to a collective bargaining agreement. We consider our relationship with our employees to be good. There can be no assurance, however, that we will be able to identify or hire and retain additional employees or consultants on acceptable terms in the future. Item 1A. RISK FACTORS Our business is subject to numerous risks and uncertainties, including those highlighted in this section, that represent challenges we face in our efforts to successfully implement our strategy. You should carefully consider the risks described below in addition to other information set forth in this Form 10-K, including Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes in Part II, Item 8. These risks, some of which have occurred and any of which may occur, alone or in combination with other events or circumstances in the future, may have a material adverse effect on our business, financial condition, cash flows, results of operations, or the trading price of our common stock. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may occur or become material in the future. Therefore, historical financial and business performance, events and trends are often not a reliable indicator of future operating results, financial and business performance, events or trends. Summary of Risk Factors Risks Related to Our Financial Position and Need for Additional Capital • Our cash reserves are extremely low, requiring that we raise substantial additional financing to satisfy our current payment obligations and to fund our operations. • We are a clinical stage biotechnology company with a history of significant operating losses; we expect to continue to incur operating losses, and we may never achieve, let alone maintain, profitability. • The amount of financing we require will depend on a number of factors, many of which are beyond our control. Our results of operations, financial condition and stock price are likely to be adversely affected if we are unable to obtain additional funding on improved terms compared to previous financings. • Our future cash requirements may differ significantly from our current estimates. • Our auditors have issued a going concern opinion, and we will not be able to achieve our objectives and will have to cease operations if we cannot find adequate financing. • We capitalized pre-launch inventories prior to receiving FDA approval and have charged-off a portion of them due to their expected expiration based on the shelf-life relative to the date we expect to obtain regulatory approval. If either the FDA approval or market acceptance post-approval do not occur at all or on a timely basis prior to shelf-life expiration, we will be required to write-off additional or all pre-launch inventories, which would materially and adversely affect our financial condition, ability to raise additional financing, and stock price. Risks Related to Our Ability to Maintain Effective Operational and Internal Controls Environment • The recruitment and retention of skilled directors, executives, employees and consultants may be difficult and expensive, may result in dilution to our stockholders, and any failure to attract and retain such individuals may adversely affect our drug development and commercialization activities. • The loss or transition of any member of our senior management team or any other key employee could adversely affect our business. • If we are unable to effectively maintain a system of internal control over financial reporting, we may not be able to accurately or timely report our financial results and our stock price could be adversely affected. • Our information technology systems could fail to perform adequately or experience data corruption, cyber-based attacks, or network security breaches. Risks Related to Legal Proceedings • Our business, operating results and financial condition could be negatively affected as a result of litigation and other demands made by stockholders. • Class-action litigation filed against us could harm our business, and insurance coverage may not be sufficient to cover all related costs and damages. • We are subject to oversight by the SEC, FDA, and other regulatory agencies. Investigations by those agencies could divert management’s focus and have a material adverse effect on our reputation and financial condition. Risks Related to Development and Commercialization of Our Drug Candidates • We have been notified by Samsung of alleged breaches of our payment obligations to Samsung, which ultimately could result in termination of our agreements for manufacturing of our drug product and related services we expect Samsung to provide under the agreements • Certain agreements and related license agreements require us to make significant milestone, royalty, and other payments, which will require additional financing and, in the event we do commercialize leronlimab, decrease the revenues we may ultimately receive on sales. To the extent that such milestone, royalty and other payments are not timely made, the counterparties to such agreements in certain cases have repurchase and termination rights thereunder with respect to leronlimab. • If we are not able to obtain all required regulatory approvals for leronlimab, we will not be able to commercialize our primary product candidate, which would materially and adversely affect our business, financial condition and stock price. • We are substantially dependent on the success of leronlimab. If we, either alone or with collaborators, are unable to complete the clinical development of, obtain and maintain marketing approval for or successfully commercialize leronlimab, including with respect to adequate coverage and reimbursement, or if we experience significant delays in doing so, our business could be substantially harmed. • Our competitors may develop drugs that are more effective, safer and less expensive than ours. • We may not be able to identify, negotiate and maintain the strategic alliances necessary to develop and commercialize our products and technologies, and we will be dependent on our corporate partners if we do. • Known third-party patent rights could delay or otherwise adversely affect our planned development and sale of leronlimab. We have identified but not exhaustively analyzed other patents that could relate to our proposed products. Risks Related to Our Dependence on Third Parties • We have a very limited number of internal research and development personnel, making us dependent on consulting relationships and strategic alliances with industry partners. • We rely on third parties, such as CROs and third-party manufacturers, to conduct clinical trials for our product candidate, leronlimab, and to produce our pre-clinical and clinical product candidate supplies. Such third parties are to significant regulation. A failure by such third-parties to properly and successfully perform their obligations to us, or failure of manufacturers on which we rely to meet regulatory requirements, may result in our inability to obtain regulatory approvals for our product candidate, and/ or to produce supplies for us with such delay causing us to impair our ability to complete our clinical trials or commercialize our product candidate. Risks Related to Our Intellectual Property Rights • Our success depends substantially upon our ability to obtain and maintain intellectual property protection relating to our product candidate, and future product candidates. • If we are sued for infringing on third-party intellectual property rights, it will be costly and time-consuming, and an unfavorable outcome would have a significant adverse effect on our business. We may also undertake infringement or other legal proceedings against third parties, causing us to spend substantial resources on litigation and exposing our own intellectual property portfolio to challenge. • We may become involved in disputes with our present or future contract partners over intellectual property ownership or other matters, which would have a significant effect on our business. Risks Related to Ownership of Our Common Stock • Our common stock is classified as “penny stock” and trading of our shares may be restricted by the SEC’s penny stock regulations. • The trading price of our common stock has been and could remain volatile, and the market price of our common stock may decrease. • Since our inception, we have been insolvent and have required debt and equity financing to maintain operations. We expect our debt service obligations and our need for additional funding to finance operations will cause additional substantial dilution to our existing stockholders and could adversely affect the trading price of our common stock. • Our certificate of incorporation allows for our Board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock. • Anti-takeover provisions of our certificate of incorporation, our bylaws and Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove the current members of our Board and management. • We do not expect any cash dividends to be paid on our common shares for the foreseeable future. Our cash reserves are extremely low, requiring that we raise substantial additional financing to satisfy our current payment obligations and to fund our operations. We must raise substantial additional funds in the near term to meet our payment obligations and fund our operations. The financial capital may not be available on acceptable terms or at all. In addition, as of May 31, 2022, we had only approximately 65.4 million shares of common stock available for issuance in new financing transactions. If we fail to raise additional funds on a timely basis, we may be forced to delay, reduce the scope of, or eliminate one or more of our planned operating activities, including our ability to remove clinical holds placed on us by the FDA, resubmission of our BLA application, analysis of clinical trial data for purposes of responding to FDA requirements and preparing additional regulatory submissions, additional clinical trials, regulatory and compliance activities, and legal defense activities. Any such delay or inability to pursue our planned activities could adversely affect our business, financial condition, and stock price. If we deplete our cash reserves, we may have to discontinue our operations and liquidate our assets. We are a clinical stage biotechnology company with a history of significant operating losses; we expect to continue to incur operating losses, and we may never achieve profitability. We have not generated significant revenue from product sales, licensing, or other income opportunities to date. Since our inception, we have incurred operating losses in each year due to costs incurred for research and development activities and general and administrative expenses related to our operations. Our current drug candidate, leronlimab, is in various stages of development for multiple indications. We expect to incur losses for the foreseeable future, with no or only minimal revenues as we continue development of, and seek regulatory approvals for, leronlimab. If leronlimab fails to gain regulatory approval, or if it or other drug or biologic candidates we may acquire or license in the future do not achieve approval or market acceptance, we will not be able to generate revenue, or explore other opportunities to enhance stockholder value, such as through a sale. If we fail to generate revenue or if we are unable to fund our continuing operations, our stockholders could lose a portion or all of their investments. The amount of financing we require will depend on a number of factors, many of which are beyond our control. Our results of operations, financial condition and stock price are likely to be adversely affected if we are unable to obtain additional funding on improved terms compared to previous financings. • the costs of preparing required regulatory submission, as well as any clinical trial programs and pre-clinical studies we may pursue and other development activities conducted by us directly, • the costs involved with our CMC activities, • the satisfaction of payment obligations we have already incurred, • the costs and timing of obtaining regulatory approvals and making related milestone payments due to Progenics, Lonza, and AbbVie, • the costs of filing, prosecuting, maintaining, and enforcing patents and other intellectual property rights and defending against potential claims of infringement, • the costs associated with hiring and retaining needed scientific and administrative employees, advisors and consultants, • the cost of legal and other professional advisors needed to support our development efforts, responsibilities as a public reporting company, regulatory compliance and investigations, and legal proceedings, • the costs of compliance with laws, regulations, or judicial decisions applicable to us, and • the costs of general and administrative infrastructure required to manage our business and protect corporate assets and stockholder interests. If any of these factors cause our funding needs to be greater than expected, our ability to continue operations, financial condition, and stock price may be adversely affected. • our ability to attract strategic partners to pay for or share costs related to our product development efforts, • whether our outstanding convertible notes are converted into equity, • whether we receive additional cash upon the exercise of our outstanding warrants and stock options for common stock, and • our ability to obtain funding under future licensing agreements or other collaborative relationships. If we deplete our cash reserves and are unable to obtain additional funding, we may be forced to discontinue our operations and liquidate our assets. Our auditors have issued a going concern opinion, and we will not be able to achieve our objectives and will have to cease operations if we cannot find adequate financing. Our auditors issued an opinion, which includes a going concern explanatory paragraph, in connection with the audit of our annual consolidated financial statements for the fiscal year ended May 31, 2022. A going concern paragraph in an audit opinion means that there is substantial doubt that we can continue as an ongoing business for the 12 months from the date the consolidated financial statements are issued. If we are unable to continue as an ongoing business, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. In addition, the inclusion of an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern and our lack of cash resources may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties. There is no assurance that we will be able to adequately fund our operations in the future. We capitalized pre-launch inventories prior to receiving FDA approval and have charged-off a portion of them due to their expected expiration based on the shelf-life relative to the date we expect to obtain regulatory approval. If either the FDA approval or market acceptance post-approval do not occur at all or on a timely basis prior to shelf-life expiration, we will be required to write-off additional or all pre-launch inventories, which would materially and adversely affect our financial condition, ability to raise additional financing, and stock price. Pre-launch inventories consist of raw materials and work-in-progress related to our product candidate leronlimab, the costs of which were capitalized prior to receiving FDA marketing approval. In addition, market acceptance of our product could fall short of our expectations due to introduction of a competing product, physicians being unwilling or unable to prescribe leronlimab to their patients, or if our target patient population is reluctant to try leronlimab as a new therapy. Pre-launch inventories consist of costs of raw materials and work-in-progress related to our product candidate leronlimab. Our planned BLA resubmission will require updating the analyses of clinical data previously provided to the FDA, which could result in a significant delay in obtaining approval. If the FDA approval is significantly delayed, the salability of our product may be affected due to the shelf-life of our pre-launch inventory and may require write-off of a significant portion of the carrying value of our pre-launch inventories, which would have a material adverse effect on our results of operations and financial condition. During the fourth fiscal quarter of 2022, the Company concluded that certain inventories no longer qualify for capitalization as pre-launch inventories due to expiration of shelf-life prior to expected commercial sales and the ability to obtain additional commercial product stability data until after shelf-life expiration. This is due to delays experienced from the originally anticipated BLA approval date from the FDA. Although these inventories are no longer being capitalized as pre-launch inventories for GAAP accounting purposes, the inventories written-off for accounting purposes continue to be physically maintained, can be used for clinical trials, and can be commercially sold if the shelf-lives can be extended as a result of the performance of on-going continued stability testing of drug product. In the event the shelf-lives of these written-off inventories are extended, and the inventories are sold commercially, the Company will not recognize any costs of goods sold on the previously expensed inventories. The Company also concluded that due to delays of future production certain raw materials would expire prior to production and as such no longer qualify for capitalization. Specifically, the Company evaluated its raw materials against the anticipated production date and determined that while the next production date is indeterminable as of May 31, 2022, specialized raw materials have remaining shelf-life ranging from 2023 to 2026. Therefore, a reserve of $10.2 million for the entire remaining value of specialized and other raw materials was recorded as of May 31, 2022. The Company also concluded that approximately $29.1 million, comprised of five batches of drug product, out of total of nine manufactured, is likely to expire prior to the anticipated date the product may be approved for commercialization. Additionally, the Company anticipates that approximately $34.2 million of the drug product comprising of the remaining four manufactured batches, with shelf-lives lasting into 2026, may expire prior to receiving approval for commercialization. The Company wrote off the entire remaining balance of the drug product, in the amount of $63.3 million, as of May 31, 2022. Refer to Note 3, Inventories, net for additional information. The recruitment and retention of skilled directors, executives, employees and consultants may be difficult and expensive, may result in dilution to our stockholders, and any failure to attract and retain such individuals may adversely affect our drug development and commercialization activities. Our business depends on the skills, performance, and dedication of our officers and key scientific and technical advisors, and our directors. All of our current scientific advisors are independent contractors and are either self-employed or employed by other organizations. As a result, they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, which may affect their ability to provide services to us in a timely manner. We may need to recruit additional directors, executive management employees, and advisors, particularly scientific and technical personnel, which will require additional financial resources. In addition, there is currently intense competition for skilled directors, executives and employees with relevant scientific and technical expertise, and this competition is likely to continue. We compete for these qualified personnel against companies with greater financial resources than ours. In order to successfully recruit and retain qualified employees, we will likely need to offer a combination of salary, cash incentives, and equity compensation. Future issuances of our equity securities for compensatory purposes will dilute existing stockholders’ ownership interests. If we are unable to attract and retain individuals with relevant scientific, technical and managerial experience, we may be forced to limit or delay our product development activities or may experience difficulties in successfully conducting our business, which would adversely affect our operations and financial condition. The loss of a member of our senior management team or other key employee could adversely affect our business. We have experienced significant turnover among our senior executives. The complexity inherent in integrating a new key member of the senior management team with existing senior management may limit the effectiveness of any such successor or otherwise adversely affect our business. Leadership transitions are inherently difficult to manage and may cause uncertainty or a disruption to our business or increase the likelihood of turnover of other key officers and employees. Further, we may incur significant expenses related to any executive transition costs. Finding suitable replacements for senior management and other key employees can be difficult, and there can be no assurance we will continue to be successful in attracting or retaining qualified personnel in the future. Our success depends significantly on the continued individual and collective contributions of our senior management team and key employees. The individual and collective efforts of these employees are important as we continue our efforts to develop leronlimab. The loss of the services of a member of our senior management team or the inability to hire and retain experienced management personnel could harm our business and operations. Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations require us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in our Form 10-K for that fiscal year. As discussed in more detail in Item 9A of this Form 10-K, management determined that there was a material weakness in our internal control over financial reporting for periods beginning with the second fiscal quarter of 2021, and that our controls and procedures were ineffective at May 31, 2022. Any failure to maintain our controls or operation of these controls, could harm our operations, decrease the reliability of our financial reporting, and cause us to fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price. Our information technology systems could fail to perform adequately or experience data corruption, cyber-based attacks, or network security breaches. We rely on information technology networks and systems, including the internet, to process, transmit, and store electronic information. In particular, we depend on our information technology infrastructure to effectively manage our business data, finance, and other business processes and electronic communications between our personnel and corporate partners. If we do not allocate and effectively manage the resources necessary to build and sustain an appropriate technology infrastructure, security breaches or system failures of this infrastructure may result in system disruptions, shutdowns, or unauthorized disclosure of confidential information including patient information in violation of HIPAA requirements. In addition, COVID-19 has led to increased remote work by our employees, contractors, and other corporate partners. As a result, we rely on information technology systems that are outside our direct control. These systems are potentially vulnerable to cyber-based attacks and security breaches. In addition, cyber criminals are increasing their attacks on individual employees, including scams designed to trick victims into transferring sensitive data or funds or stealing credentials that compromise information systems. If one of our employees falls victim to these attacks, or our information technology systems or those of our partners are compromised, our operations could be disrupted, or we may suffer financial loss, loss or misappropriation of intellectual property or other critical assets, reputational harm, and regulatory fines and intervention, and our business and financial condition may be adversely affected. Our business, operating results and financial condition could be negatively affected as a result of litigation and other demands made by stockholders. We are and have been involved in legal proceedings and other claims brought by stockholders, including class actions alleging securities law violations, derivative actions alleging waste of corporate assets, unjust enrichment, and other breaches of fiduciary duties by former directors and current and former executive officers, and demands by activist investors. Similar actions may occur in the future. While the Company welcomes opinions of all stockholders, responding to demands, litigation, proxy contests or other initiatives by stockholders or activist investors may divert the attention of our Board of Directors, management team, and employees from their regular duties in the pursuit of business opportunities to enhance stockholder value. Such actions may also cause our existing or potential employees, strategic partners and stockholders to have questions or doubts about the future direction of the Company and may provide our competitors with an opportunity to exploit these concerns. Such circumstances could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. Refer to Part II, Item 8, Note 10, Commitments and Contingencies – Legal Proceedings in this Form 10-K for additional information. Class-action litigation filed against us could harm our business, and insurance coverage may not be sufficient to cover all related costs and damages. The market price of our common stock has historically experienced and may continue to experience significant volatility. In the past, we had been subject to putative class action lawsuits in which plaintiffs cited, among other things, volatility of our common stock. Litigation, whether or not successful, may result in diversion of our management’s attention and resources, and may require us to incur substantial costs, some of which may not be covered in full by insurance, which could harm our business and financial condition. During the course of litigation, there may be negative public announcements of the results of hearings, motions or other interim proceedings or developments, which could have a further negative effect on the market price of our common stock. Refer to Part II, Item 8, Note 10, Commitments and Contingencies – Legal Proceedings of this Form 10-K for further information. We are subject to the oversight by the SEC and other regulatory agencies. Investigations by those agencies could divert management’s focus and have a material adverse effect on our reputation and financial condition. We are subject to the regulation and oversight by the SEC and state regulatory agencies, in addition to the FDA and other federal regulatory agencies. As a result, we may face legal or administrative proceedings by these agencies. We have received subpoenas from the SEC and the U.S Department of Justice (the “DOJ”) requesting documents and information concerning, among other matters, leronlimab, our public statements regarding the use of leronlimab as a potential treatment for COVID-19, HIV, and triple-negative breast cancer, related communications with the FDA, investors, and others, litigation involving former employees, our retention of investor relations consultants, and trading in our securities. Certain of our executives have received subpoenas concerning similar issues and may be interviewed by the DOJ or SEC in the future. We are cooperating fully with these non-public, fact-finding investigations. In addition, we have received a Warning Letter from the FDA in which FDA asserted, among other matters, that statements made by our former CEO and President in a video interview created a misleading impression regarding the safety and efficacy of leronlimab. The Company is working closely with the FDA to resolve this matter and take the proper corrective actions. We are unable to predict the effect of any governmental investigations on our business, financial condition or reputation. In addition, publicity surrounding any investigation, even if ultimately resolved in our favor, could have a material adverse effect on our business. Refer to Part II, Item 8, Note 10, Commitments and Contingencies – Legal Proceedings of this Form 10-K for further information. We have been notified by Samsung of alleged breaches of our payment obligations to Samsung, which ultimately could result in termination of our agreements for manufacturing of our drug product and related services we expect Samsung to provide under the agreements. During fiscal 2022, Samsung communicated to us regarding alleged breaches of our agreements with Samsung relating to past due balances totaling approximately $38.1 million. The Company has been pursuing negotiations with Samsung regarding potential approaches to resolve the issues short of litigation, including proposals by each party for an alternative schedule of payments, and proposals by the Company to satisfy a portion of the Company’s payment obligations in the form of equity securities of the Company and to postpone or cancel provisions in the agreements calling for the manufacturing of additional drug product. There can be no assurance that we will be able to address the issues raised by Samsung or avoid being found to be in breach of our agreements with Samsung. Failure to reach mutual agreement to resolve the issues may ultimately result in termination of our agreements with Samsung, which could jeopardize our ability to properly store our inventories of drug product and manufacture additional drug product when needed. Refer to Part II, Item 8, Note 10, Commitments and Contingencies of this Form 10-K for additional information. Certain agreements and related license agreements require us to make significant milestone, royalty, and other payments, which will require additional financing and, in the event we do commercialize leronlimab, decrease the revenues we may ultimately receive on sales. To the extent that such milestone, royalty and other payments are not timely made, the counterparties to such agreements in certain cases have repurchase and termination rights thereunder with respect to leronlimab. Under the Progenics Purchase Agreement, the PDL License, and the Lonza Agreement, we must pay to Progenics, AbbVie, and Lonza significant milestone payments, license fees for “system know-how” technology, and royalties related to leronlimab. In order to make these milestone and license payments, we will need to raise additional funds. In addition, our royalty obligations will reduce the economic benefits to us of any future sales, if any. To the extent that such milestone payments and royalties are not timely made, under their respective agreements, Progenics has certain repurchase rights relating to the assets sold to us, and AbbVie has certain termination rights relating to our license of leronlimab under the PDL License. For more information, refer to Part II, Item 8, Note 10, Commitments and Contingencies of this Form 10-K. If we are not able to obtain all required regulatory approvals for leronlimab, we will not be able to commercialize our primary product candidate, which would materially and adversely affect our business, financial condition and stock price. Clinical testing is expensive, difficult to design and implement, may take many years to complete, and its outcome is uncertain. Success in early phases of pre-clinical and clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A failure of one or more of our clinical trials may occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize leronlimab, or any future drug candidate. The research, testing, manufacturing, labeling, packaging, storage, approval, sale, marketing, advertising and promotion, pricing, export, import and distribution of drug products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, with regulations differing from country to country. We are not permitted to market a drug candidate as prescription pharmaceutical products in the United States until we receive approval of a BLA from the FDA, or in foreign markets until we receive the requisite approval from comparable regulatory authorities in foreign countries. In the United States, the FDA generally requires the completion of clinical trials of each drug to establish its safety and efficacy, and extensive pharmaceutical development to ensure its quality before a BLA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of the large number of drugs in development, only a small percentage result in the submission of BLA to the FDA and even fewer are eventually approved for commercialization. Receipt of necessary regulatory approval for the use of leronlimab for one or more indications is subject to a number of risks, including the following: • the FDA or comparable foreign regulatory authorities or institutional review boards (“IRBs”) may disagree with the design or implementation of our clinical trials, • we may not be able to provide acceptable evidence of the safety and efficacy of our drug candidate, • the results of our clinical trials may not be satisfactory or may not meet the level of statistical or clinical significance required by the FDA, the European Medicines Agency (“EMA”), or other comparable foreign regulatory authorities for marketing approval, • the dosing of our drug candidate in a particular clinical trial may not be at an optimal level, • patients in our clinical trials may suffer adverse effects for reasons that may or may not be related to our drug candidate, • the data collected from clinical trials may not be sufficient to support the submission of an application for marketing approval in the United States or elsewhere, • the FDA or comparable foreign regulatory authorities may not approve the manufacturing processes or facilities of third-party manufacturers with which we contract for clinical and commercial supplies, and • the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval. As discussed in Part I, Item I, Business, the Company received a Refusal to File letter from the FDA regarding its BLA submission for leronlimab as a combination therapy with highly active antiretroviral therapy (“HAART”) for highly treatment-experienced HIV patients. The Company also announced that the FDA placed a full clinical hold on its COVID-19 program and a partial clinical hold on its HIV program in the United States. Failure to obtain regulatory approval for leronlimab for the foregoing or any other reasons will prevent us from commercializing such product candidate as a prescription product, and our ability to generate revenue will be materially impaired. We cannot guarantee that regulators will agree with our assessment of the results of our clinical trials or that such trials will be considered by regulators to have shown safety or efficacy of our product candidate. The FDA, EMA and other regulators have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional clinical trials, or pre-clinical or other studies. In addition, varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate. Additionally, we have limited experience in filing the applications necessary to gain regulatory approvals and expect to continue to rely on consultants and our CROs to assist us in this process. Securing FDA approval requires the submission of pre-clinical, clinical and/or pharmacokinetic data, information about product manufacturing processes and inspection of facilities and supporting information for each therapeutic indication to establish a product candidate’s safety and efficacy for each indication. Our drug candidate may prove to have undesirable or unintended side effects, toxicities, or other characteristics that may preclude us from obtaining regulatory approval or prevent or limit commercial use with respect to one or all intended indications. If we experience any delays in obtaining approval or if we fail to obtain approval of our product candidate, the commercial prospects for our product candidate may be harmed, and our ability to generate revenues will be materially impaired. We are substantially dependent on the success of leronlimab. If we, either alone or with collaborators, are unable to complete the clinical development of, obtain and maintain marketing approval for or successfully commercialize leronlimab, including with respect to adequate coverage and reimbursement, or if we experience significant delays in doing so, our business could be substantially harmed. We currently have no products approved for sale and are investing a significant portion of our resources in the development of leronlimab for marketing approval in the United States and potentially other countries. Our prospects are substantially dependent on our ability to develop, obtain marketing approval for, and successfully commercialize leronlimab in the United States in one or more disease indications. The success of our Company will depend on a number of factors, including the following: • a safety, tolerability and efficacy profile for leronlimab that is satisfactory to the FDA and potential foreign regulatory authorities, • timely receipt of marketing approvals for leronlimab from applicable regulatory authorities, including the FDA, • the performance of the CROs we have hired to manage our clinical studies and the resulting data, as well as that of our collaborators and other third-party contractors, • obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally, including our ability to maintain our license agreement with Abbvie, as successor to Progenics Pharmaceuticals, Inc., • protection of our rights in our intellectual property portfolio, including our ability to maintain our license agreement with AbbVie, • a continued acceptable safety profile for leronlimab following any marketing approval, • commercial acceptance of leronlimab by patients, the medical community and third-party payors, and • our ability to position leronlimab to compete with other therapies. Many of these factors are beyond our control. If we are unable to develop, receive marketing approval for, and successfully provide for commercialization of leronlimab on our own or through third parties, or if we experience delays as a result of any of these factors or otherwise, our business could be substantially harmed. If we are unable to obtain adequate coverage and reimbursement for leronlimab, or if healthcare reform or other proposals affect the availability of coverage and reimbursement for leronlimab, our business could be substantially harmed. The biopharmaceutical industry is intensely competitive and our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of product candidates. For example, there are current treatments that are quite effective at controlling the effects of HIV and we expect that new developments by other companies and academic institutions in the areas of HIV treatment will continue. Similarly, new or improved therapies in the oncology and immunology arenas are the subject of frequent announcements. If approved for marketing by the FDA, depending on the approved clinical indication, leronlimab may be competing with existing and future treatments. Our competitors may: • develop drug candidates and market drugs that increase the levels of safety or efficacy that our product candidate will need to show in order to obtain regulatory approval, • develop drug candidates and market drugs that are less expensive or more effective than ours, • commercialize competing drugs before we or our partners can launch any products we are working to develop, • hold or obtain proprietary rights that could prevent us from commercializing our products, and • introduce therapies or market drugs that render our product candidate obsolete. We expect to compete against large pharmaceutical and biotechnology companies and smaller companies that are collaborating with larger pharmaceutical companies, new companies, academic institutions, government agencies, and other public and private research organizations. These competitors, in nearly all cases, operate research and development programs that have substantially greater financial resources than we do. Our competitors also have significantly greater experience in: • developing drug and other product candidates, • undertaking pre-clinical testing and clinical trials, • building relationships with key customers and opinion-leading physicians, • obtaining and maintaining the FDA and other regulatory approvals, • formulating and manufacturing drugs, • launching, marketing and selling drugs, and • providing management oversight for all of the above-listed operational functions. If we fail to achieve superiority over other existing or newly developed treatments, we may be unable to obtain regulatory approval. If our competitors market drugs that are less expensive, safer, or more effective than our product candidate, or which gain or maintain greater market acceptance, we may not be able to compete effectively. We may seek to enter into a strategic alliance with a pharmaceutical company for further development and approval of our product candidate in one or more indications. Strategic alliances could potentially provide us with additional funds, expertise, access, and other resources in exchange for exclusive or non-exclusive licenses or other rights to the technologies and products that we are currently developing or may explore in the future. We cannot give any assurance we will be able to enter into strategic relationships with a pharmaceutical company or other strategic partner in the near future or at all, or maintain our current relationships. In addition, we cannot assure that any agreements we may reach will achieve our goals or be on terms that prove to be economically beneficial to us. We anticipate that if we were to enter into strategic or contractual relationships, we may become dependent on the successful performance of our partners or counterparties. If they fail to perform as expected, such failure could adversely affect our financial condition, lead to increases in our capital needs, or hinder or delay our development efforts. Known third-party patent rights could delay or otherwise adversely affect our planned development and sale of leronlimab. We have identified but not exhaustively analyzed other patents that could relate to our proposed products. We are aware of patent rights held by a third party that may cover certain compositions within our leronlimab candidate. The patent holder has the right to prevent others from making, using, or selling a drug that incorporates the patented compositions, while the patent remains in force. While we believe that the third party’s patent rights will not affect our planned development, regulatory clearance, and eventual commercial production, marketing, and sale of leronlimab, there can be no assurance that this will be the case. We believe the relevant patent expires before we expect to commercially introduce leronlimab. In addition, the Hatch-Waxman exemption to U.S. patent law permits all uses of compounds in clinical trials and for other purposes reasonably related to obtaining the FDA clearance of drugs that will be sold only after patent expiration; we believe our use of leronlimab in those FDA-related activities would not infringe the patent holder’s rights. However, were the patent holder to assert its rights against us before expiration of the patent for activities unrelated to the FDA clearance, the development and ultimate sale of a leronlimab product could be significantly delayed, and we could incur expenses for defending a patent infringement suit and for damages that may relate to periods prior to the patent’s expiration. In connection with our acquisition of rights to leronlimab, our patent counsel conducted a freedom-to-operate search that identified other patents that could relate to our proposed leronlimab candidate. Based upon research and analysis to date, we believe leronlimab likely does not infringe those patent rights. If any of the holders of the identified patents were to assert patent rights against us, the development and sale of leronlimab could be delayed, we could be required to spend time and money defending patent litigation, and we could incur liability for infringement or be enjoined from producing our products if the patent holders prevailed in an infringement suit. We have few employees dedicated to quality control and CMC activities. We rely and intend to continue to rely on third parties to supplement many of these critical functions. When we conduct clinical trials, we contract with third party full service CROs to manage our trials. As a result, we are dependent on consultants and strategic partners in our development activities, and it may be administratively challenging for us to monitor and coordinate these relationships. If we do not appropriately manage our relationships with third parties, we may not be able to successfully manage development, testing, and preparation of regulatory filings for our product or commercialize any approved product, which would have a material and adverse effect on our business, financial condition and stock price. We rely on third parties, such as CROs and third-party manufacturers, to conduct clinical trials for our product candidate, leronlimab, and to produce our pre-clinical and clinical product candidate supplies. Such third parties are subject to significant regulation. A failure by such third-parties to properly and successfully perform their obligations to us, or failure of manufacturers on which we rely to meet regulatory requirements, may result in our inability to obtain regulatory approvals for our product candidate, and/ or to produce supplies for us with such delay causing us to impair our ability to complete our clinical trials or commercialize our product candidate. We are dependent on third parties for important aspects of our product development strategy. We do not have the required financial and human resources to carry out independently the pre-clinical and clinical development of our current product candidate. We also do not have capability or resources to manufacture, store, market or sell our current product candidate. As a result, we contract with and rely on third parties to perform such important functions. We, in consultation with our collaborators, where applicable, design the clinical trials for our product candidate, leronlimab, but we rely on CROs and other third parties to perform many of the functions in managing, monitoring and otherwise carrying out many of these trials. We compete with larger companies for the resources of these third parties. Although we plan to continue to rely on these third parties to conduct our ongoing and any future clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with regulations and standards, including good clinical practices, for designing, conducting, monitoring, recording, analyzing, and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. The third parties on whom we rely generally may terminate their engagements with us at any time. If these third parties do not successfully carry out their duties under their agreements with us, if the quality or accuracy of the data they obtain, process and analyze is compromised for any reason or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines, our clinical trials may experience delays or may fail to meet regulatory requirements. If our clinical trials do not meet regulatory requirements or if these third parties need to be replaced, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, or if problems develop in our relationships with third parties, or if such parties fail to perform as expected, it could lead to delays or lack of progress, significant cost increases, changes in our strategies, and even failure of our product initiatives, potentially resulting in our inability to obtain regulatory approval of our product candidate and harming our reputation. Refer to Part II, Item 8, Note 10, Commitments and Contingencies – Amarex Dispute for additional information. As we stated earlier, we do not have capability or resources to manufacture, store, market or sell our current product candidate, and we do not own or operate manufacturing facilities for the production of clinical or commercial quantities of our product candidate; further, we have no plans to build our own clinical or commercial scale manufacturing capabilities. Therefore we relied, and anticipate to continue to do so in the future, upon third-party manufacturers to perform these services for us. Reliance on third-party manufacturers entails risks such as reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement because of factors beyond our control, failure of the third party to accept orders to supply raw materials, and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities. In addition, all entities involved in the preparation of product candidates for clinical trials or commercial sale, including any contract manufacturers, are subject to extensive regulation which require that our product candidate be manufactured according to current good manufacturing practices (the “cGMP”), or similar foreign standards. These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. We or our contract manufacturers must supply all necessary documentation in support of a BLA on a timely basis and must adhere to the FDA’s current Good Laboratory Practice and cGMP regulations enforced through its facilities inspection program. Failure by our third-party manufacturers to comply with cGMP or failure to scale-up manufacturing processes as needed, including any failure to deliver sufficient quantities of product candidate in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of our product candidate. In addition, such failure could be the basis for action by the FDA to withdraw approvals for any product candidate previously granted to us and for other regulatory action, including recall or seizure, fines, imposition of operating restrictions, total or partial suspension of production or injunctions. Any significant delay in the supply of a product candidate or the raw material components thereof for an ongoing clinical trial or potential commercial launch due to the need to replace a third-party manufacturer could considerably delay completion of future clinical trials, product testing and potential regulatory approval of our product candidate. Any manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations. Further, if we or our third-party manufacturers fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new product, or revocation of a pre-existing approval. If we are unable to arrange for third-party manufacturing sources, or to do so on commercially reasonable terms, we may not be able to complete development of our product candidate or to market it. Any unanticipated disruption of our relationship with a contract manufacturer could delay shipment of our products and increase our manufacturing and storage costs. Refer to Part II, Item 8, Note 10, Commitments and Contingencies – Commitments with Samsung BioLogics Co., Ltd. Our success depends substantially upon our ability to obtain and maintain intellectual property protection relating to our product candidate. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the claim scope of patents, our ability to enforce our existing patents and to obtain and enforce patents that may issue from any pending or future patent applications is uncertain and involves complex legal, scientific and factual questions. To date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology and pharmaceutical patents. We have pending patents for certain indications for our core product candidate and continue to seek patent coverage for various potential therapeutic applications for leronlimab. However, we cannot be sure that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents do issue, we cannot be sure that the claims of these patents will be held valid or enforceable by a court of law, will provide us with any significant protection against competing products, or will afford us a commercial advantage over competitive products. If one or more products resulting from our product candidate is approved for sale by the FDA and we do not have adequate intellectual property protection for those products, competitors could duplicate them for approval and sale in the United States without repeating the extensive testing required of us or our partners to obtain the FDA approval, once our data exclusivity period has expired. If we are sued for infringing on third-party intellectual property rights, it will be costly and time-consuming, and an unfavorable outcome would have a significant adverse effect on our business. We may also undertake infringement or other legal proceedings against third parties, causing us to spend substantial resources on litigation and exposing our own intellectual property portfolio to challenge. Our ability to commercialize our product candidate depends on our ability to use, manufacture and sell that product without infringing on the patents or other proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the monoclonal antibody therapeutic area in which we are developing our product candidate and seeking new potential product candidates. There may be existing patents, unknown to us, on which our activities with our product candidate could infringe. If a third party claims our actions or products or technologies infringe on its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including, but not limited to: • infringement and other intellectual property claims that, even if meritless, can be costly and time-consuming, delay the regulatory approval process and divert management’s attention from our core business operations, • substantial damages for infringement if a court determines that our products or technologies infringe a third party’s patent or other proprietary rights, • a court prohibiting us from selling or licensing our products or technologies unless the holder licenses the patent or other proprietary rights to us, which it is not required to do, and • even if a license is available from a holder, we may have to pay substantial royalties or grant cross-licenses to our patents or other proprietary rights. If any of these events occur, it could significantly harm our operations and financial condition and negatively affect our stock price. Additionally, although no third party asserted a claim of infringement against us, others may hold proprietary rights that could prevent our product candidate from being marketed. Any patent-related legal action against us claiming damages and seeking to enjoin commercial activities relating to our product candidate or our processes could subject us to potential liability for damages and require us to obtain a license to continue to manufacture or market leronlimab or any other product candidates. We cannot predict whether we would prevail in any such actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. Further, we cannot be sure that we could redesign leronlimab or any other product candidates or processes to avoid infringement, if necessary. Accordingly, an adverse determination in a judicial or administrative proceeding, or the failure to obtain necessary licenses, could prevent us from developing and commercializing leronlimab or another product candidate, which could harm our business, financial condition and operating results. We may come to believe that third parties are infringing on our patents or other proprietary rights. To prevent infringement or unauthorized use, we may need to file infringement and/or misappropriation suits, which are very expensive and time-consuming and would distract management’s attention. Also, in an infringement or misappropriation proceeding, a court may decide that one or more of our patents is invalid, unenforceable, or both, in which case third parties may be able to use our technology without paying license fees or royalties. Even if the validity of our patents is upheld, a court may refuse to stop the other party from using the technology at issue on the ground that the other party’s activities are not covered by our patents. Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales practice and disclosure requirements on certain brokers-dealers who engage in transactions involving a “penny stock.” The SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our common stock is covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the prospective investor with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the investor’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock that is not otherwise exempt, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules may discourage investor interest in and limit the marketability of our common stock. The trading price of our common stock has been and could remain volatile, and the market price of our common stock may decrease. The market price of our common stock has historically experienced and may continue to experience significant volatility. From June 1, 2021 through May 31, 2022, the market price of our common stock has fluctuated from a high of $2.46 per share to a low of $0.24 per share, and our stock price reached a 52-week high of $2.46 on September 22, 2021. The volatile nature of our common share price may cause investment losses for our stockholders. In addition, the market price of stock in small capitalization biotech companies is often driven by investor sentiment, expectation and perception, all of which may be independent of fundamental, objective and intrinsic valuation metrics or traditional financial performance metrics, thereby exacerbating volatility. In addition, our common stock is quoted on the OTCQB of the OTC Markets marketplace, which may increase price quotation volatility and could limit liquidity, all of which may adversely affect the market price of our shares. Since our inception, we have been insolvent and have required debt and equity financing to maintain operations. We expect our debt service obligations and our need for additional funding to finance operations will cause additional substantial dilution to our existing stockholders and could adversely affect the trading price of our common stock. Since our inception, we have not achieved cash flows from revenues sufficient to cover basic operating costs. As a result, we have relied heavily on debt and equity financing. Equity financing, including securities convertible into equity, in particular has had a dilutive effect on our common stock, which has hampered our ability to attract reasonable financing terms. The terms of our convertible note financings require us to make periodic debt repayments to reduce the outstanding balance of our debt. As a result, we likely will be required to use a significant portion of our available cash to repay our debt and satisfy other payment obligations, which will reduce the amount of capital available to finance our operations and other business activities. We expect to continue to seek to exchange all or part of our outstanding debt for shares of common stock. If the Company enters into any future exchange offers, they will likely be negotiated at a discount to the market price of our common stock and will cause additional dilution to our existing stockholders. If the convertible noteholders sell the common stock they receive in exchange for outstanding debt, this could result in a decline in our stock price. In addition, the exercise of our outstanding warrants and stock options, which are exercisable for or convertible into shares of our common stock, and the exercise of which we have encouraged through public or private warrant exchange offers from time to time, would dilute our existing common stockholders. Issuances of additional equity or convertible debt securities will continue to reduce the percentage ownership of our then-existing stockholders. We may also be required to grant potential investors new securities rights, preferences or privileges senior to those possessed by our then-existing stockholders in order to induce them to invest in our company. The issuance of these senior securities may adversely affect the holders of our common stock as a result of preferential dividend and liquidation rights over the common stock and dilution of the voting power of the common stock. As the result of these and other factors, the issuance of additional equity or convertible debt securities may have an adverse impact on the market price of our common stock. For the foreseeable future, we will be required to continue to rely on debt and equity financing to maintain our operations. Our certificate of incorporation allows for our Board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock. Our Board has the authority to fix and determine the relative rights and preferences of preferred stock. Currently, our Board has the authority to designate and issue approximately 4.9 million additional shares of our preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of another series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock, and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our Board could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. Anti-takeover provisions of our certificate of incorporation, our bylaws, and Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult, and may prevent attempts by our stockholders to replace or remove the current members of our Board and management. Certain provisions of our amended and restated certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change of control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for shares of common stock. Furthermore, these provisions could frustrate attempts by our stockholders to replace or remove members of our Board. These provisions also could limit the price that investors might be willing to pay in the future for our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Among other things, these provisions: • allow us to designate and issue shares of preferred stock, without stockholder approval, that could adversely affect the rights, preferences and privileges of the holders of our common stock and could make it more difficult or less economically beneficial to acquire or seek to acquire us, • provide that special meetings of stockholders may be called only by the Board acting pursuant to a resolution approved by the affirmative majority of the entire Board, • do not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority stockholders to effect changes in the composition of our Board. In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of our voting stock, from merging or combining with us for a prescribed period of time. We do not expect cash dividends to be paid on our common shares for the foreseeable future. We have never declared or paid a cash dividend on our common shares and we do not anticipate declaring or paying dividends on our common shares for the foreseeable future. We expect to use future financing proceeds and earnings, if any, to fund operating expenses. Consequently, common stockholders’ only opportunity to achieve a return on their investment is if the price of our stock appreciates and they sell their shares at a profit. We cannot assure common stockholders of a positive return on their investment when they sell their shares or that stockholders will not lose the entire amount of their investment. Item 1B. UNRESOLVED STAFF COMMENTS Item 2. PROPERTIES Our principal office location is 1111 Main Street, Suite 660, Vancouver, Washington 98660. The space is subject to a lease effective through April 30, 2026. Item 3. LEGAL PROCEEDINGS For a description of material legal proceedings, refer to Part II, Item 8, Note 10, Commitments and Contingencies of this Form 10-K. Item 4. MINE SAFETY DISCLOSURES Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is quoted on the OTCQB of the OTC Markets marketplace under the trading symbol CYDY. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Historically, trading in our stock has been limited and the trades that occurred cannot be characterized as those in the established public trading market. As a result, the trading prices of our common stock may not reflect the price that would result if our stock was more actively traded. The stock performance graph has been prepared assuming that $100 was invested on June 1, 2017 in our common stock. The stock price performance reflected in the graph may not be indicative of future price performance. The number of record holders of our common stock on July 31, 2022 was approximately 993. Holders of our common stock are entitled to receive dividends if declared by our Board. While we have no contractual restrictions or restrictions in our governing documents on our ability to pay dividends, other than the preferential rights provided to the holders of our outstanding preferred stock, we have never paid cash dividends to holders of common stock and do not anticipate paying any in the foreseeable future as we retain earnings, if any, for use in our operations. Also, under Section 170 of the Delaware General Corporation Law (the “DGCL”), we are permitted to pay dividends only out of capital surplus or, if none, out of net profits for the fiscal year in which the dividend is declared or net profits from the preceding fiscal year. As of May 31, 2022, the Company had an accumulated deficit of approximately $766.1 million and had net loss in each fiscal year since inception and therefore is prohibited from paying any dividends whether in cash, other property, or in shares of capital stock. Refer to Part II, Item 8, Note 6, Convertible Instruments and Accrued Interest for additional information. Item 6. [Reserved] Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the other sections of this Form 10-K, including our consolidated financial statements and related notes set forth in Part II, Item 8. This discussion and analysis contains forward-looking statements including information about possible or assumed results of our financial condition, operations, plans, objectives and performance that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated and set forth in such forward-looking statements. See Forward-Looking Statements preceding Part I, Item 1A, Risk Factors of this Form 10-K. The Company is a biotechnology company focused on the clinical development and potential commercialization of its product candidate, leronlimab (PRO 140), which is being studied for the treatment of HIV infection, NASH, oncology and other immunological indications. Our current business strategy is to seek the removal of the partial and full clinical holds recently imposed by the US FDA in March 2022, evaluate feasibility and timelines for the resubmission of our BLA for leronlimab as a combination therapy for highly treatment-experienced HIV patients, and to seek to further develop leronlimab for other HIV-related indications. We also seek to advance our clinical development of leronlimab for various forms of cancer, including metastatic triple negative breast cancer (“mTNBC”) and other solid tumors, as well as to continue to evaluate NAFLD and NASH, and concurrently to explore other potential immunologic indications for leronlimab. As further discussed in Part II, Item 8, Note 2, Summary of Significant Accounting Policies - Inventories, Note 3, Inventories, net, and Note 10, Commitments and Contingencies, the Company capitalized procured or produced pre-launch inventories in preparation for product launches. The Company considers anticipated future sales, shelf-lives, and expected approval date when evaluating realizability of pre-launch inventories. The shelf-life of a product is determined as part of the regulatory approval process; however, in assessing whether to capitalize pre-launch inventory, the Company considers the stability data of all inventories. As inventories approach their shelf-life expiration, the Company may perform additional stability testing to determine if the inventory is still viable, which may result in an extension of its shelf-life. Further, in addition to performing additional stability testing, certain raw materials inventory may be sold in its then current condition prior to reaching expiration. In determining whether pre-approval inventory remains salable, the Company considers a number of factors, including potential delays in obtaining regulatory approval, the introduction of competing products that may negatively impact the demand for our product, the likelihood that physicians would be willing to prescribe leronlimab to their patients, and whether the target patient population would be willing to try leronlimab as a new therapy. Fiscal 2022 Overview Fiscal 2022 was a transitional year for the Company which included: ● Notification that the FDA had placed our HIV and COVID-19 programs on partial and full clinical holds, respectively; ● Successfully avoiding an attempted proxy contest seeking to replace the Company’s Board of Directors; ● Strengthening the Company’s Board of Directors and Scientific Advisory Board through the addition of highly-qualified and experienced members; ● Leadership transitions including the termination of the Company’s former President and CEO in January 2022 and the hiring of a biotech veteran as its new President in July 2022; ● Completion of COVID-19 Long-Haulers, NASH, and oncology studies; ● Entering into a research agreement with a leading US cancer research institution; ● Resubmission of two of the three sections of the HIV BLA; ● Acceptance of five articles into various scientific journals; ● Strengthening our pharmacovigilance program, in part in response to the clinical holds placed on the Company by the FDA; ● Settlement of an ongoing legal disputes with the Company’s former CMO and the 2020 shareholder derivative suit; and ● Completion of a number of private offerings to continue to fund the Company’s progress. Clinical and corporate development highlights are provided below. HIV BLA and Clinical Developments The remaining BLA section to be completed and submitted remains in progress as of the date of this report. The Company is in a dispute with its former contract research organization (“CRO”); the Company obtained an order requiring the CRO to release the Company’s clinical data related to the BLA, which the CRO had been withholding, thereby preventing the Company from completing necessary clinical data submissions to the FDA. The order granted the Company access to the data and the right to perform an audit of the CRO’s services. In March 2022, the FDA notified the Company that it had placed a partial clinical hold on the Company’s HIV program; the Company was not enrolling any new patients in the trials placed on hold. The partial clinical hold on the HIV program impacted patients currently enrolled in HIV extension trials. The affected patients have been transitioned to other available therapeutics. No clinical studies can be initiated or resumed until the partial clinical hold is resolved, which may affect our ability to resubmit the BLA. The Company’s efforts are focused on activities that will allow us to resolve the partial clinical hold and resume the BLA resubmission process. The Company will update the status of its anticipated resubmission of the clinical section of the BLA once it determines a date for resubmission. Earlier in fiscal 2022, the Company completed the following: ● In June 2021, an animal study was published in Nature Communications regarding the use of leronlimab for HIV PrEP. ● In July 2021, the Company submitted its dose justification draft report to the FDA in connection with the resubmission of its BLA. ● In August 2021, the Company received guidance from the FDA with regard to its previously submitted HIV BLA draft dose justification report. ● In October 2021, the FDA accepted a revised rolling review timeline for resubmitting the BLA, allowing for contemporaneous review by the FDA for sections as they are submitted. ● In November 2021, the Company resubmitted two of the three integral sections of the BLA for review by the FDA, the non-clinical and manufacturing sections. NASH Clinical Developments There is currently no approved drug for NASH, and liver disease is one of the leading causes of non-AIDS-related death in HIV patients. The Company is identifying the next steps in clinical development and is exploring potential business opportunities to continue the investigation of leronlimab in the NASH indication and HIV patients with NASH. In October 2019, the FDA granted clearance to CytoDyn to proceed with a Phase 2 study to test whether leronlimab may control the effects of liver fibrosis associated with NASH. This trial was converted to an exploratory trial with an open label 350mg arm. The first patient was enrolled in December 2020. Leronlimab 700mg did not reduce mean change in PDFF and cT1 from baseline to week 14 versus placebo and did not meet its primary or secondary endpoints. Leronlimab 350mg significantly reduced mean change in PDFF and cT1 from baseline to week 14 versus placebo. Despite increased fibro-inflammation, in patients with moderate and severe cT1 values at baseline, leronlimab 350mg showed significantly reduced cT1 from baseline to week 14 versus placebo. Cancer Clinical Developments During 2021, the Company reported results from mTNBC patients who had failed at least two lines of previous therapy in the Compassionate Use program, our Phase 1b/2 clinical trial, and our Basket trial. The data were insufficient to support resubmission of a Breakthrough Therapy designation request without additional data. The Company is identifying the next steps in clinical development and potential business opportunities to continue the development of this indication, including potentially facilitating research in leronlimab’s role in oncology at various academic institutions. ● In July 2021, the Company’s Phase 1b clinical trial for mTNBC advanced to Phase 2 of the trial. ● In August 2021, the Company’s final mTNBC report indicated an increase in 12-month overall survival and 12-month modified progression-free survival in certain patients. ● In October 2021, the Company signed a research agreement with a leading cancer research institution, the University of Texas MD Anderson Cancer Center, to evaluate the potential synergistic therapeutic efficacy of leronlimab in combination with immune checkpoint blockade. ● In January 2022, the FDA notified the Company that its mTNBC data did not demonstrate a substantial improvement over existing mTNBC therapies in the limited number of patients provided; therefore, it could not grant Breakthrough Therapy designation. The FDA indicated that the Company may submit a new request with additional clinical evidence that demonstrates a substantial improvement in second-line treatment of mTNBC over existing therapies. COVID-19 Clinical Developments In March 2022, the FDA notified the Company it had placed a full clinical hold on the Company’s COVID-19 program. The Company was not conducting any COVID-19 trials in the United States at the time the hold was placed, and elected to voluntarily withdraw the respective IND. The Company will need to resolve the clinical hold and submit another IND before initiating any future COVID-19 trials in the United States. Further, the Company had elected to pause its Brazil COVID-19 trials pending results from its previously scheduled data safety monitoring board (“DSMB”) meeting in early April 2022. In April 2022, the DSMB for the Brazilian COVID-19 clinical trials met and recommended that the Brazilian COVID-19 trials, previously paused by the Company, may continue based on the review of the interim patient safety data from the clinical trials. The Company is in the process of considering strategic alternatives prior to commencing the enrollment of new patients in the Brazilian trials. Earlier in the year, the Company completed the following: ● In June 2021, the Company received its first purchase order from Chiral Pharma Corporation (“Chiral”) to treat critically ill COVID-19 patients in the Philippines under a Compassionate Special Permit (“CSP”). This order was fulfilled in August 2021. In September 2021, the Company received two additional purchase orders from Chiral in the aggregate amount of approximately $0.2 million to continue to treat critically ill COVID-19 patients in the Philippines under a CSP. These orders were shipped during the quarter ended November 30, 2021. ● In July 2021, the Company was granted a patent by the U.S. Patent and Trademark Office for methods of treating COVID-19. ● In August 2021, the Company received clearance from Brazil’s ANVISA to commence its Phase 3 trial for severe COVID-19 patients. The trial was conducted in up to 35 clinical sites with 612 patients. The first patient was treated in this trial in September 2021. Also in September 2021, the Company received clearance from Brazil’s ANVISA to commence its pivotal Phase 3 trial in critically ill COVID-19 patients. The first patient was treated in this trial in October 2021. In January 2022, the Board of Directors terminated the employment of Nader Z. Pourhassan, Ph.D. as President and CEO of the Company; he is also no longer a member of the Board of Directors. A committee of three Board members was appointed to initiate the search for a new CEO culminating in the appointment of Cyrus Arman, Ph.D., MBA as President effective July 9, 2022. Antonio Migliarese, the Company’s Chief Financial Officer, was appointed interim President and served in that role until July 9, 2022. During February 2022, the Board of Directors approved the continued appointments to the Scientific Advisory Board (“SAB”) of Dr. Hope Rugo (oncology), Dr. Mazen Noureddin (hepatology), Dr. Jonah Sacha (HIV), Dr. Norman Gaylis (rheumatology), and Dr. Eric Mininberg (oncology), as well as new SAB members Dr. Otto Yang (infectious diseases/immunology), Dr. Kabir Mody (oncology), Dr. Paul Edison (neuroscience/neuroinflammation), and Dr. Gero Hutter (hematology, oncology and transfusion medicine). In March 2022, the Board of Directors appointed Karen J. Brunke, Ph.D. as a director of the Company. Dr. Brunke has over 30 years of scientific, operational, clinical, senior executive, and corporate development experience with large and small biotechnology companies. Results of operations for the fiscal years ended May 31, 2022, 2021 and 2020 Fluctuations in Operating Results The Company’s operating results may fluctuate significantly depending on the outcomes of clinical trials, patient enrollment and/or completion rates in clinical trials, entering into new clinical trial protocols, and their related effect on research and development expenses, regulatory and compliance activities, activities related to preparation and resubmission of the HIV BLA, general and administrative expenses, professional fees, and legal proceedings and the related outcomes. As a predominantly non-revenue generating company, we require a significant amount of additional capital to continue to operate; therefore, we regularly conduct offerings to raise capital, which can create various forms of non-cash interest expense or expense related to amortization of issuance costs. Additionally, we periodically negotiate settlement of debt payment obligations in exchange for equity securities of the Company, and enter into private warrant exchanges which may create a non-cash charge upon extinguishment of debt and/or inducement expense. Our ability to continue to fund operations will depend on our ability to raise additional capital. Refer to Part 1, Item 1A, Risk Factors of this Form 10-K, Liquidity and Capital Resources, and Going Concern sections below. The results of operations were as follows for the periods presented: 2022/2021 Change (in thousands, except for per share data) (Restated) (1) (Revised) (1) Intangible asset impairment charge Inventory write-off Interest and other expense: Interest on convertible notes Loss on induced conversion Legal settlement Change in fair value of derivative liabilities Total interest and other expense Basic and diluted: Loss per share Weighted average common shares outstanding (1)See Note 2, Revision of Financial Statements, and Note 14, Restatement. Product revenue, Cost of goods sold (“COGS”) and Gross margin We recognized revenue of approximately $266.4 thousand and cost of goods sold of approximately $52.8 thousand in the fiscal year ended May 31, 2022; none in fiscal year 2021. Revenue was related to the fulfillment of orders under a Compassionate Special Permit (“CSP”) in the Philippines for the treatment of COVID-19 patients. Sales were made under the April 2021 exclusive supply and distribution agreement granting Chiral the right to distribute and sell up to 200,000 vials of leronlimab through April 15, 2022. At the time of the sales, FDA approval had not yet been received for leronlimab and the product sold was previously expensed as research and development expense due to its being manufactured prior to the commencement of the manufacturing of commercial grade pre-launch inventories. Therefore, COGS consists only of the costs of packaging and shipping of the vials, including related customs and duties. For additional information about revenue recognition and our inventories policies, refer to Note 2, Summary of Significant Accounting Policies, Revenue Recognition and Inventories to the consolidated financial statements of this Form 10-K. There were no revenues or cost of goods sold recognized in the fiscal years ended May 31, 2021 and 2020. General and administrative expenses General and administrative expenses consisted of the following: Salaries, benefits, and other compensation G&A expenses totaled approximately $44.3 million and $34.3 million during the fiscal years ended May 31, 2022 and 2021, respectively, representing an increase of approximately $10.0 million, or 29% over the previous fiscal year. The increase in G&A expenses over the 2021 fiscal year was primarily due to legal and consulting fees and increased insurance premiums, offset by decreases in salaries, benefits, and stock-based compensation. The increase in legal fees was related to the proxy contest and related lawsuits, SEC and DOJ investigations, the Pestell employment dispute, and the Amarex dispute. G&A expenses totaled approximately $34.3 million and $20.0 million during the fiscal years ended May 31, 2021 and 2020 respectively, representing an increase of approximately $14.3 million, or 72% over the preceding fiscal year. The increase in G&A expenses over the 2020 fiscal year was primarily due to employee compensation and related expenses, increased non-cash stock-based compensation, and higher professional services fees. Research and development expenses R&D expenses consisted of the following: License and patent fees R&D expenses totaled approximately $27.0 million during the fiscal year ended May 31, 2022, a decrease of approximately $26.4 million, or 49%, compared to the preceding fiscal year. The decrease year over year was primarily due to lower clinical trial expenses resulting from clinical trials predominantly being administered and completed in prior year related to US COVID-19, oncology, and NASH, the pausing of the Brazilian COVID-19 trials, and the closing of HIV extension studies due to clinical holds placed on the Company by the FDA. The future trend of R&D expenses is dependent on the timing of BLA resubmission and the FDA approval, if any, the timing of FDA clearance from clinical hold, if any, of our pivotal trial protocol for leronlimab as a monotherapy for HIV patients, the future clinical development of oncology and NASH indications, the outcome of pre-clinical studies for several other cancer indications, and potential outcomes of the Brazilian COVID-19 trials. Additionally, the Company concluded the majority of its CMC activities related to the HIV BLA during fiscal 2021, thus resulting in a significant expense decrease in fiscal 2022 as compared to the preceding year. R&D expenses totaled approximately $53.4 million during the fiscal year ended May 31, 2021, an increase of approximately $0.8 million, or 1%, over the fiscal year ended May 31, 2020. The 2021 increase over 2020 was primarily attributable to higher clinical trial expenses, partially offset by decreases in non-clinical and CMC expenses. The increase in clinical trial costs were attributable to clinical trials related to COVID-19, oncology and immunology indications. Amortization and depreciation expenses and Intangible asset impairment charge Amortization and depreciation expense totaled approximately $0.8 million for the fiscal year ended May 31, 2022, a decrease of approximately $1.0 million, or 57% from the preceding year. The decrease was attributable to the intangible write-off of a proprietary algorithm intangible asset during the fiscal year ended May 31, 2021 and the ProstaGene noncompete intangible asset becoming fully amortized as of November 30, 2021, resulting in decreased amortization expense of intangibles. Amortization and depreciation expense totaled approximately $1.8 million for the fiscal year ended May 31, 2021, a decrease of approximately $0.2 million, or 12% from the prior year. The decrease was attributable to the intangible write-off of a proprietary algorithm intangible asset, resulting in decreased amortization of intangibles. For the fiscal years ended May 31, 2022 and 2020, the Company recorded no intangible asset impairment charges. The charge recorded in fiscal year 2021 was attributable to the impairment of the net carrying value of the proprietary algorithm the Company acquired in connection with the acquisition of the assets of ProstaGene, LLC in November 2018, and which was recorded as intangible asset in the Company’s consolidated balance sheets. During the fourth fiscal quarter of 2022, the Company concluded that certain inventories no longer qualify for capitalization as pre-launch inventories due to expiration of shelf-life prior to expected commercial sales and the ability to obtain additional commercial product stability data until after shelf-life expiration. This is due to delays experienced from the originally anticipated BLA approval date from the FDA. Although these inventories are no longer being capitalized as pre-launch inventories for GAAP accounting purposes, the inventories written-off for accounting purposes continue to be physically maintained, can be used for clinical trials, and can be commercially sold if the shelf-lives can be extended as a result of the performance of on-going continued stability testing of drug product. In the event the shelf-lives of these written-off inventories are extended, and the inventories are sold commercially, the Company will not recognize any costs of goods sold on the previously expensed inventories. The Company also concluded that due to delays of future production certain raw materials would expire prior to production and as such no longer qualify for capitalization. Specifically, the Company evaluated its raw materials against the anticipated production date and determined that while the next production date is indeterminable as of May 31, 2022, specialized raw materials have remaining shelf-life ranging from 2023 to 2026. Therefore, a reserve of $10.2 million for the entire remaining value of specialized and other raw materials was recorded as of May 31, 2022. The Company also concluded that approximately $29.1 million, comprised of five batches of drug product, out of total of nine manufactured, is likely to expire prior to the anticipated date the product may be approved for commercialization. Additionally, the Company anticipates that approximately $34.2 million of the drug product comprising of the remaining four manufactured batches, with shelf-lives lasting into 2026, may expire prior to receiving approval for commercialization. The Company wrote-off the entire remaining balance of the drug product, in the amount of $63.3 million, as of May 31, 2022. The Company recorded an inventory write-off based on its expected expiration dates of $5.0 million in fiscal 2021. Refer to Part II, Item 8, Note 3, Inventories, net in this Form 10-K for additional information. Interest and other expense Interest and other expenses consisted of the following: (1) See Note 2, Revision of Financial Statements, and Note 14, Restatement. Interest and other expense totaled approximately $65.4 million for the fiscal year ended May 31, 2022, a decrease of approximately $6.5 million, or 9%, from the preceding year. For the fiscal year ended May 31, 2022, we recognized non-cash losses on the induced conversion of convertible notes with common stock of approximately $37.4 million, a decrease of approximately $1.8 million, or 4%, from the preceding fiscal year. The losses resulted from separately and independently negotiated exchange agreements to satisfy certain note payment obligations in which certain debt was agreed to be settled in exchange for shares issued at a price less than the closing price for the effective date of the respective transactions. Inducement interest expense related to warrant inducements for the fiscal year ended May 31, 2022, totaled $6.7 million, a decrease of approximately $7.2 million, or 52%, from fiscal year ended May 31, 2021. During fiscal year ended May 31, 2021, the Company entered into fewer warrant inducement transactions as compared to the preceding year, resulting in a decreased inducement expense. During fiscal year 2022, the Company issued a total of 10.2 million shares of common stock, including additional shares as an inducement for warrant holders to exercise warrants; by comparison the Company issued a total of 36.2 million shares in connection with private warrant exchanges in the fiscal year ended May 31, 2021. During the year, we also recorded $2.4 million of estimated finance charges related to open amounts due to Samsung. Additionally, we recorded approximately $6.6 million of non-cash finance charges related to 15 million warrants issued under a surety bond backstop agreement as a finance charge in the accompanying consolidated statement of operations. Refer to Note 7, Equity Awards, and Note 10, Commitments and Contingencies - Commitments with Samsung BioLogics Co., Ltd. (“Samsung”), respectively, of this Form 10-K for additional information. There were no comparable expenses in the preceding fiscal year. We also recorded $3.9 million of legal settlement charges related to settlement of a dispute with a placement agent and settlement of the Pestell employment dispute. Refer to Part II, Item 8, Note 10, Commitments and Contingencies for additional information. Interest and other expense totaled approximately $71.9 million for the fiscal year ended May 31, 2021, an increase of approximately $6.6 million, or 10%, from fiscal year ended May 31, 2020. The increase mainly relates to an increase in loss on the induced conversion of convertible notes, offset by decreases in change in fair value of derivative liabilities, legal settlement expense, and inducement interest. For the fiscal year ended May 31, 2021, we did not realize a change in fair value of derivative liabilities as compared to the prior year, as the originating instruments were all exercised and settled during the 2020 fiscal year. The originating underlying instruments were certain warrants that originated in September 2016 and two convertible note instruments originated in June 2018 and January 2019 containing contingent cash settlement provisions, which gave rise to a derivative liability. For each reporting period, the Company determined the fair value of the derivative liability and recorded a corresponding non-cash benefit or non-cash charge, due to a decrease or increase, respectively, in the calculated derivative liability. Legal settlements for the fiscal year ended May 31, 2021, of $10.6 million related to cash damages awarded to plaintiffs in legal proceedings against the Company. Legal settlements (non-cash) for the fiscal year ended May 31, 2020, of $22.5 million related to the issuance of shares of common stock in settlement of a claim filed by the holder of the January 2019 note alleging that the note holder was owed additional shares upon conversion of the note. Inducement interest expense related to warrant inducements for the fiscal year ended May 31, 2021, totaled $13.9 million, a decrease of approximately $9.5 million, or 41%, from fiscal year ended May 31, 2020. During fiscal year ended May 31, 2021, the Company entered into fewer warrant inducement transactions as compared to the preceding year, resulting in decreased inducement expense. During fiscal year 2021, the Company issued a total of approximately 35.8 million shares of common stock, and approximately 0.4 million additional shares as an inducement for warrant holders to exercise warrants, for a total of approximately 36.2 million shares related to warrant inducements. In fiscal year 2020, the Company issued a total of 65.9 million shares in connection with private warrant exchanges. During fiscal year 2022, the Company identified an error in how non-cash inducement interest expense was calculated in previous reporting periods dating back to fiscal year 2018, resulting in a revision of previously reported inducement interest expense amounts. Refer to Part II, Item 8, Note 2, Summary of Significant Accounting Policies - Revision of Financial Statements of this Form 10-K for the discussion. During the preparation and audit of the annual financial statements as of and for the fiscal year ended May 31, 2022, the Company concluded that a material error was identified in how the Company was accounting for common stock issued to settle certain convertible note obligations dating back to fiscal year 2021. The Company had been accounting for these transactions in accordance with debt extinguishment accounting. However, although the contractual terms did not explicitly describe the transactions as induced conversions, the transactions should be accounted for as induced conversions rather than extinguishments of debt and are therefore subject to induced conversion accounting. The error resulted in an understatement of the previously reported non-cash loss on induced conversions and additional paid-in capital. The errors had no impact on operating loss, cash, net cash used in or provided by operating, financing, and investing activities, assets, liabilities, commitments and contingencies, total stockholders’ (deficit) equity, number of shares issued and outstanding, basic and diluted weighted average common shares outstanding, and number of shares available for future issuance for any of the affected periods. Refer to Part II, Item 8, Note 14, Restatement for additional information. For the fiscal year ended May 31, 2021, we recognized non-cash losses on the induced conversion of convertible notes of approximately $39.1 million. We did not recognize any non-cash losses on induced conversion of convertible notes in fiscal year ended May 31, 2020. The losses resulted from separately and independently negotiated exchange agreements to satisfy certain note payment obligations in which certain debt was agreed to be settled in exchange for shares issued at a price less than the closing price for the effective date of the respective transactions. As of May 31, 2022, we had a total of approximately $4.2 million in cash and approximately $123.2 million in short-term liabilities consisting primarily of approximately $42.2 million representing the current portion and accrued interest of convertible notes payable and approximately $76.8 million in accounts payable and accrued liabilities and compensation. We will continue to incur operating losses and the Company will require a significant amount of additional capital in the future as we continue to seek approval to commercialize leronlimab. Despite the Company’s negative working capital position, vendor relations remain accommodative and we do not currently anticipate significant delays in our business initiatives schedule due to liquidity constraints. We cannot be certain, however, that future funding will be available to us when needed on terms that are acceptable to us, or at all. We sell securities and incur debt when the terms of such agreements are deemed favorable to both parties under then current circumstances and as necessary to fund our current and projected cash needs. The Company’s cash position of approximately $4.2 million at May 31, 2022 decreased by approximately $29.7 million compared to the balance of approximately $33.9 million at May 31, 2021. During the fiscal year ended May 31, 2022, we funded our operations by obtaining a total of approximately $48.0 million of net cash proceeds primarily funded through the sales of common stock and warrants. Summary of cash flows and changes between the periods presented is as follows: Net cash (used in) provided by: Cash used in operating activities decreased by approximately $39.9 million during the fiscal year ended May 31, 2022 primarily due to changes in our net loss, working capital fluctuations and changes in our non-cash expenses, all of which are highly variable. Cash used in operating activities totaled approximately $117.6 million during the fiscal year ended May 31, 2021, which reflects an increase of approximately $48.8 million over the approximately $68.8 million in fiscal year 2020. The increase in net cash used in operating activities was due to increased pre-launch inventories, and net loss, offset in part by the intangible asset impairment charge, increased accounts payables and accrued liabilities, and increased non-cash loss on induced conversion of debt, when compared to the changes in the prior year. Cash used in investing activities did not change significantly between the fiscal years. Cash provided by financing activities decreased by approximately $89.3 million which was primarily attributable to decreased funding in fiscal 2022 through convertible debt and decreased proceeds from warrant exercises, offset by proceeds from the sale of common stock and warrants during the fiscal year 2022. Cash provided by financing activities totaled approximately $137.3 million during the fiscal year ended May 31, 2021 representing an approximate $57.7 million increase in net cash provided by financing activities when compared to the previous fiscal year. The increase in net cash provided from financing activities was primarily attributable to an increase in proceeds from convertible debt issuances and an increase in proceeds from warrant inducement transactions. Pre-launch inventories During the fourth fiscal quarter of 2022, the Company concluded that certain inventories no longer qualify for capitalization as pre-launch inventories due to expiration of shelf-life prior to expected commercial sales and the ability to obtain additional commercial product stability data until after shelf-life expiration. This is due to delays experienced from the originally anticipated BLA approval date from the FDA. Although these inventories are no longer being capitalized as pre-launch inventories for GAAP accounting purposes, the inventories written-off for accounting purposes continue to be physically maintained, can be used for clinical trials, and can be commercially sold if the shelf-lives can be extended as a result of the performance of on-going continued stability testing of drug product. In the event the shelf-lives of these written-off inventories are extended, and the inventories are sold commercially, the Company will not recognize any costs of goods sold on the previously expensed inventories. The Company also concluded that due to delays of future production certain raw materials would expire prior to production and as such no longer qualify for capitalization. Specifically, the Company evaluated its raw materials against the anticipated production date and determined that while the next production date is indeterminable as of May 31, 2022, specialized raw materials have remaining shelf-life ranging from 2023 to 2026. Therefore, a reserve of $10.2 million for the entire remaining value of specialized and other raw materials was recorded as of May 31, 2022. The Company also concluded that approximately $29.1 million, comprised of five batches of drug product, out of total of nine manufactured, is likely to expire prior to the anticipated date the product may be approved for commercialization. Additionally, the Company anticipates that approximately $34.2 million of the drug product comprising of the remaining four manufactured batches, with shelf-lives lasting into 2026, may expire prior to receiving approval for commercialization. The Company wrote-off the entire remaining balance of the drug product, in the amount of $63.3 million, as of May 31, 2022. Refer to Part II, Item 8, Note 3, Inventories, net for additional information. Convertible debt April 2, 2021 Note. On April 2, 2021, we issued a convertible note with a principal amount of $28.5 million resulting in net cash proceeds of $25.0 million, after $3.4 million of debt discount and $0.1 million of offering costs. The note accrues interest daily at a rate of 10% per annum, contains a stated conversion price of $10.00 per share, and matures in April 2023. The April 2, 2021 Note required monthly debt reduction payments of $7.5 million for the six months beginning in May 2021, which could also be satisfied by payments on other notes held by the noteholder or its affiliates. Beginning six months after the issuance date, the noteholder may request monthly redemptions of up to $3.5 million. As of May 31, 2022, the outstanding balance of the April 2, 2021 Note, including accrued interest, was $11.9 million. April 23, 2021 Note. On April 23, 2021, we issued a convertible note with a principal amount of $28.5 million resulting in net cash proceeds of $25.0 million, after $3.4 million of debt discount and $0.1 million of offering costs. The note accrues interest daily at a rate of 10% per annum, contains a stated conversion price of $10.00 per share, and matures in April 2023. Beginning six months after the issuance date, the noteholder may request monthly redemptions of up to $7.0 million. As of May 31, 2022, the outstanding balance of the April 23, 2021 Note, including accrued interest, was $30.3 million. Refer to Part II, Item 8, Note 6, Convertible Instruments and Accrued Interest of this Form 10-K for additional information. We have 1,000.0 million authorized shares of common stock. The table below summarizes intended uses of common stock. Issuable upon: Warrants exercise Convertible preferred stock and undeclared dividends conversion Outstanding stock options exercise or vesting of outstanding RSUs Reserved for issuance pursuant to future stock-based awards under equity incentive plan Reserved and issuable upon conversion of outstanding convertible notes Reserved for private placement of common stock and warrants through placement agent Total shares reserved for future uses Common stock outstanding As a result, as of May 31, 2022, we had approximately 65.4 million unreserved authorized shares of common stock available for issuance. Our ability to continue to fund our operations depends on our ability to raise capital. The funding necessary for our operations may not be available on acceptable terms, or at all. If we deplete our cash reserves, we may have to discontinue our operations and liquidate our assets, in extreme cases, we could be forced to file for bankruptcy protection, discontinue operations or liquidate assets. As of May 31, 2022, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on our current or future financial condition, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations Refer to Note 6, Convertible Instruments and Accrued Interest, and Note 10, Commitments and Contingencies included in Part II, Item 8 of this Form 10-K. The Company is a party to various legal proceedings described in Part II, Item 8, Note 10, Commitments and Contingencies - Legal Proceedings of this Form 10-K. The Company recognizes accruals for such proceedings to the extent a loss is determined to be both probable and reasonably estimable. The best estimate of a loss within a possible range is accrued; however, if no estimate in the range is more probable than another, then the minimum amount in the range is accrued. If it is determined that a material loss is not probable but reasonably possible and the loss or range of loss can be estimated, the possible loss is disclosed. It is not possible to determine the outcome of these proceedings, including the defense and other litigation-related costs and expenses that may be incurred by the Company, as the outcomes of legal proceedings are inherently uncertain, and the outcomes could differ significantly from recognized accruals. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a recognized accrual, or if an accrual had not been made, could be material to the Company’s consolidated financial statements. Refer to Note 10, Commitments and Contingencies – Legal Proceedings for further discussion of legal proceedings. FDA Refusal to File Letter re HIV BLA Submission In July 2020, the Company received a Refusal to File letter from the FDA regarding its BLA submission for leronlimab as a combination therapy with HAART for highly treatment-experienced HIV patients. The FDA informed the Company the BLA did not contain certain information and data needed to complete a substantive review and therefore, the FDA would not file the BLA. The deficiencies cited by FDA included administrative deficiencies, omissions, corrections to data presentation and related analyses, and clarifications regarding the manufacturing processes. The Company is working with consultants to cure the BLA deficiencies noted and will resubmit the BLA as soon as practical. In November 2021, the Company resubmitted the non-clinical and CMC sections of the BLA and is currently reevaluating when it expects to complete the clinical section. As of March 2022, the FDA had commenced its review of the CMC section. The Company is in dispute with its former contract research organization (“CRO”), as described in Note 10, Commitments and Contingencies – Legal Proceedings to this Form 10-K. Recently, in the context of the litigation, the Company obtained an order requiring the CRO to release the Company’s clinical data related to the BLA, which the CRO had been withholding. Further, the order granted the Company the right to perform an audit of the CRO’s services. Additionally, the FDA recently placed the HIV program on a partial clinical hold, which may affect the ability to resubmit the BLA. The Company is in the process of evaluating the data, results of the audit, and implications of the partial clinical hold. The Company will provide an updated strategy once it completes its evaluation, the impact those results may have on the BLA and an updated strategy timeline. FDA Warning Letter re COVID-19 Misbranding of Investigational Drug In January 2022, the Company received a Warning Letter from the United States FDA alleging that its former CEO and President, Dr. Nader Pourhassan, had made references in a video interview to COVID-19 and leronlimab in a promotional context to the effect that leronlimab, an investigational new drug, is safe and effective for the purpose for which it is being investigated or otherwise promoted the drug. The FDA warned the Company that leronlimab has not been approved or authorized by the FDA, its safety and effectiveness has not yet been established, and that the related clinical trial data was mischaracterized in the video. The FDA further alleged the video misbrands leronlimab under section 502(f)(1) of the FD&C Act and in violation of section 301(a) of the FD&C Act, as the claims in the video make representations in a promotional context regarding the safety and efficacy of an investigational new drug that has not been approved or authorized by the FDA. The Company is working closely with the FDA to resolve this matter and take the proper corrective actions. FDA Partial Clinical Hold re HIV and Full Clinical Hold re COVID-19 Letters In March 2022, the United States FDA placed a partial clinical hold on the Company’s HIV program and a full clinical hold on its COVID-19 program in the United States. The Company was not enrolling any new patients in the trials placed on hold in the United States. The partial clinical hold on the HIV program impacts patients currently enrolled in extension trials. These patients have transitioned to other available therapeutics and no clinical studies can be initiated or resumed until the partial clinical hold is resolved. CytoDyn is working closely with the FDA to resolve the partial clinical hold as soon as possible. Under the full clinical hold on the COVID-19 program, no new clinical studies may be initiated until the clinical hold is resolved. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As presented in the accompanying consolidated financial statements, the Company had losses for all periods presented. The Company incurred a net loss of $210.8 million for the year ended May 31, 2022 and has an accumulated deficit of $766.1 million as of May 31, 2022. As of May 31, 2022, these factors, among several others, raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The Company has had limited to no activities that produced revenue in the periods presented and has operated at a loss since inception. The Company’s continuation as a going concern is dependent upon its ability to obtain a significant amount of additional operating capital, to continue to fund operations and pay its liabilities and commitments, its research into multiple indications for and development of its product candidate, to obtain FDA approval of its product candidate for use in treating one or more indications, to outsource manufacturing of its product, and ultimately to attain profitability. We intend to seek additional funding through equity or debt offerings, licensing agreements, supply and distribution agreements, and strategic alliances to implement our business plan. There are no assurances, however, that we will be successful in these endeavors. If we are not able to raise capital on a timely basis on favorable terms, if at all, we may need to significantly change or scale back operations, including our efforts to complete the resubmission of our BLA and other development and commercialization initiatives or to adequately fund legal proceedings, all of which individually or in combination could materially impede our ability to achieve profitability. The Company’s failure to raise additional capital could also affect our relationships with key vendors, including Samsung, disrupting our ability to timely execute our business plan. In extreme cases, the Company could be forced to file for bankruptcy protection, discontinue operations or liquidate assets. Since inception, the Company has financed its activities principally from the public and private sale of equity securities as well as with proceeds from issuance of convertible notes and related party notes payable. The Company intends to finance its future operating activities and its working capital needs largely from the sale of equity and debt securities. As of the date of this filing, the Company has approximately 65.4 million shares of common stock, authorized for issuance under its certificate of incorporation, as amended, and available for future uses. The sale of equity and convertible debt securities to raise additional capital is likely to result in dilution to stockholders and those securities may have rights senior to those of common shares. If the Company raises funds through the issuance of additional preferred stock, convertible debt securities or other debt or equity financing, the related transaction documents could contain covenants restricting its operations. In April 2021, the Company entered into long-term convertible notes that are secured by all of our assets (excluding our intellectual property), and include certain restrictive provisions, including limitations on incurring additional indebtedness and future dilutive issuances of securities, any of which could impair our ability to raise additional capital on acceptable terms. In February 2022, in exchange for warrants, the Company entered into a backstop arrangement with an accredited investor whereby the Company pledged its patents and the investor agreed to indemnify the issuer of the surety bond in the Amarex dispute with respect to the Company’s obligations under the surety bond. Future third-party funding arrangements may also require the Company to relinquish valuable rights. Additional capital, if available, may not be available on reasonable or non-dilutive terms. Refer to Part I, Item 1A, Risk Factors of this Form 10-K for additional information. Refer to Part II, Item 8, Note 2, Summary of Significant Accounting Policies – Recent Accounting Pronouncements of this Form 10-K for the discussion. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, and expense and related disclosures. On an ongoing basis, management bases and evaluates estimates on historical experience and on various other market specific and other relevant assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from those estimates. We believe the following critical policies reflect the more significant judgments and estimates used in preparation of the consolidated financial statements. We capitalize inventories procured or produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory begins when the results of clinical trials have reached a status sufficient to support regulatory approval, uncertainties regarding ultimate regulatory approval have been significantly reduced and we have determined that it is probable that these capitalized costs will provide some future economic benefit in excess of capitalized costs. The material factors considered by the Company in evaluating these uncertainties include the receipt and analysis of positive Phase 3 clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, and the compilation of the regulatory application. We closely monitor the status of the product within the regulatory review and approval process, including all relevant communication with regulatory authorities. If we are aware of any specific material risks or contingencies other than the normal regulatory review and approval process or if there are any specific issues identified relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory may no longer qualify for capitalization. We value inventory at the lower of cost or net realizable value using the average cost method. Inventories currently consist of raw materials, bulk drug substance, and drug product in unlabeled vials to be used for commercialization of the Company’s biologic, leronlimab, which is in the regulatory approval process. Inventory purchased in preparation for product launches is evaluated for recoverability by considering the likelihood that revenue will be obtained from the future sale of the related inventory, in light of the status of the product within the regulatory approval process. The Company evaluates its inventory levels on a quarterly basis and writes down inventory that has become obsolete, or has a cost in excess of its expected net realizable value, and inventory quantities in excess of expected requirements. In assessing the lower of cost or net realizable value to pre-launch inventory, the Company relies on independent analysis provided by third parties knowledgeable of the range of likely commercial prices comparable to current comparable commercial product. For inventories capitalized prior to FDA marketing approval in preparation of product launch, anticipated future sales, shelf-lives, and expected approval date are considered when evaluating realizability of pre-launch inventories. The shelf-life of a product is determined as part of the regulatory approval process; however, in assessing whether to capitalize pre-launch inventory the Company considers the stability data of all inventories. As inventories approach their shelf-life expiration, the Company may perform additional stability testing to determine if the inventory is still viable, which can result in an extension of its shelf-life. Further, in addition to performing additional stability testing, certain raw materials inventory may be sold in its then current condition prior to reaching expiration. We also consider potential delays associated with regulatory approval in determining whether pre-approval inventory remains salable. In determining whether pre-approval inventory remains salable, the Company considers a number of factors ranging from potential delays associated with regulatory approval, whether the introduction of a competing product could negatively impact the demand for our product and affect the realizability of our inventories, whether physicians would be willing to prescribe leronlimab to their patients, or if the target patient population would be willing to try leronlimab as a new therapy. During the fourth fiscal quarter of 2022, the Company concluded that certain inventories no longer qualify for capitalization as pre-launch inventories due to expiration of shelf-life prior to expected commercial sales and the ability to obtain additional commercial product stability data until after shelf-life expiration. This is due to delays experienced from the originally anticipated BLA approval date from the FDA. Although these inventories are no longer being capitalized as pre-launch inventories for GAAP accounting purposes, the inventories written-off for accounting purposes continue to be physically maintained, can be used for clinical trials, and can be commercially sold if the shelf-lives can be extended as a result of the performance of on-going continued stability testing of drug product. In the event the shelf-lives of these written-off inventories are extended, and the inventories are sold commercially, the Company will not recognize any costs of goods sold on the previously expensed inventories. The Company also concluded that due to delays of future production certain raw materials would expire prior to production and as such no longer qualify for capitalization. Specifically, the Company evaluated its raw materials against the anticipated production date and determined that while the next production date is indeterminable as of May 31, 2022, specialized raw materials have remaining shelf-life ranging from 2023 to 2026. Therefore, a reserve of $10.2 million for the entire remaining value of specialized and other raw materials was recorded as of May 31, 2022. The Company also concluded that approximately $29.1 million, comprised of five batches of drug product, out of total of nine manufactured, is likely to expire prior to the anticipated date the product may be approved for commercialization. Additionally, the Company anticipates that approximately $34.2 million of the drug product comprising of the remaining four manufactured batches, with shelf-lives lasting into 2026, may expire prior to receiving approval for commercialization. The Company wrote off the entire remaining balance of the drug product, in the amount of $63.3 million, as of May 31, 2022. Refer to Part II, Item 8, Note 3, Inventories, net for additional information. We use the Black-Scholes option pricing model to estimate the fair value of equity awards on the date of grant utilizing certain assumptions that require judgments and estimates. These assumptions include estimates for stock price volatility, expected term and risk-free interest rates in determining the fair value of the equity awards. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the equity award. The expected volatility is based on the historical volatility of the Company’s common stock at monthly intervals. The computation of the expected option term is based on the “simplified method,” as the options issued by the Company are considered “plain vanilla” options. We estimate forfeitures at the time of grant and revise them, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Based on limited historical experience of forfeitures, we estimated future unvested forfeitures at 0% for all periods presented. Quarterly expense is reduced during the period when grants are forfeited, such that the full expense is recorded at the time of grant and only reduced when the grant is forfeited. We at times issue restricted common stock and/or restricted stock units to executives or third parties as compensation for services rendered. Such awards are valued at fair market value on the effective date of the Company’s obligation. From time to time, we also issue stock options and warrants to consultants as compensation for services. Costs for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily measurable. Contingent liabilities We have significant license and contingent milestone and royalty liabilities. We estimate the likelihood of paying these contingent liabilities periodically based on the progress of our clinical trials, BLA approval status, and status of commercialization. We are also party to various legal proceedings. We recognize accruals for such proceedings to the extent a loss is determined to be both probable and reasonably estimable. The best estimate of a loss within a possible range is accrued; however, if no estimate in the range is more probable than another, then the minimum amount in the range is accrued. If it is determined that a material loss is not probable but reasonably possible it is disclosed and if the loss or range of loss can be estimated, the possible loss is also disclosed. It is not possible to determine the ultimate outcome of these proceedings, including the defense and other litigation-related costs and expenses that may be incurred by the Company, as the outcomes of legal proceedings are inherently uncertain, and the outcomes could differ significantly from recognized accruals. Therefore, it is possible that the ultimate outcome of any proceeding, if in excess of a recognized accrual, or if an accrual had not been made, could be material to the Company’s consolidated financial statements. We periodically reassess these matters when additional information becomes available and adjust our estimates and assumptions when facts and circumstances indicate the need for any changes. Refer to Part II, Item 8, Note 10, Commitments and Contingencies of this Form 10-K for additional information. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks in the ordinary course of business. Our primary exposure to market risk is sensitivity to changes in interest rates. We hold our cash in interest-bearing money market accounts; due to the short-term maturities of such financial instruments, a 100 basis point change in interest rates would not have a material effect on the fair market value of our cash. As of May 31, 2022, we had $4.2 million in cash. Common Stock Price Volatility The Compensation Committee of the Board of Directors has historically granted stock incentive awards to management and employees in the form of stock options. Stock-based compensation expense is recognized for stock options over the requisite service period using the fair value of these grants as estimated at the awards grant date using the Black-Scholes pricing model and the market value of our publicly traded common stock on the date of grant. In addition to the market value of our common stock, one of the inputs into this model that significantly impacts the fair value of the options is the expected volatility of our common stock over the estimated life of the option. We estimate expected volatility by using the most recent historical experience. Since November 2019, our common stock has experienced periods of high trading volatility. Grants of stock options and warrants during 2022 continued to reflect expected volatility as part of the estimated fair value of stock options. Additionally, we negotiate the settlement of debt payment obligations in exchange for equity securities of the Company, which can create a non-cash charge upon extinguishment of debt as the price of our common stock fluctuates. If we continue to enter into these settlements, the increased levels of volatility in our common stock trading price will result in increased dilution and extinguishment gains or losses. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Warren Averett, LLC, PCAOB ID 2226) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Macias Gini & O’Connell LLP PCAOB ID 324) CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2022 AND 2021 We have audited, before the effects of the adjustments for the correction of the error described in Note 14, Restatement, the accompanying consolidated balance sheet of CytoDyn Inc. (the Company) as of May 31, 2021 and the related consolidated statements of operations, changes in stockholders’ (deficit) equity, and cash flows for the two years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, except for the error described in Note 14, Restatement, the 2021 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2021, and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America. We were not engaged to audit, review, or apply any procedures to the adjustments of the correction of the error described in Note 14, Restatement and accordingly, we do not express an opinion or any form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Macias Gini & O’Connell LLP. (The 2021 consolidated financial statements before the effects of the adjustments discussed in Note 14, Restatement have been withdrawn and are not presented herein.) Substantial Doubt as to the Company’s Ability to Continue as a Going Concern The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2, Summary of Significant Accounting Policies – Going Concern to the consolidated financial statements, the Company incurred significant net losses and has an accumulated deficit through May 31, 2021, which raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We served as the Company’s auditor from 2007 through 2021. July 30, 2021, except for the effect of the revision discussed in Note 2, as to which the date is January 10, 2022 We have audited the accompanying consolidated balance sheet of CytoDyn Inc. (the “Company”) as of May 31, 2022, and the related statements of operations, changes in stockholders’ (deficit) equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. We also have audited the adjustments described in Note 14, Restatement that were applied to restate the 2021 consolidated financial statements to correct an error. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2021 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2021 consolidated financial statements taken as a whole. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of May 31, 2022, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 15, 2022 expressed an adverse opinion. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2, Summary of Significant Accounting Policies – Going Concern to the consolidated financial statements, the Company incurred a net loss of approximately $210,820,000 for the year ended May 31, 2022 and has an accumulated deficit of approximately $766,131,000 through May 31, 2022, which raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Restatement of fiscal year 2021 Consolidated Financial Statements As discussed in Note 14, Restatement to the consolidated financial statements, the consolidated financial statements as of December 31, 2021 and for the year then ended have been restated to correct misstatements. These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on the entity’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of the Reserve and Write-off against Pre-Launch Inventory and Determination of alternate future use for Residual Raw Materials Critical Audit Matter Description As explained in Note 2, Summary of Significant Accounting Policies to the consolidated financial statements, the Company has capitalized pre-launch inventories procured or produced for product launches sufficient to support estimated initial demand. Typically, capitalization of such pre-launch inventory begins when the results of the clinical trial have reached a status sufficient for regulatory approval and the Company has determined that the capitalized costs will provide future economic benefits. Anticipated future sales, shelf lives, and expected approval dates are all factors when evaluating the realizability of capitalized pre-launch inventory. Evaluating the adequacy of the Company’s reserve against pre-launch inventory, the write-off of certain components, as well as the alternate future use of residual raw materials was challenging because it involved a higher degree of management judgment. How the Critical Audit Matter was Addressed in the Audit Our audit procedures related to address this critical audit matter included: ● External confirmation of inventories held by others. ● Performing physical inventory count observation procedures ● Review of manufacturing contracts and inquiries of management who oversee research and development efforts. ● Testing the accuracy and completeness of the underlying data used in the estimate, including testing the methodology utilized to calculate the reserve and write-offs. ● Evaluating the factors used by management to determine if the pre-launch inventory should continue to be capitalized before regulatory approval. ● Evaluating the adequacy of reserves against pre-launch inventory. ● Evaluating the alternate use criteria for residual raw materials. Identification, bifurcation and evaluation of derivatives in hybrid equity linked instrument and induced conversion of debt As described in Note 6, Convertible Instruments and Accrued Interest to the consolidated financial statements, the Company entered into security purchase agreements pursuant to which the Company issued secured convertible promissory notes with two-year terms. In addition, as described in Note 7, Equity Awards to the consolidated financial statements, the Company entered into several transactions that included the issuance of equity and warrants. We identified the accounting for these financing transactions, including the evaluation for potential embedded derivatives, classification of the warrants, as well as the subsequent accounting and extinguishment/induced of these equity linked instruments, as a critical audit matter. The application of the accounting guidance applicable to these transactions, including the evaluation for potential embedded derivatives, and the classification of the related warrants is complex, and therefore, applying such guidance to the contract terms is complex and requires significant judgment. Auditing these elements involved especially complex auditor judgment due to the nature of the terms of the financings and warrants, their extinguishment/induced accounting, and the significant effort required to address these matters, including the extent of specialized skills and knowledge needed. ● Inspecting the agreements associated with each transaction and evaluating the completeness and accuracy of the Company’s technical accounting analysis and application of the relevant accounting literature. ● Utilizing personnel with specialized knowledge and skills in valuations and technical accounting to assist in assessing management’s analysis of the security purchase agreements and warrants, including the evaluation for potential embedded derivatives, and classification of warrants including: (i) evaluating the contracts to identify relevant terms that affect the recognition in the consolidated financial statements, and (ii) assessing the appropriateness of conclusions reached by management. ● Re-calculating inducement expense to validate accuracy related to current and prior period adjustments related to correcting misstatements and verifying all periods impacted are correctly restated. /s/ Macias Gini & O’Connell LLP We have served as the Company's auditor since 2022. We have audited CytoDyn Inc.’s (the “Company”) internal control over financial reporting as of May 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of May 31, 2022, based on the COSO criteria. We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of May 31, 2022, the related consolidated statements of operations, changes in stockholders’ (deficit) equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated August 15, 2022 expressed an unqualified opinion thereon. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A. Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Material weaknesses regarding management’s failure to design and maintain controls over the following have been identified and described in management’s assessment: ● The failure to identify errors related to evaluation of complex accounting issues for which alternative accounting treatments exist constitutes a material weakness in the Company’s internal control over financial reporting. This material weakness is deemed to be caused by lack of review of equity transactions to allow to consider alternative accounting treatments, and an insufficient number of financial reporting and accounting personnel with the knowledge, experience, or training appropriate with the Company’s financial reporting requirements. ● The Company failed to perform an adequate risk assessment, did not adequately design, and did not fully document information technology (IT) general controls in the areas of user access, program change management, operations over certain IT systems that support the company’s financial reporting processes, including controls to respond to the Complementary User Entity Controls assumed in the design and implementation of third-party service organizations controls. We concluded that in aggregate, these failures constitute a material weakness in the Company’s internal control over financial reporting. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal year 2022 consolidated financial statements, and this report does not affect our report dated August 15, 2022 on those consolidated financial statements. (In thousands, except par value) Operating leases right-of-use asset Liabilities and Stockholders’ Equity (Deficit) Accrued dividends on convertible preferred stock Operating leases Commitments and Contingencies (Note 10) Stockholders’ (deficit) equity: Preferred stock, $0.001 par value; 5,000 shares authorized: Series B convertible preferred stock, $0.001 par value; 400 shares authorized; 19 and 79 shares issued and outstanding at May 31, 2022 and May 31, 2021, respectively Series C convertible preferred stock, $0.001 par value; 8 authorized; 7 and 8 issued and outstanding at May 31, 2022 and May 31, 2021, respectively Series D convertible preferred stock, $0.001 par value; 12 authorized; 9 issued and outstanding at May 31, 2022 and May 31, 2021, respectively Common stock, $0.001 par value; 1,000,000 shares authorized; 720,028 and 626,123 issued, and 719,585 and 625,680 outstanding at May 31, 2022 and May 31, 2021, respectively Treasury stock, $0.001 par value; 443 at May 31, 2022 and May 31, 2021 Total stockholders’ deficit Total liabilities and stockholders' equity

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professional_accounting

Are there any best SIPs? SIPs are a medium to invest in mutual funds. Hence, there’s nothing like ‘best SIPs’; you need to select best or winning mutual fund schemes to invest so that SIPs work best for your objective of wealth creation to achieve long-term financial goals. So, selecting an appropriate mutual fund scheme for your SIPs is very crucial. Most of us generally have a good amount of money lying around in our various savings bank accounts, earning just about 4% per annum. This money may be part of our salary waiting to be spent, maturity amounts of insurance policies or FDs, redemptions from investments or any other credits received from elsewhere. We may not have any immediate plans to spend, invest or reinvest this money. When the money becomes available, we take our own time to plan its further use while it keeps lying in the savings bank account earning a low return. But did you know that you can earn double the returns of a savings bank account while having almost the same level of safety, liquidity and ease of transaction? Liquid funds – These are a class of mutual funds that have no exposure to stocks and invest only in debt (fixed income) instruments, generally with a residual maturity of less than 92 days. These investments are mostly in money market instruments, short-term corporate deposits and treasury bills. Liquid funds provide good liquidity, low interest rate risk and also the prevailing market yield. Along with liquidity, the safety factor makes these funds a preferred parking option for HNIs and corporates as a good alternative to savings bank accounts and short-term fixed deposits. Most liquid schemes don’t have a lock-in period and offer redemption proceeds within 24 hours directly into your bank account. All mutual funds have liquid schemes and try to provide the convenience of investments and redemptions in line with advancements in technology. You can invest in liquid funds through SMS, online banking, phone banking, call centre services and also physical applications. The same applies for redemptions also. If it’s so easy and safe, why are these funds not so popular among common investors? That is simply because of a lack of awareness. Mutual funds are generally associated with investments in stocks, while banks occupy a much larger part of retail investors’ consciousness than mutual funds do. You should remember some important points while investing in liquid funds. These are essentially short-term investments. If you keep your money here for too long, typically more than a year, you may lose out on better opportunities elsewhere. Another advantage of liquid funds is that if you think your money is likely to be lying around for a longer time than thought initially, you can seamlessly shift it to longer duration debt mutual funds or even equity funds without much hassle. On the issue of taxation, even with part-redemptions from a liquid fund within a year, the gains will be taxed according to your income tax slab. Beyond a year, the gains get the benefit of indexation as a long-term gain. You can invest in growth, dividend and dividend reinvestment options. Dividends paid by these funds are tax-free in your hands. Liquid funds also score over bank deposits because they do not deduct tax at source (TDS). Investors who tend to keep a sizeable balance in their savings bank accounts, and that too for a long period, may look at investing in liquid funds to enhance returns. It can make an appreciable difference to what you get to keep in the end. Risk is inherent to investing. Investments vary across the risk spectrum, but there is hardly any investment that’s entirely risk-free. Mutual funds also carry risk. But first, what is ‘risk’? In the world of investments, risk is the other name for volatility or fluctuation in price. An investment that is susceptible to wild swings in either direction is considered to be highly risky. Both equity funds and debt funds carry risk. Comparatively, debt funds are generally not as risky as equity funds. Equity tends to be volatile, especially in the short to medium term. In order to judge the inherent risk in mutual funds, the most basic tool is the riskometer. All mutual fund schemes carry a riskometer which points at the inherent risk in the scheme. The figure alongside shows a mutual fund riskometer. Balanced funds are the least risky as they can invest as much as 35 per cent of their assets in debt. Since large companies don’t fluctuate wildly, they come next. Mid and small caps are notorious for their crazy moves, so the funds investing in them appear at the second-last position. Finally, since thematic and sectoral funds take highly theme-specific bets, they are the riskiest of all. With debt funds, the risks are two fold: interest risk and credit risk. Interest risk means that interest rates may move up or down unexpectedly. A rise in interest rates results in a decline in bond prices and vice-versa. So, a fund that holds long-duration bonds is subject to high risk. Credit risk is the risk of default by the bond issuer. Debt funds that invest in relatively lower-rated paper carry this risk. There are other risks also in mutual funds, which the investor can minimise by making prudent decisions. By investing across multiple fund houses and schemes, one can reduce the fund-house-specific, fund-manager specific and scheme-specific risk. Also, by sticking to multi-cap equity funds one can reduce the portfolio risk. An ideal retirement corpus should take care of all your expenses after you stop working. But can you calculate the amount required? It involves taking into account life expectancy, interest rates, inflation and the time value of money…and can be a bit tricky. Here we explain how to use MS Excel to calculate the amount easily. But first, let’s understand some basics. The concept of time value of money states that the worth of a rupee received today is more than a rupee received at a later date because of its earning potential. The concept of time value has two elements: Compounding and discounting. Compounding helps to estimate future values whereas discounting helps to estimate present values. For calculating your retirement corpus, it is the present value that matters. For example, an investment product promises ₹8 lakh in 10 years if you invest ₹4 lakh today. Given interest or term deposit rates of 8% per annum, will this investment product be profitable? You will have to find out the present value of ₹8 lakh at 8% discount rate to arrive at the right answer. Present value is calculated by dividing ₹8 lakh by (1+r) ^n, where ‘r’ is the discount rate (or interest rate) and ‘n’ is the tenure of investment. The present value of ₹8 lakh works out to be ₹3.7 lakh. Since the present value of the amount that the product promises to pay (fund inflow) is less than the amount invested (fund outflow), the product is not profitable. In other words, the net present value of the investment product is negative. Net present value is the difference between the present value of cash inflows and present value of cash outflows. If the same ₹4 lakh is invested in an FD for 10 years, offering 8% annual interest, the maturity proceeds work out to be ₹8.63 lakh (assuming no tax)—₹63,000 higher than the aforementioned investment product. Calculating the present value of an amount gets complicated, if the investment generates a series of payments over a period of time. To calculate the current worth of such an investment, the present value of each payment in the entire series of payments needs to be derived. Technically, one needs to find out the present value of an annuity. Estimating one’s retirement corpus involves calculating the present value of an annuity. This is because, one expects to generate a stream of payments—monthly, quarterly or annually—from one’s retirement corpus for a given number of years at a certain rate. Such stream of payments seek to take care of one’s post-retirement expenses—based on one’s current expenses and assumed inflation rate. A 38-year-old with current annual expense of ₹6 lakh can calculate his annual expenditure requirements when she retires at the age of 60, based on an assumed annual inflation rate over 22 years (the period after which she will retire). For instance, at 5% assumed inflation she will need ₹17.5 lakh—₹6 lakh x (1+5%)^22. The ideal retirement corpus must generate a stream of ₹17.5 lakh annually for 25 years after retirement, assuming life expectancy of 85 years. Such a corpus can be arrived at by adding the present value of each stream of ₹17.5 lakh discounted at an appropriate rate. The appropriate rate is generally the average long-term (10-year) yield on government securities. Additionally, the post-retirement inflation also needs to be taken into account. Although the methodology appears complex, MS Excel’s NPV function can help you do the calculations easily. NPV requires you to input the discount (or interest) rate and the series of expected inflows or estimated expenses. At 7% discount rate and assuming no inflation, the present value of the annuity works out to be ₹2.04 crore. So, in our example, the working professional will have to accumulate ₹2.04 crore for his retirement. However, if we assume post-retirement inflation of 4.5% per annum, he will have to accumulate ₹3.12 crore. One can play with the numbers to see how changes in inflation, discount or interest rates changes the desired corpus. Investors looking for a regular monthly income can choose between Monthly Income Plans (MIPs) offered by mutual fund houses or Post Offices. Both have their own advantages and disadvantages. While the former can offer higher returns, since they invest in market linked instruments, the latter is safer since it is guaranteed by the government. The Post Office schemes are very easy to invest in, due to which they are preferred by retired people. But MIPs are more tax efficient and hence, suitable for High Networth Individuals ( HNIs) Investors should invest in MIP or Post Office Monthly Income Schemes ( POMIS) based on their risk appetite. While MIPs can offer higher returns as compared to POMIS; it also carries market risk and interest risk. On the contrary POMIS provide guaranteed monthly income, but do not meet the inflation ‘ risk’. MIPs are open- ended schemes that invest a majority of their assets in fixed income instruments and allocate asmall portion to equity and equity- related instruments. MIPs typically invest in debt instruments like debentures, corporate bonds, government securities and so on, while maintaining a small exposure to equity to earn something extra. Generally, the equity allocation is maintained between 10 per cent to 25 per cent of the total assets. This is a good option for those investors who are looking at regular and steady income and still want to dabble a bit in equities. Like all other mutual funds, MIPs too come with the growth and dividend ( Payout and Reinvestment) option. The growth option of an MIP is ideal for a ‘moderate’ risk profile, since it typically falls between a pure income fund and a balanced fund. It is a viable option for HNIs, institutions, trusts and so on, as these investors typically do not require a regular monthly dividend inflow, but still would like capital appreciation at controlled risk levels. Investors can invest in such funds if they are conservative in their investing style and are looking out for better returns or are looking for a regular source of income. Also, this is suitable for investors in the high tax bracket, since it is more tax efficient than options like fixed deposits and post office monthly income schemes. MIPs offer an investor regular income through the ‘ dividend’ option. Since they invest in debt instruments, whenever the interest rate falls, the capital gain on bonds rises as price of bond increases and when interest rate raises, capital gain on bond falls. MIPs are treated as debt funds and, hence, the taxation is same as debt funds. Dividends are exempted from tax in the hands of investors, since company pays a Dividend Distribution Tax on such dividend declared. Redemption is covered by capital gains tax based on the holding period tenure. Short- term capital gain – if the holding period is less than one year, the capital gain will be considered as a short term capital gain. It will be taxed as per tax slab Long- term capital gain – if the holding period is more than one year, the capital gain will be considered as a long term capital gain. It will be taxed either 10 per cent without indexation or 20 per cent with indexation. loss – The good part of MIP is that any short term gains made on MIPs can be set off against short term losses. And long term capital gain on MIPs can be set off against long term losses. Scheme ( POMIS) is a guaranteed return investment available at the post office. On the deposit made in the post office, monthly assured return in the form of interest is earned. Though it offers no tax incentive, it is a preferred instrument amongst small savers because of its government backing that the product offers. However, there is an upper limit for investment into POMIS. You cannot invest more than ₹ 4.5 lakh in asingle account. If you invest jointly, the limit is ₹ 9 lakh. The minimum investment is ₹ 1,500. The capital invested in POMIS is completely protected as the scheme is backed by the Government of India, making it totally risk- free with guaranteed returns. The amount invested is liquid, despite the fact that there is asix- year lock in period. However, the biggest disadvantage of POMIS is that it is not inflation protected, which means that if the inflation is the same as interest rate, then there is no real rate of returns. Taxation of POMIS – It is taxed along with the regular source of income. However, Tax Deduction at Source is not applicable.

{'timestamp': '2019-04-20T06:29:35Z', 'url': 'http://www.robomf.com/blog/2018/12/', 'language': 'en', 'source': 'c4'}

professional_accounting

Approach Resources Inc. Reports Fourth Quarter and Full-Year 2017 Financial and Operating Results and Provides 2018 Outlook March 08, 2018 05:35 PM Eastern Standard Time FORT WORTH, Texas--(BUSINESS WIRE)--Approach Resources Inc. (NASDAQ: AREX) today reported financial and operational results for the fourth quarter and full-year 2017 and estimated year-end 2017 proved reserves. Fourth Quarter 2017 Highlights Fourth quarter production of 1,064 MBoe or 11.6 MBoe/d Closed bolt-on acquisition increasing our contiguous acreage position by approximately 39,000 net acres and proved developed reserves of 1.6 MMBoe Extended term on revolving credit facility to May 7, 2020, and reaffirmed $325 million borrowing base Net income was $45.8 million, or $0.51 per diluted share. Adjusted net loss (non-GAAP) was $6.1 million, or $0.07 per diluted share EBITDAX (non-GAAP) of $13.9 million Revenues of $28.4 million, an 11% increase over the prior quarter Unhedged cash margin (non-GAAP) of $15.76 per Boe, a 17% increase over the prior quarter Full-Year 2017 Highlights Full year production of 4,232 MBoe or 11.6 MBoe/d, above the midpoint of annual guidance Year-end 2017 proved reserves 181.5 MMBoe, an increase of 16% over the prior year Type curve updated to 700 MBoe EUR, an increase of 37% Strengthened balance sheet and reduced the outstanding principal of our long-term debt by $127.1 million Increased operating cash flow by $11.4 million or 44% over the prior year 7% decrease in lease operating expense (“LOE”) over the prior year, delivering record low annual LOE of $4.23 per Boe Drilled 13 and completed nine horizontal Wolfcamp wells during the year with an inventory of 10 drilled and uncompleted wells at year-end Reserve replacement ratio of 748% Net loss was $112.4 million, or $1.35 per diluted share. Adjusted net loss (non-GAAP) was $29.8 million, or $0.36 per diluted share EBITDAX (non-GAAP) of $54.8 million, a 5% increase over the prior year Adjusted net loss, EBITDAX and unhedged cash margin are non-GAAP measures. See “Supplemental Non-GAAP Financial and Other Measures” below for our definitions and reconciliations of adjusted net loss and EBITDAX to net income (loss) and unhedged cash margin to revenues. Management Comment Ross Craft, Approach’s Chairman and CEO, commented, “In the face of continued volatile commodity prices, in 2017 we delivered a third consecutive year of fiscal discipline, optimizing returns and providing steady production output. Our continued emphasis on cost control and operating efficiency delivered industry-leading LOE, a record low on a per Boe basis, despite double-digit service cost escalation across the Permian Basin. Even with weather-related operational restrictions during the year, we delivered solid production, above the midpoint of annual guidance. We also successfully completed a strategic exchange and follow-on exchange of senior notes for equity and closed the Pangea West bolt-on acquisition, adding production and HBP acreage in the highest oil concentration of our core position. With 186 horizontal Wolfcamp wells on line at year-end, we continue to demonstrate the resilience of our asset, its suitability for manufacturing-style development and the proficiency of our team as we exploit science and technique to increase well recoveries and manage natural production decline. “We enter 2018 with our strategic objectives unchanged: deliver a focused, disciplined capital program designed to maximize asset value, maintain our industry-leading cost structure and seek synergistic acquisition opportunities that will strengthen the balance sheet and are accretive to per share metrics. By remaining focused on our plan, we believe we are well positioned to create value for our shareholders.” Fourth Quarter 2017 Results Production for fourth quarter 2017 totaled 1,064 MBoe (11.6 MBoe/d), made up of 25% oil, 36% NGLs and 39% natural gas. Average realized commodity prices for fourth quarter 2017, before the effect of commodity derivatives, were $52.09 per Bbl of oil, $22.61 per Bbl of NGLs and $2.32 per Mcf of natural gas. Our average realized price, including the effect of commodity derivatives, was $24.01 per Boe for fourth quarter 2017. Net income for fourth quarter 2017 was $45.8 million, or $0.51 per diluted share, on revenues of $28.4 million. Net income for fourth quarter 2017 included an income tax benefit of $51.9 million related to the reduction in our deferred tax liabilities resulting from the Tax Cuts and Jobs Act and an increase in the fair value of our commodity derivatives of $1.4 million. Excluding these items, adjusted net loss (non-GAAP) for fourth quarter 2017 was $6.1 million, or $0.07 per diluted share. EBITDAX (non-GAAP) for fourth quarter 2017 was $13.9 million. See “Supplemental Non-GAAP Financial and Other Measures” below for our reconciliation of adjusted net loss and EBITDAX to net income. LOE averaged $4.77 per Boe. Production and ad valorem taxes averaged $2.09 per Boe, or 7.8% of oil, NGLs and gas sales. Exploration costs were $0.38 per Boe. Total general and administrative (“G&A”) costs averaged $5.16 per Boe, including cash G&A costs of $4.09 per Boe. Depletion, depreciation and amortization expense averaged $15.20 per Boe. Interest expense totaled $5.4 million. Full-Year 2017 Results Production for 2017 was 4,232 MBoe (11.6 MBoe/d), made up of 26% oil, 35% NGLs and 39% natural gas. Average realized commodity prices for 2017, before the effect of commodity derivatives, were $47.63 per Bbl of oil, $18.64 per Bbl of NGLs and $2.53 per Mcf of natural gas. Our average realized price, including the effect of commodity derivatives, was $23.86 per Boe for 2017. Net loss for 2017 was $112.4 million, or $1.35 per diluted share, on revenues of $105.3 million. Net loss for 2017 included a write-off of $139.1 million of deferred tax assets in connection with the completed debt for equity exchange transactions, an income tax benefit of $51.9 million related to the reduction in our deferred tax liabilities resulting from the Tax Cuts and Jobs Act, a gain on debt extinguishment of $5.1 million and an increase in the fair value of our commodity derivative of $4.1 million. Excluding these items, adjusted net loss (non-GAAP) for 2017 was $29.8 million, or $0.36 per diluted share. EBITDAX (non-GAAP) for 2017 was $54.8 million. See “Supplemental Non-GAAP Financial and Other Measures” below for our reconciliation of adjusted net loss and EBITDAX to net loss. LOE averaged an annual record low of $4.23 per Boe. Production and ad valorem taxes averaged $2.04 per Boe, or 8.2% of oil, NGLs and gas sales. Exploration costs were $0.86 per Boe. Total G&A costs averaged $5.75 per Boe, including cash G&A costs of $4.65 per Boe. Depletion, depreciation and amortization expense averaged $16.66 per Boe. Interest expense totaled $21.1 million. During the fourth quarter of 2017 we drilled one horizontal Wolfcamp well to the A Bench in Pangea West. Currently, the well is in flowback. In total, we completed four wells in the first quarter of 2018 using our Generation X frac design and are very encouraged by the early results of the wells. We hope to have additional information to report in our next operations update. In 2017, we focused on operating substantially within cash flow and increasing activity in a disciplined manner in conjunction with slowly recovering commodity prices. We maintained focus on managing natural production decline through surface facility optimization, operating efficiencies and investment in well repairs, workovers and maintenance. During 2017, we drilled 13 horizontal Wolfcamp wells. Of these, three wells were drilled to the A bench, five wells were drilled to the B bench and five wells were drilled to the C bench. We completed nine horizontal Wolfcamp wells. Of these, one well was completed in the A bench, five wells were completed in the B bench and three wells were completed in the C bench. The nine completed wells are tracking at or above our 700 MBoe type curve, wells normalized for a 7,500 foot lateral length. At December 31, 2017, we had 10 horizontal wells waiting on completion. Our extensive infrastructure network of centralized production facilities, water transportation, handling and recycling system, gas lift lines and salt water disposal wells continue to provide sustainable competitive advantages and environmentally responsible facility operations. In 2017, by reducing resource consumption, improving operating practices and minimizing ground transportation we were able to maintain our industry leading LOE per Boe at $4.23. Innovation Drives Value Our focus on driving value through a combination of innovation and efficiency is evidenced in our GenX frac design, which balances EUR improvement with cost control. The GenX frac design, first used in 2015, has delivered significant well performance improvement in our horizontal Wolfcamp wells while maintaining a competitive drilling cost. As a result, Approach raised its type curve to an EUR of 700 MBoe to reflect the improved productivity, an increase of 37%. Fourth Quarter and Full-Year 2017 Production Fourth quarter 2017 production totaled 1,064 MBoe (11.6 MBoe/d). Full-year 2017 production totaled 4,232 MBoe (11.6 MBoe/d). Three and 12 Months Ended months 12 months Oil (MBbls) 270 1,107 NGLs (MBbls) 377 1,486 Gas (MMcf) 2,498 9,829 Total (MBoe) 1,064 4,232 Total (Mboe/d) 11.6 11.6 2017 Estimated Proved Reserves and Costs Incurred Year-end 2017 proved reserves totaled 181.5 MMBoe. Year-end 2017 proved reserves were 28% oil, 32% NGLs and 40% natural gas. Proved developed reserves represent approximately 37% of total year-end 2017 proved reserves. At December 31, 2017, substantially all of our proved reserves were located in our core operating area in the southern Midland Basin. Year-end 2017 estimated proved reserves included 170.2 MMBoe attributable to the horizontal Wolfcamp shale play. The table below illustrates our horizontal Wolfcamp and other reserves over the last three years ended December 31, 2017, 2016, and 2015. Horizontal Wolfcamp Proved developed 55,032 47,861 49,843 Proved undeveloped 115,146 97,502 104,790 Total 170,178 145,363 154,633 Percent of total proved reserves 94 % 93 % 93 % Other Vertical Percent of total proved reserves 6 % 7 % 7 % Total proved reserves 181,546 156,377 166,646 Extensions and discoveries for 2017 were 33.3 MMBoe, primarily attributable to our development project in the Wolfcamp shale oil resource play in the Permian Basin. During 2017, we acquired 1.6 MMBoe of proved reserves through the bolt-on acquisition, and we reclassified 17.7 MMBoe of proved undeveloped reserves to unproved reserves. The reserves reclassified are attributable to horizontal well locations in Project Pangea that are no longer expected to be developed within five years from their initial booking, as required by SEC rules. Revisions included an increase of 9.4 MMBoe resulting from updated well performance and technical parameters, and an increase of 3.1 MMBoe due to higher commodity prices. The following table summarizes the changes in our estimated proved reserves during 2017. Oil NGLs Natural Gas Total (MBbls) (MBbls) (MMcf) (MBoe) Balance — December 31, 2016 50,031 47,634 352,277 156,377 Extensions and discoveries 10,546 9,975 76,709 33,307 Acquisition of minerals in place 710 394 2,808 1,572 Production(1) (1,107 ) (1,486 ) (11,148 ) (4,452 ) Revisions to previous estimates (10,120 ) 1,431 20,582 (5,259 ) Reserve replacement ratio Extensions and discoveries / Production 748 % (1) Production includes 1,319 MMcf related to field fuel. Our preliminary, unaudited estimate of the standardized after-tax measure of discounted future net cash flows (“standardized measure”) of our proved reserves at December 31, 2017, was $460.8 million. The PV-10 (non-GAAP), or pre-tax present value of our proved reserves discounted at 10%, of our proved reserves at December 31, 2017, was $521 million ($582.2 million at December 31, 2017, NYMEX strip). The independent engineering firm DeGolyer and MacNaughton prepared our estimates of year-end 2017 proved reserves and PV-10 at SEC pricing. PV-10 is a non-GAAP measure. See “Supplemental Non-GAAP Financial and Other Measures” below for our definition of PV-10 and reconciliation to the standardized measure (GAAP). Our reserve estimates and our calculation of standardized measure and PV-10 are based on the 12-month average of the first-day-of-the-month pricing of $51.34 per Bbl of oil, $18.67 per Bbl of NGLs and $2.99 per MMBtu of natural gas during 2017. At NYMEX strip pricing at December 31, 2017, PV-10 is $582.2 million. The following table summarizes the NYMEX strip prices at December 31, 2017. 2018 2019 2020 2021 2022(1) Oil (per Bbl) $ 59.55 $ 56.19 $ 53.76 $ 52.29 $ 51.67 Natural gas (per MMBtu) $ 2.84 $ 2.81 $ 2.82 $ 2.85 $ 2.89 (1) Subsequent year prices were held flat for the remaining lives of the properties. (2) NGLs prices per Bbl were estimated at 40% of the oil strip price. Fourth quarter capital expenditures were $1.3 million. Net capital expenditures incurred during 2017 totaled $47.1 million and were attributable to drilling and development ($44.2 million), infrastructure projects and equipment ($3.6 million) and acreage extensions ($0.2 million), partially offset by a sales tax refund of $0.9 million. Liquidity Update At December 31, 2017, we had a $1 billion senior secured revolving credit facility in place with a borrowing base of $325 million, and liquidity of $33.7 million. See “Supplemental Non-GAAP Financial and Other Measures” below for our definition and calculation of liquidity. Commodity Derivatives Update We enter into commodity derivatives positions to reduce the risk of commodity price fluctuations. At present, approximately 52% of 2018 forecasted oil, 55% of 2018 forecasted natural gas and 50% of NGL production is hedged. The table below is a summary of our current derivatives positions. Commodity and Period Type Volume Transacted Contract Price January 2018 — December 2018 Swap 300 Bbls/day $50.00/Bbl January 2018 — March 2018 Collar 1,000 Bbls/day $50.00/Bbl - $55.05/Bbl January 2018 — June 2018 Collar 500 Bbls/day $55.00/Bbl - $60.00/Bbl January 2018 — September 2018 Swap 700 Bbls/day $60.50/Bbl April 2018 — September 2018 Swap 800 Bbls/day $60.50/Bbl January 2018 — December 2018 Swap 200,000 MMBtu/month $3.085/MMBtu NGLs (C2 - Ethane) February 2018 — December 2018 Swap 1,000 Bbls/day $11.424/Bbl NGLs (C3 - Propane) January 2018 — March 2018 Swap 450 Bbls/day $30.24/Bbl February 2018 — December 2018 Swap 600 Bbls/day $32.991/Bbl NGLs (IC4 - Isobutane) January 2018 — March 2018 Swap 50 Bbls/day $36.12/Bbl February 2018 — December 2018 Swap 50 Bbls/day $38.262/Bbl NGLs (NC4 - Butane) February 2018 — December 2018 Swap 200 Bbls/day $38.22/Bbl NGLs (C5 - Pentane) January 2018 — December 2018 Swap 200 Bbls/day $56.364/Bbl The Company’s capital budget for 2018 is a range of $50 million to $70 million, depending on commodity prices. The table below sets forth our production and operating costs and expenses guidance for 2018. 2018 Guidance Capital Expenditures (in millions) $50 − $70 Oil (MBbls) 1,150 − 1,250 NGLs (MBbls) 1,450 − 1,550 Gas (MMcf) 9,600 − 10,200 Total (MBoe) 4,200 − 4,500 Cash operating costs (per Boe): Lease operating $4.50 − 5.50 Production and ad valorem taxes 8.25% of oil and gas revenues Cash general and administrative $4.50 − 5.50 Non-cash operating costs (per Boe): Non-cash general and administrative $0.50 − 1.00 Exploration $0.50 − 1.00 Depletion, depreciation and amortization $16.00 − 17.00 First quarter 2018 production is estimated to be approximately 11.3 MBoe/d. First quarter 2018 production will be affected by no new well completions in the fourth quarter of 2017 and weather. As further discussed below under “Forward-Looking and Cautionary Statements,” our guidance is forward-looking information that is subject to a number of risks and uncertainties, many of which are beyond our control. In addition, our 2018 capital budget excludes acquisitions and lease extensions and renewals and is subject to change depending upon a number of factors, including prevailing and anticipated prices for oil, NGLs and natural gas, results of horizontal drilling and completions, economic and industry conditions at the time of drilling, the availability of sufficient capital resources for drilling prospects, our financial results and the availability of lease extensions and renewals on reasonable terms. Conference Call Information and Summary Presentation The Company will host a conference call on Friday, March 9, 2018, at 10:00 a.m. Central Time (11:00 a.m. Eastern Time) to discuss fourth quarter and full-year 2017 financial and operational results. Those wishing to listen to the conference call, may do so by visiting the Events page under the Investor Relations section of the Company’s website, www.approachresources.com, or by phone: Dial in: (844) 884-9950 / Conference ID: 4883409 International Dial In: (661) 378-9660 A replay of the call will be available on the Company’s website or by dialing: Dial in: (855) 859-2056 / Passcode: 4883409 In addition, a fourth quarter and full-year 2017 summary presentation will be available on the Company’s website. About Approach Resources Approach Resources Inc. is an independent energy company focused on the exploration, development, production and acquisition of unconventional oil and natural gas reserves in the Midland Basin of the greater Permian Basin in West Texas. For more information about the Company, please visit www.approachresources.com. Please note that the Company routinely posts important information about the Company under the Investor Relations section of its website. This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this press release specifically include expectations of anticipated financial and operating results. These statements are based on certain assumptions made by the Company based on management’s experience, perception of historical trends and technical analyses, current conditions, anticipated future developments and other factors believed to be appropriate and reasonable by management. When used in this press release, the words “will,” “potential,” “believe,” “estimate,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “plan,” “predict,” “project,” “profile,” “model” or their negatives, other similar expressions or the statements that include those words, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Further information on such assumptions, risks and uncertainties is available in the Company’s SEC filings. The Company’s SEC filings are available on the Company’s website at www.approachresources.com. Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law. UNAUDITED RESULTS OF OPERATIONS Three Months Ended Twelve Months Ended December 31, December 31, Revenues (in thousands): Oil $ 14,082 $ 14,007 $ 52,748 $ 48,311 NGLs 8,530 5,798 27,702 19,761 Gas 5,805 6,700 24,899 22,230 Total oil, NGLs and gas sales 28,417 26,505 105,349 90,302 Net cash (payment) receipt on derivative settlements (2,878 ) 442 (4,359 ) 6,132 Total oil, NGLs and gas sales including derivative impact $ 25,539 $ 26,947 $ 100,990 $ 96,434 Oil (MBbls) 270 304 1,107 1,275 NGLs (MBbls) 377 380 1,486 1,529 Gas (MMcf) 2,498 2,530 9,829 10,404 Total (MBoe) 1,064 1,106 4,232 4,537 Total (MBoe/d) 11.6 12.0 11.6 12.4 Average prices: Oil (per Bbl) $ 52.09 $ 46.02 $ 47.63 $ 37.90 NGLs (per Bbl) 22.61 15.25 18.64 12.93 Gas (per Mcf) 2.32 2.65 2.53 2.14 Total (per Boe) $ 26.71 $ 23.96 $ 24.89 $ 19.90 Net cash (payment) receipt on derivative settlements (per Boe) (2.70 ) 0.40 (1.03 ) 1.35 Total including derivative impact (per Boe) $ 24.01 $ 24.36 $ 23.86 $ 21.25 Costs and expenses (per Boe): Lease operating $ 4.77 $ 3.40 $ 4.23 $ 4.24 Production and ad valorem taxes 2.09 2.43 2.04 1.81 Exploration 0.38 0.62 0.86 0.86 General and administrative (1) 5.16 6.35 5.75 5.45 Depletion, depreciation and amortization 15.20 17.54 16.66 17.42 (1) Below is a summary of general and administrative expense: General and administrative - cash component $ 4.09 $ 4.55 $ 4.65 $ 4.07 General and administrative - noncash component (share-based compensation) 1.07 1.80 1.10 1.38 APPROACH RESOURCES INC. AND SUBSIDIARIES (In thousands, except shares and per-share amounts) Oil, NGLs and gas sales $ 28,417 $ 26,505 $ 105,349 $ 90,302 Lease operating 5,076 3,766 17,902 19,250 Production and ad valorem taxes 2,219 2,685 8,644 8,217 Exploration 406 685 3,657 3,923 General and administrative 5,491 7,026 24,333 24,734 Depletion, depreciation and amortization 16,173 19,402 70,521 79,044 Total expenses 29,365 33,564 125,057 135,168 OPERATING LOSS (948 ) (7,059 ) (19,708 ) (44,866 ) Interest expense, net (5,370 ) (7,086 ) (21,053 ) (27,259 ) Gain on debt extinguishment — — 5,053 — Write-off of debt issuance costs — — — (563 ) Commodity derivative (loss) gain (1,377 ) (2,901 ) (262 ) (5,484 ) Other income — — 32 1,511 LOSS BEFORE INCOME TAX (BENEFIT) PROVISION (7,695 ) (17,046 ) (35,938 ) (76,661 ) INCOME TAX (BENEFIT) PROVISION: Current — — (66 ) — Deferred (53,512 ) (3,571 ) 76,487 (24,418 ) NET INCOME (LOSS) $ 45,817 $ (13,475 ) $ (112,359 ) $ (52,243 ) EARNINGS (LOSS) PER SHARE: Basic $ 0.51 $ (0.32 ) $ (1.35 ) $ (1.26 ) Diluted $ 0.51 $ (0.32 ) $ (1.35 ) $ (1.26 ) Basic 90,114,659 41,705,462 83,404,104 41,488,206 Diluted 90,114,659 41,705,462 83,404,104 41,488,206 UNAUDITED SELECTED FINANCIAL DATA Unaudited Consolidated Balance Sheet Data December 31, Cash and cash equivalents $ 21 $ 21 Other current assets 16,679 12,473 Property and equipment, net, successful efforts method 1,082,876 1,092,061 Current liabilities $ 25,067 $ 26,369 Long-term debt (1) 373,460 498,349 Deferred income taxes 82,102 5,615 Other long-term liabilities 11,531 11,270 Stockholders' equity 607,416 562,952 Total liabilities and stockholders' equity $ 1,099,576 $ 1,104,555 (1) Long-term debt at December 31, 2017, is comprised of $85.2 million in 7% senior notes due 2021 and $291 million in outstanding borrowings under our revolving credit facility, net of issuance costs of $1.1 million and $1.7 million, respectively. Long-term debt at December 31, 2016, is comprised of $230.3 million in 7% senior notes due 2021 and $273 million in outstanding borrowings under our revolving credit facility, net of issuance costs of $3.7 million and $1.3 million, respectively. Unaudited Consolidated Cash Flow Data Year Ended December 31, Net cash provided by (used in): Operating activities $ 37,454 $ 26,081 Investing activities (52,409 ) (23,890 ) Financing activities 14,955 (2,770 ) Supplemental Non-GAAP Financial and Other Measures This release contains certain financial measures that are non-GAAP measures. We have provided reconciliations below of the non-GAAP financial measures to the most directly comparable GAAP financial measures and on the Non-GAAP Financial Information page under the Financial Reporting subsection of the Investor Relations section of our website at www.approachresources.com. Adjusted Net Loss This release contains the non-GAAP financial measures adjusted net loss and adjusted net loss per diluted share, which excludes (1) non-cash fair value (gain) loss on commodity derivatives, (2) gain on debt extinguishment, (3) write-off of debt issuance costs, (4) write-off of deferred tax assets, (5) acquisition related costs, (6) tax benefit related to federal tax law change, and (6) related income tax effect on adjustments and other discrete tax items. The amounts included in the calculation of adjusted net loss and adjusted net loss per diluted share below were computed in accordance with GAAP. We believe adjusted net loss and adjusted net loss per diluted share are useful to investors because they provide readers with a meaningful measure of our profitability before recording certain items whose timing or amount cannot be reasonably determined. However, these measures are provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website. The table below provides a reconciliation of adjusted net loss to net income (loss) for the three and twelve months ended December 31, 2017 and 2016 (in thousands, except per-share amounts). Adjustments for certain items: Non-cash fair value (gain) loss on derivatives (1,500 ) 3,343 (4,097 ) 11,616 Gain on debt extinguishment — — (5,053 ) — Write-off of debt issuance costs — — — 563 Write-off of deferred tax assets — — 139,090 — Acquisition related costs 110 110 Tax benefit related to change in federal tax law (51,939 ) — (51,939 ) — Tax effect and other discrete tax items (1) 1,446 401 4,443 (2,437 ) Adjusted net loss $ (6,066 ) $ (9,731 ) $ (29,805 ) $ (42,501 ) Adjusted net loss per diluted share $ (0.07 ) $ (0.23 ) $ (0.36 ) $ (1.02 ) (1) The estimated income tax impacts on adjustments to net income (loss) are computed based upon a statutory rate of 35%, applicable to all periods presented. Additionally, this includes the tax impact of a tax shortfall related to share-based compensation of $1 million, and $1.6 million for the three months ended December 31, 2017, and December 31, 2016, respectively; and $1.3 million and $1.8 million for the years ended December 31, 2017, and December 31, 2016, respectively. EBITDAX We define EBITDAX as net income (loss), plus (1) exploration expense, (2) depletion, depreciation and amortization expense, (3) share-based compensation expense, (4) non-cash fair value (gain) loss on derivatives, (5) gain on debt extinguishment, (6) write-off of debt issuance costs, (7) interest expense, net, and (8) income tax benefit. EBITDAX is not a measure of net income or cash flow as determined by GAAP. The amounts included in the calculation of EBITDAX were computed in accordance with GAAP. EBITDAX is presented herein and reconciled to the GAAP measure of net income (loss) because of its wide acceptance by the investment community as a financial indicator of a company's ability to internally fund development and exploration activities. This measure is provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website. The table below provides a reconciliation of EBITDAX to net income (loss) for the three and twelve months ended December 31, 2017 and 2016 (in thousands). Share-based compensation 1,138 1,998 4,656 6,279 Interest expense, net 5,370 7,086 21,053 27,259 Income tax (benefit) provision (53,512 ) (3,571 ) 76,421 (24,418 ) EBITDAX $ 13,892 $ 15,468 $ 54,799 $ 52,023 Unhedged Cash Margin and Cash Operating Expenses We define unhedged cash margin as revenue, less cash operating expenses. We define cash operating expenses as operating expenses, excluding (1) exploration expense, (2) depletion, depreciation and amortization expense, and (3) share-based compensation expense. Unhedged cash margin and cash operating expenses are not measures of operating income or cash flows as determined by GAAP. The amounts included in the calculations of unhedged cash margin and cash operating expenses were computed in accordance with GAAP. Unhedged cash margin and cash operating expenses are presented herein and reconciled to the GAAP measures of revenue and operating expenses. We use unhedged cash margin and cash operating expenses as an indicator of the Company’s profitability and ability to manage its operating income and cash flows. This measure is provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website. The table below provides a reconciliation of unhedged cash margin and cash operating expenses to revenues and operating expenses for the three and twelve months ended December 31, 2017 and 2016 (in thousands, except per-Boe amounts). Revenues $ 28,417 $ 26,505 $ 105,349 $ 90,302 Production (Mboe) 1,064 1,106 4,232 4,537 Average realized price (per Boe) $ 26.71 $ 23.96 $ 24.89 $ 19.90 Operating expenses $ 29,365 $ 33,564 $ 125,057 $ 135,168 Exploration (406 ) (685 ) (3,657 ) (3,923 ) Depletion, depreciation and amortization (16,173 ) (19,402 ) (70,521 ) (79,044 ) Share-based compensation (1,138 ) (1,998 ) (4,656 ) (6,279 ) Cash operating expenses $ 11,648 $ 11,479 $ 46,223 $ 45,922 Cash operating expenses per Boe $ 10.95 $ 10.38 $ 10.92 $ 10.12 Unhedged cash margin $ 16,769 $ 15,026 $ 59,126 $ 44,380 Unhedged cash margin per Boe $ 15.76 $ 13.58 $ 13.97 $ 9.78 PV-10 The present value of our proved reserves, discounted at 10% (“PV-10”), was estimated at $521 million at December 31, 2017, and was calculated based on the first-of-the-month, 12-month average prices for oil, NGLs and gas, of $51.34 per Bbl of oil, $18.67 per Bbl of NGLs and $2.99 per MMBtu of natural gas price during 2017, adjusted for basis differentials, grade and quality. PV-10 is our estimate of the present value of future net revenues from proved oil and gas reserves after deducting estimated production and ad valorem taxes, future capital costs and operating expenses, but before deducting any estimates of future income taxes. The estimated future net revenues are discounted at an annual rate of 10% to determine their “present value.” We believe PV-10 to be an important measure for evaluating the relative significance of our oil and gas properties and that the presentation of the non-GAAP financial measure of PV-10 provides useful information to investors because it is widely used by professional analysts and investors in evaluating oil and gas companies. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, we believe the use of a pre-tax measure is valuable for evaluating the Company. We believe that PV-10 is a financial measure routinely used and calculated similarly by other companies in the oil and gas industry. The table below reconciles PV-10 to our standardized measure of discounted future net cash flows, the most directly comparable measure calculated and presented in accordance with GAAP. PV-10 should not be considered as an alternative to the standardized measure as computed under GAAP. (in millions) December 31, 2017 PV-10 $ 521.0 Less income taxes: Undiscounted future income taxes (323.3 ) 10% discount factor 263.3 Future discounted income taxes (60.0 ) Standardized measure of discounted future net cash flows $ 461.0 Liquidity is calculated by adding the net funds available under our revolving credit facility and cash and cash equivalents. We use liquidity as an indicator of the Company’s ability to fund development and exploration activities. However, this measurement has limitations. This measurement can vary from year-to-year for the Company and can vary among companies based on what is or is not included in the measurement on a company’s financial statements. This measurement is provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website. The table below summarizes our liquidity at December 31, 2017 and 2016 (in thousands). Credit Facility commitments $ 325,000 $ 325,000 Cash and cash equivalents 21 21 Long-term debt — Credit Facility (291,000 ) (273,000 ) Undrawn letters of credit (325 ) (575 ) Liquidity $ 33,696 $ 51,446 Approach Resources Inc. Suzanne Ogle, 817-989-9000 Vice President – Investor Relations & Corporate Communications [email protected] Approach Resources Inc. Reports Fourth Quarter and Full-Year 2017 Financial and Operating Results and Provides 2018 Outlook. #earnings #results #report #approachresources #value #nasdaq #oilandgas #quarter

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professional_accounting

FOREIGN INCOME & TAXPAYERS Individuals’ Use of Offshore Holding Companies (Part I) By Paul M. Schmidt, J.D., LL.M., CPA; Todd C. Lady, J.D., LL.M. Income & Exclusions Special tax rules apply to shareholders of foreign entities that qualify as either CFCs or PFICs. While a CFC is treated as a separate taxable entity, U.S. shareholders must include some CFC earnings as current income, regardless of whether any amounts are distributed. A foreign corporation will be considered a PFIC if it meets either a gross income test or an asset test. Moderate- to high-net-worth individuals frequently solicit advice on the potential for achieving tax savings via the use of offshore holding companies, inevitably located in a low-tax jurisdiction. A client’s motivations for wanting to form an offshore holding company are often as vague and unidentifiable as his or her understanding of the tax objectives intended to be achieved. Often some acquaintance (e.g., doctor, lawyer, dentist, in-law, college roommate, etc.) has told the client that he or she has an offshore corporation that does not pay tax on its income (because it is not a U.S. taxpayer). To best serve (and keep) such clients, a tax adviser must be able to provide a similar solution, or convince the client that such a strategy does not provide the perceived tax benefits. This two-part article will provide tax practitioners that do not routinely deal with international tax issues a guide as to why the use of a foreign corporation to shelter passive income from U.S. tax usually has negative tax consequences for the average taxpayer. There are, of course, occasions in which use of a foreign corporation to isolate earnings from U.S. tax is a fundamental element of sound Federal income tax planning (particularly when acquiring an interest in an active foreign business). Using various examples, some of the circumstances in which such an investment structure should be considered will be examined and illustrated. Part I provides an overview of the controlled foreign corporation (CFC) anti-deferral regime as it relates to “portfolio-type investments” through a foreign holding company (FHC) structure (i.e., shifting capital to an offshore corporation to facilitate conventional investments in publicly traded stocks and bonds), and the statutory deterrents to using such a structure. Part II, in the September 2007 issue, will illustrate the tax consequences of an FHC’s investments in an array of foreign business opportunities, including foreign partnerships, investment funds and closely held foreign corporations, and provide examples in which use of an FHC may be consistent with sound tax planning objectives. Basic Anti-Deferral Regimes For a taxpayer to benefit from deferral, the foreign entity that holds the income-producing property or activity must be a foreign corporation. If a U.S. taxpayer invests through a foreign entity that is treated as a partnership, branch or disregarded entity for Federal income tax purposes, it will remain subject to tax on its allocable share of the entity’s income, regardless of whether the partnership is formed under domestic or foreign law. Accordingly, the general rules applicable to the taxation of foreign corporations owned by U.S. persons must first be considered. There are two main anti-deferral regimes under which the U.S. imposes tax on the income of a foreign corporation with U.S. shareholders. These regimes operate by applying special tax rules to shareholders of foreign entities that qualify as either CFCs or passive foreign investment companies (PFICs). Both sets of rules are aimed predominantly at taxing a U.S. shareholder on the foreign corporation’s passive and “mobile” income (i.e., income that may easily be shifted to low-tax jurisdictions). If the rules apply, the U.S. shareholder may either: (1) be taxed currently on the foreign corporation’s income, despite the fact that no income was repatriated to the shareholder through a distribution; or (2) face a somewhat punitive interest charge (in addition to the shareholder’s ordinary income tax liability) on an ultimate distribution to the U.S. shareholder or disposition of the entity’s stock. Rules Applicable to CFCs Determining CFC Status Sec. 957(a) defines a CFC as a foreign corporation with respect to which “U.S. shareholders” collectively own stock representing more than 50% of the combined voting power or value. For this purpose, only stock owned by U.S. persons that own 10% or more of the company’s voting power is considered, according to Sec. 951(b). For example, if 11 unrelated U.S. persons own the voting stock of a foreign corporation equally, the foreign corporation will not be a CFC; there are no U.S. shareholders (i.e., 10% shareholders) with respect to the foreign corporation, despite the fact that the foreign corporation is 100% owned by U.S. persons. In determining ownership, certain attribution rules apply to treat stock owned by a related party as being owned by a shareholder.1 For example, Sec. 958(a) provides that stock owned by a foreign corporation is treated as owned proportionately by its shareholders. In addition, certain constructive ownership rules apply, under Sec. 958(b). Taxation of CFC Income under Subpart F Generally, a CFC is respected as a separate taxable entity for Federal income tax purposes, and its U.S. shareholders are taxed on the foreign corporation’s earnings only on payment of a dividend. Further, a CFC generally will not be subject to U.S. Federal income tax on its earnings unless such earnings are derived from U.S. sources.2 For certain classes of income, however, U.S. shareholders are required under Sec. 951(a)(1) to include currently a CFC’s earnings as income, regardless of whether an actual dividend has been distributed, essentially as a deemed distribution. The type of income required to be included currently by the U.S. shareholders as a deemed distribution is commonly referred to as subpart F income. Though essentially the economic equivalent of a dividend, subpart F inclusions do not qualify for the preferential 15% rate applicable to dividend income.3 Subpart F income includes the foreign personal holding company income (FPHCI) earned by a CFC, as well as special types of sales and services income.4 Generally, FPHCI includes dividends, interest, rents and royalties earned by a CFC. However, certain dividends, interest, rents and royalties may be excludible from a CFC’s subpart F income if received from a related person (i.e., generally a greater-than-50%-owned or commonly controlled person) for tax years beginning before 2009.5 According to Sec. 954(c)(1)(B), FPHCI also includes gain from the sale of property that produces dividends, interest, rents and royalties. For example, gain from the sale of a bond is treated as a sale of property that gives rise to interest income, and thus results in FPHCI. Gain from the sale of active business assets, however, is not subpart F income.6 For a sale of a partnership interest, the general rule is that such a sale gives rise to FPHCI. However, if the CFC owns a 25%-or-greater interest in the partnership, it will be deemed to sell the assets of the partnership directly; thus, to the extent such assets are active business assets, the income would not be FPHCI, under Sec. 954(c)(4). A U.S. shareholder of a CFC that generates subpart F income generally will be required to include such income as gross income in the year earned, regardless of distributions.7 Further, such income is taxable to the U.S. shareholder as ordinary income, regardless of whether it arose from a transaction that would generate long-term capital gain if entered into directly by such shareholder.8 PFIC Rules A foreign corporation will be considered a PFIC if it meets either a “gross income test” or an “asset test.” Under the gross income test, a foreign corporation will be treated as a PFIC if 75% or more of its income for the year is passive income (within the meaning of Sec. 954(c)). Under the asset test, a foreign corporation will be deemed a PFIC if more than 50% of its assets produce, or are held for the production of, passive income. Because of the mathematical nature of the PFIC tests, the analysis of whether a foreign corporation is a PFIC as to a U.S. shareholder is a factual determination that generally requires a detailed analysis. (The PFIC rules will be explained in more detail in Part II.) General Application to a Holding Company Tax Consequences of an Offshore Investment Company Assume a tax adviser’s client (a U.S. individual, T) is seeking to achieve deferral of Federal income tax by entering into portfolio-type investments through a wholly owned foreign corporation (Holdco). Because Holdco is 100% owned by T, it will be a CFC. Under the subpart F rules, T will be required to include as income any subpart F income Holdco earns on a current basis, regardless of the payment of an actual distribution. Thus, to the extent Holdco generates passive income (or another type of subpart F income), T generally will have a current Federal income tax liability. The following example illustrates the potentially detrimental tax consequences that may result from Holdco’s ownership of portfolio investments. Example: Holdco is capitalized by T with $100,000 in a jurisdiction that does not tax Holdco on income earned from passive investments or apply a withholding tax to dividend distributions (e.g., the Cayman Islands). T directs Holdco to make equal portfolio investments (noncontrolling) in publicly traded stocks and bonds, with the intention that any dividend income or sales gains will not be subject to tax, and thus will increase T’s overall return by allowing pre-tax reinvestment of the income. Holdco’s investments produce the following results: (1) the stock appreciates by 10% and pays an aggregate dividend of $5,000; (2) the annual interest earned on the bonds is 7%, resulting in $3,500 of annual stated interest; and (3) Holdco sells half of the stock after it has been held for one year and one day, resulting in $2,500 gain. Dividend and interest income: The $5,000 dividend income on the stock and the $3,500 interest income on the bonds generally will be FPHCI. Thus, both will be currently includible by T as subpart F income. Subpart F income does not qualify for the preferential 15% rate applicable to qualifying dividends from U.S. companies and certain qualified foreign corporations. Accordingly, as to the dividend income, in addition to failing to achieve deferral, T has converted income potentially taxed currently at 15% into currently taxable ordinary income subject to T’s ordinary income rate. If T is taxed at the maximum rate applicable to individuals (35%), T’s Federal income tax liability with respect to the income would be $2,975. Had T made the investments directly, he would have incurred a Federal income tax liability of $1,975 ($5,000 dividend income at 15% + $3,500 interest income at 35%). Thus, not even considering the cost of compliance, the investment strategy cost T $1,000 in additional Federal income tax as to the income generated on the investments. Gain on sale: The $2,500 gain from the sale of the stock (as well as any bonds sold) similarly will be FPHCI. Thus, gain from the sale of stock will be currently includible by T as subpart F income. In general, a U.S. person’s capital gains on sales of most stocks and bonds held for more than one year qualify for a 15% rate. Accordingly (as with the dividend income), T has potentially converted income taxable at 15% into income subject to his ordinary income rate. Assuming a maximum individual rate of 35%, the investment structure will result in $500 additional tax. Because the subpart F rules generally require the current taxation of most forms of passive income, the example is a good illustration that the Federal income tax rules do not re-sult in a tax benefit in connection with the isolation of passive investments in a foreign low-tax jurisdiction. On the contrary, such a structure may be detrimental, because the taxpayer may not benefit from preferential dividend and capital gain rates. An analysis of implementing an FHC structure also must address the practical realities of the fairly complex reporting obligations involved. Every tax adviser is charged by his or her applicable ethical standards to provide clients with advice on the illegality of failing to report income and the potential financial and criminal ramifications of such actions. Providing a client with a clear understanding of the likely penalties for failing to report income or meet tax reporting obligations typically will serve as a sufficient deterrent to generally honest taxpayers. U.S. taxpayers are required to satisfy various information reporting requirements when funding and maintaining offshore investments. If a taxpayer transfers capital (including cash) to a foreign corporation, he or she generally will be required to complete Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Form 926 requires certain information as to the amount of the property transferred and the identity of both the transferor and the transferee. Failure to file this form may result in a penalty of 10% of the amount transferred, up to $100,000.9 The $100,000 limit does not apply, however, if the failure to file was due to the taxpayer’s intentional disregard of the rule. Further, a U.S. person that owns greater than 50% of a foreign corporation with a foreign bank account and that has on deposit in foreign bank accounts amounts exceeding $10,000 during the year must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, for each year in which the threshold is met. A non-willful failure to file Form TD F 90-22.1 could result in penalties up to $10,000 per occurrence.10 U.S. taxpayers also have certain annual information reporting requirements as to foreign corporations. Generally, taxpayers that own material interests in foreign corporations are required annually to file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, with their Federal income tax returns. Form 5471 is an informational return that reports the activities of the foreign corporation. Failure to file it may result in a $10,000 penalty per occurrence (i.e., with respect to each year in which a required form is not filed).11 If a taxpayer receives notice of a failure to file a Form 5471 from the IRS and does not provide the required information within 90 days, the penalty may be increased by $10,000 for each 30-day period such failure continues (after the original 90-day period), up to a maximum additional penalty of $50,000.12 In addition, the statute of limitations on assessment on items that should have been reported on Form 5471 generally will not start to run until the form is filed.13 The IRS takes attempts by U.S. persons to erode the U.S. tax base through the use of offshore investment vehicles seriously, and U.S. tax law looks to deter such investment strategies. Nevertheless, clients unfamiliar with the complicated labyrinth of potentially applicable tax laws may seek to achieve deferral of U.S. tax on investment income through the use of controlled offshore investment vehicles. By being aware of the basic taxation of such structures and the associated compliance and reporting burdens, tax advisers generally should be able to assist clients in understanding that such investment strategies are often not likely to achieve the intended result (and could, in fact, have many unfavorable consequences). Part II of this article will discuss the PFIC rules and explore the tax consequences of investments by an FHC in nonportfolio-type opportunities, including investment strategies that may warrant the use of an FHC as part of sound Federal income tax planning. 1 Sec. 957(a)(2) applies the attribution rules of Sec. 958(a) and (b). 2 U.S.-source active business income of a CFC generally will be subject to U.S. Federal income tax only if it is effectively connected with a U.S. trade or business of the CFC within the U.S., or when an in- come tax treaty is applicable, if such income is attributable to a permanent establishment within the U.S. Passive U.S.-source income earned by a CFC may be subject to a gross-basis tax within the U.S. collected through withholding at the source. 3 Sec. 1(h)(11)(C) provides for a 15% rate on qualifying dividends paid in tax years beginning before 2011. Dividends from qualified foreign corporations (including CFCs) may qualify for the 15% rate. Because subpart F inclusions technically are not dividends, however, it is the IRS’s position that the preferential rate is not available. See Notice 2004-70, IRB 2004-44, 1. 4 The subpart F sales and services income rules are found in Sec. 954(d) and (e). 5 See Sec. 954(c)(6). The rule permitting dividends, interest, rents and royalties received by a CFC from a related person to be taxed on a lookthrough basis expires for tax years beginning after 2008. Thus, lookthrough treatment will not be available after such time, except for certain dividends paid by a lower-tier subsidiary organized in the CFC’s same country of incorporation; see Sec. 954(c)(3). Consequently, such dividends that do not qualify for the limited same-country exception received in tax years beginning after 2008 will be treated as subpart F income (unless Congress extends the lookthrough rule). 6 See Regs. Sec.1.954-2(e)(3). 7 See Sec. 951(a)(1)(A). The inclusion is required if the shareholder is a shareholder on the last day of the CFC’s year and the foreign corporation qualifies as a CFC for an uninterrupted 30 days or more during the year. 8 Sec. 1(h)(1) generally provides a maximum long-term capital gain rate of 15% for tax years beginning before 2011. 9 Regs. Sec. 1.6038B-1(f). 10 See 31 USC Section 5321(a)(5)(B)(i). A willful violation will result in penalties equal to the greater of $100,000 or 50% of the amount of the transaction or of the balance of the account at the time of the offense; see 31 USC Section 5321(a) (5)(C). The U.S. has also entered into various agreements with other countries to share information in furtherance of tax administration. Information exchange provisions are included in U.S. bilateral income tax treaties; in addition, the U.S. has also entered into taxpayer information exchange agreements with various non-treaty partners concerning the exchange of information necessary to prevent tax fraud and tax evasion. 11 Sec. 6038(b)(1). 13 See Sec. 6501(c)(8). There have been a number of tax-avoidance schemes using offshore entities and credit cards to access cash that have caught the attention of the IRS and Congress; see, e.g., Rev. Proc. 2003-11, 2003-1 CB 311 (announcing partial amnesty for taxpayers that have participated in offshore credit card arrangements targeted under the IRS’s Offshore Credit Card Program). See also the U.S. Troop Readiness, Veterans’ Health, and Iraq Accountability Act (HR 1591) (proposing that fines and penalties on certain offshore financing arrangements be doubled) and the Stop Tax Haven Abuse Act (S 681) (proposing additional penalties and modified investigation procedures in relation to U.S. taxpayer activities in so-called offshore secrecy jurisdictions).

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professional_accounting

Important Tax Changes for Individuals and Businesses Important Tax Changes for Individuals… Every year, it’s a sure bet that there will be changes to current tax law and this year is no different. From standard deductions to health savings accounts and tax rate schedules, here’s a checklist of tax changes to help you plan the year ahead. In 2021, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion. The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2020; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise, and as a reminder, personal exemptions have been eliminated through tax year 2025. In 2021, the standard deduction increases to $12,550 for individuals (up from $12,400 in 2020) and to $25,100 for married couples (up from $24,800 in 2020). In 2021, AMT exemption amounts increase to $73,600 for individuals (up from $72,900 in 2020) and $114,600 for married couples filing jointly (up from $113,400 in 2020). Also, the phaseout threshold increases to $523,600 ($1,047,200 for married filing jointly). Both the exemption and threshold amounts are indexed annually for inflation. “Kiddie Tax” For taxable years beginning in 2021, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,100. The same $1,100 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.” For example, one of the requirements for the parental election is that a child’s gross income for 2021 must be more than $1,100 but less than $11,000. Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return. A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care. For calendar year 2021, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $7,000 for self-only coverage and $14,000 for family coverage. Medical Savings Accounts (MSAs) There are two types of Medical Savings Accounts (MSAs): The Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high-deductible health plan (HDHP). Self-only coverage. For taxable years beginning in 2021, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,400 ($2,350 in 2020) and not more than $3,600 (up $50 from 2020), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,800 (up $50 from 2020). Family coverage. For taxable years beginning in 2021, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,800 and not more than $7,150, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,750. AGI Limit for Deductible Medical Expenses In 2021, the deduction threshold for deductible medical expenses is 7.5 percent of adjusted gross income (AGI), made permanent by the Consolidated Appropriations Act, 2021. Eligible Long-Term Care Premiums Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2021, the limitation is $450. Persons more than 40 but not more than 50 can deduct $850. Those more than 50 but not more than 60 can deduct $1,690 while individuals more than 60 but not more than 70 can deduct $4,520. The maximum deduction is $5,640 and applies to anyone more than 70 years of age. The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly) remains in effect for 2021, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the tax. For 2021, the foreign earned income exclusion amount is $108,700 up from $107,600 in 2020. Long-Term Capital Gains and Dividends In 2021 tax rates on capital gains and dividends remain the same as 2020 rates (0%, 15%, and a top rate of 20%); however, threshold amounts have increased: the maximum zero percent rate amounts are $40,400 for individuals and $80,800 for married filing jointly. For an individual taxpayer whose income is at or above $445,850 ($501,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $40,400 and below $445,850 for single filers). For an estate of any decedent during calendar year 2021, the basic exclusion amount is $11.70 million, indexed for inflation (up from $11.58 million in 2020). The maximum tax rate remains at 40 percent. The annual exclusion for gifts remains at $15,000. Individuals – Tax Credits Adoption Credit In 2021, a non-refundable (only those individuals with tax liability will benefit) credit of up to $14,440 is available for qualified adoption expenses for each eligible child. For tax year 2021, the maximum Earned Income Tax Credit (EITC) for low and moderate-income workers and working families rises to $6,728 up from $6,660 in 2020. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children. For tax years 2020 through 2025, the child tax credit is $2,000 per child. The refundable portion of the credit is $1,400 so that even if taxpayers do not owe any tax, they can still claim the credit. A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older). Child and Dependent Care Tax Credit The Child and Dependent Care Tax Credit also remained under tax reform. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2021. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable. Individuals – Education American Opportunity Tax Credit and Lifetime Learning Credit The maximum credit is $2,500 per student for the American Opportunity Tax Credit. The Lifetime Learning Credit remains at $2,000 per return. To claim the full credit for either, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). Prior to the passage of the Consolidated Appropriations Act, 2021, taxpayers with MAGI of $139,000 (joint filers) or $69,500 (single filers) were not able to claim the Lifetime Learning Credit. While the phaseout limits for Lifetime Learning Credit increased, taxpayers should note that the qualified tuition and expenses deduction has been repealed starting in 2021. Interest on Educational Loans In 2021, the maximum deduction for interest paid on student loans is $2,500. The deduction begins to be phased out for higher-income taxpayers with modified adjusted gross income of more than $70,000 ($140,000 for joint filers) and is completely eliminated for taxpayers with modified adjusted gross income of $85,000 ($170,000 joint filers). Individuals – Retirement Contribution Limits The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains at $19,500. Contribution limits for SIMPLE plans also remain at $13,500. The maximum compensation used to determine contributions increases to $290,000 (up from $285,000 in 2020). Income Phase-out Ranges The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $66,000 and $76,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $105,000 to $125,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $198,000 and $208,000. The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $13999,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000. Saver’s Credit In 2021, the AGI limit for the Saver’s Credit (also known as the Retirement Savings Contribution Credit) for low and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000 in 2020; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500 in 2020. Standard Mileage Rates In 2021, the rate for business miles driven is 56 cents per mile, down one half of a cent from the rate for 2020. Section 179 Expensing In 2021, the Section 179 expense deduction increases to a maximum deduction of $1,050,000 of the first $2,620,000 of qualifying equipment placed in service during the current tax year. This amount is indexed to inflation for tax years after 2018. The deduction was enhanced under the TCJA to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems. Also, of note is that costs associated with the purchase of any sport utility vehicle, treated as a Section 179 expense, cannot exceed $26,200. Bonus Depreciation Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and years beyond. Qualified Business Income Deduction Eligible taxpayers are able to deduct up to 20 percent of certain business income from qualified domestic businesses, as well as certain dividends. To qualify for the deduction business income must not exceed a certain dollar amount. In 2021, these threshold amounts are $164,900 for single and head of household filers and $329,800 for married taxpayers filing joint returns. Research & Development Tax Credit Starting in 2018, businesses with less than $50 million in gross receipts can use this credit to offset alternative minimum tax. Certain start-up businesses that might not have any income tax liability will be able to offset payroll taxes with the credit as well. Work Opportunity Tax Credit (WOTC) Extended through 2025 (The Consolidated Appropriations Act, 2021), the Work Opportunity Tax Credit is available for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Employee Health Insurance Expenses For taxable years beginning in 2021, the dollar amount of average wages is $27,800 ($27,600 in 2020). This amount is used for limiting the small employer health insurance credit and for determining who is an eligible small employer for purposes of the credit. Business Meals and Entertainment Expenses Taxpayers who incur food and beverage expenses associated with operating a trade or business are able to deduct 100 percent (50 percent for tax years 2018-2020) of these expenses for tax years 2021 and 2022 (The Consolidated Appropriations Act, 2021) as long as the meal is provided by a restaurant. Employer-provided Transportation Fringe Benefits If you provide transportation fringe benefits to your employees in 2021, the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $270. The monthly limitation for qualified parking is $270. While this checklist outlines important tax changes for 2021, additional changes in tax law are likely to arise during the year ahead. Don’t hesitate to call if you have any questions or want to get a head start on tax planning for the year ahead. Categories: COVID-19, News, Newsletter, TaxesBy ABIP PreviousPrevious post:Working Remotely Could Affect Your TaxesNextNext post:Identity Protection Pin Available To All Taxpayers Protecting Business Taxpayers From Identity Theft ABIP CPAs & Advisors Welcomes Rich Majeres and Staff COVID-related Tax Relief Act of 2020 Identity Protection Pin Available To All Taxpayers Working Remotely Could Affect Your Taxes Solar Technology Tax Credits Still Available for 2020 ABIP, P.C. is a full-service accounting firm with offices in Houston and San Antonio. ABIP, P.C. is a proactive firm, providing year-round guidance and services. Houston: 713.954.2002 San Antonio: 210.341.2581 Pearsall: 830.334.4476

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professional_accounting

You are at:Home»Economy»THE VEIL OF INCORPORATION THE VEIL OF INCORPORATION By The Accountant July 29, 2020 No Comments Is the Curtain Falling? By Samuel Oyombra In the recent past, there has been a rise in the number of cases in Kenya, as well as in many other jurisdictions, where company directors and/ or officers have been arraigned in court, even convicted of offences committed by their respective companies. The question which often comes to mind is whether in deed it is the directors / officers, or rather the company itself, which should be the appropriate defendant or respondent in such cases. Obviously, there could be a few challenges when it comes to holding a company criminally liable in some scenarios; since the company does not possess a mind of its own, but operates only on the basis of thoughts and minds of natural persons who run or govern it. Arguably therefore, a just regime of punishment for crimes of corporations must instead target the officers and servants of the corporations by whose consent, fault or negligence the offences have been committed or omitted (George O. Otieno, 2008). Without attempting an exhaustive legal discourse on this subject matter, this article attempts to examine the evolving legal environment under which companies operate today, especially with respect to perhaps, the most basic principle which underpinned its formation, and the growing irrelevance of the fundamental doctrine of a ‘separate legal entity’ as originally envisaged in the formation of body corporates. Working behind the Veil; – The Agency Theory This theory is closely linked to the concept of a registered corporation, and with it, the establishment of a general body of agents who act on behalf of the corporation, to invest the funds supplied by others and execute daily operations of the entity. The question which often comes to mind is whether in deed it is the directors / officers, or rather the company itself, which should be the appropriate defendant or respondent in such cases. Obviously, there could be a few challenges when it comes to holding a company criminally liable in some scenarios; since the company does not possess a mind of its own, but operates only on the basis of thoughts and minds of natural persons who run or govern it. Arguably therefore, a just regime of punishment for crimes of corporations must instead target the officers and servants of the corporations by whose consent, fault or negligence the offences have been committed or omitted (George O. Otieno, 2008) The theory stems from the concept of stewardship, and is as old as life itself; it exists in many human relationships and even in the relationship between mankind and nature. It should be understood that servants / agents are expected to act in the best interest, in the service of their masters / principals. Vicarious Liability and the Doctrine of Separate Legal Personality To shield servants from legal action while serving their masters, the principle of vicarious liability was born. Founded on the rule of common sense, it refers to the legal responsibility imposed on a master/ principal for a range of omissions or wrongdoings of their servants/agents/ employees; as long as it can be proved that the aggrieving actions or omissions took place in the course of the servant’s (agent’s/ employee’s) service/employment Relating this to companies, upon registration, the law permits the company so registered to do all the things that an incorporated entity can do. However, given her natural inability to think or act by herself, the registered entity can only do business through agents and/or servants/ officers/ employees who would be presumed to be acting on its behalf. When, in the course of acting for it, such an agent/ servant/ employee causes an injury/damage or other loss to a third party, the party so injured would be able to seek compensation from the employing company, being the principal, and not from the servant/ agent, as long as it can be established that the servant/ agent was acting in the course of, or within the scope and authority of the employment relationship. It is on this same understanding that the Companies Act originally sought to shield a company’s directors from any personal liabilities which could arise from any legal actions instituted against them individually for any grievances caused by their actions or omissions in the service to their respective companies. Such, was the rule upheld in Salomon v A Salomon & Co Ltd. [1896] UKHL 1, [1897] AC 22 as explained hereunder. The Veil Strengthened in the Case of Salomon v A Salomon & Co Ltd (1896) As such, the House of Lords upheld that the company (and not the individual director) was liable for the obligations arising from the offending actions done in the name of the company. However, over the years, there has been a paradigm shift, especially in light of the fight against corruption and fraud, which puts to question the continuing relevance of this celebrated doctrine. There are provisions in law and regulations which seem to threaten this original underpinning principle in corporate governance. The recent amendments to the Companies Act 2015 and the Income Tax Act in Kenya are just but some of the legislative interventions that seek to diminish the doctrine of a company’s separate legal personality. The Companies Act and the Doctrine of Separate Legal Entity These provisions have the effect of rendering the position held by the UK House of Lords in Salomon v A Salomon & Co Ltd as discussed above, untenable. Tax Liability and the Principle of Separate Legal Personality There are also provisions in the Kenyan tax laws which impose personal liability on individual officers of a body corporate with respect to tax offences committed by the body corporates for which they work. Sec 37A of the Income Tax Act, for example, provides that, where a corporate body which is required to make specified tax deductions fails to remit the deducted amount as required or directed by the Commissioner, then every director and every officer of the corporate body concerned with the management thereof, shall be guilty of an offence, and shall be liable to a fine of up-to two hundred thousand shillings or to imprisonment for a term not exceeding two years, or to both such fine and imprisonment. In fact, Sec 18 of the Tax Procedures Act No 29 of 2015 goes further to impose an obligation for tax payable by a company, on a controlling shareholder (subject to specified defenses) in a situation where an arrangement has been entered into, with the intention or effect of rendering a company unable to satisfy a current or future tax liability under the law. Respecting the doctrine of separate legal personality, the company, and not the member, would have been liable in such circumstances. Yet, just like in the case of the Companies Act cited earlier, these tax law provisions, by imposing a personal liability on specified individuals, further appear to tear away the veil that has hitherto separated a corporate body from the officers / servants who work for it. Unclaimed Financial Assets Act and the Veil of Incorporation The Kenya’s Unclaimed Financial Assets Act (UFAA) No. 40 of 2011 is another law that imposes individual liability on directors and officers of a company where the corporate body commits an offence under the Act. It provides, under Sec 52, that where a body corporate commits an offence under the section, an employee, officer, director or agent of the corporation who authorizes, permits or acquiesces in the commission of the offense commits an offense and would be liable to a fine of up to one million shillings or to imprisonment for not more than one year, or to both such fine and imprisonment. Curtain of Incorporation Pierced in the Insolvency Act No 18 of 2015 Sec 509 of the Kenya’s Insolvency Act provides for instances where a person would be held personally liable for the debts of a company. In fact, Sec 510 provides for instances where a past or present officer or member of a company in liquidation would be prosecuted for specified offences. Granted, the law has always allowed for limited exceptions where the veil of incorporation could be lifted, but now, with emerging numerous provisions and laws expanding the exceptions, that veil appears to have become so thin and so porous that it could as well be presumed to be no longer existent. Financial Reporting and the Veil of Incorporation Of crucial importance for Accountants and Auditors though, is to determine whether related legal expenses as well as the fines and penalties levied on individual directors and officers of a company as discussed above, but settled by the respective company, would constitute valid expenses of that company to be reported in the statement of profit or loss; and whether it would be necessary for the auditor to consider modifying the audit report in a situation where the board of directors approves and insists on including such legal fees, and related fines and penalties as expenses of the company. The same challenge could also come up in the public sector, in a situation where a public servant/state officer is individually sued and fined, for actions or omissions arising in the course of his/her service, but then the employing government entity settles those fines on behalf of their employee. Though it should be noted that the Human Resource Policies and Procedures Manual for the Public Service (Public Service Commission, 2016, pp. 157-158) provides that public officers facing criminal or civil charges in Court could be assisted in their defense by the government, there could be need for the auditor to exercise his/her professional judgment in determining whether the related legal expenses incurred by the government in this case would form part of public spending. An auditor who fails to consider this fact, in forming an audit opinion on the financial statements of the reporting entity, which is subject to an audit, could be at a risk of issuing an inappropriate audit opinion. From the foregoing, and in light of these emerging legislative developments, it is possible to start to glean a trend of actions which could end up totally removing the veil of incorporation that has hitherto separated companies from the individuals who run or own it. The effect of these developments is that there’s now increased responsibility placed on the shoulders of the natural persons who own or run the company. As such, there is a growing occupational risk which company directors must be aware of, even as they serve, or plan to serve in their respective boards. Worse still, even controlling shareholders of today’s companies must be alive to the fact that there could be instances where they would be called upon to defend themselves in a case where their companies are charged in court. This is a crucial risk factor which an aspiring director must be aware of, and should take into account in making the decision to accept an invitation to serve in any board of a company. The same applies to promoters desiring to form themselves into a company. CPA Samuel Oyombra is a Member of the Institute of Certified Public Accountants of Kenya BIG FOUR AGENDA HEADED FOR FAILURE UNLESS… IS KENYA’S KSH 3 TRILLION BUDGET REALISTIC?

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professional_accounting

As filed with the Securities and Exchange Commission on April 11, 2019. Registration No. 333- FORM S-1 THE SECURITIES ACT OF 1933 Delaware 7372 45-2647441 (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) (Address, including zip code and telephone number, of Registrant’s principal executive offices) Nelson Chai (Name, address, including zip code and telephone number, including area code, of agent for service) Tony West Keir Gumbs David Peinsipp Siana Lowrey Andrew Williamson 101 California Street, 5th Floor Eric W. Blanchard Kerry S. Burke Brian K. Rosenzweig Covington & Burling LLP 620 Eighth Avenue Alan F. Denenberg Sarah K. Solum Davis Polk & Wardwell LLP Menlo Park, California 94025 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐ CALCULATION OF REGISTRATION FEE Title of Each Class of Securities to be Registered Proposed Maximum Offering Price(1)(2) Common Stock, $0.00001 par value per share $1,000,000,000 $121,200 Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of any additional shares that the underwriters have the option to purchase. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. PROSPECTUS (Subject to Completion) Issued April 11, 2019 Common Stock Shares Uber Technologies, Inc. is offering shares of its common stock, and the selling stockholders identified in this prospectus are offering shares of common stock. We will not receive any of the proceeds from the sale of shares by the selling stockholders. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $ and $ per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “UBER.” Investing in our common stock involves risks. See “Risk Factors” beginning on page 25. Per Share Total Price to Public Underwriting Discounts and Commissions ¹ Proceeds to Uber Proceeds to Selling Stockholders See the section titled “Underwriters” for a description of the compensation payable to the underwriters. We have granted the underwriters the right to purchase up to an additional shares of common stock solely to cover over-allotments, if any. At our request, the underwriters have reserved up to shares of common stock, or up to % of the shares offered by this prospectus, for sale at the initial public offering price through a directed share program to certain qualifying Drivers in the United States. See the section titled “Underwriters—Directed Share Program.” The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares of common stock to purchasers on , 2019. Morgan Stanley Goldman Sachs & Co. LLC BofA Merrill Lynch Barclays Citigroup Allen & Company LLC RBC Capital Markets SunTrust Robinson Humphrey Deutsche Bank Securities HSBC SMBC Mizuho Securities Needham & Company Loop Capital Markets Siebert Cisneros Shank & Co., L.L.C. Academy Securities BTIG Canaccord Genuity CastleOak Securities, L.P. Cowen Evercore ISI JMP Securities Macquarie Capital Mischler Financial Group, Inc. Oppenheimer & Co. Raymond James William Blair The Williams Capital Group, L.P. TPG Capital BD Prospectus dated , 2019. We ignite opportunity by setting the world in motion. 6 Continents 3 Platform Offerings 700+ Cities 91M MAPCs 14M Trips a day $78B Paid to Drivers Trips a day for the year ended December 31, 2018. All other data as of December 31, 2018 10+ Billion Trips 10B Trips September 2018 12 Months later (+5B) 5B Trips September 2017 11 Months later (+3B) 2B Trips October 2016 7 Months later (+1B) 1B Trips March 2016 5 Years after launch (+1B) 2012 2013 2014 2015 2016 2017 2018 Letter from Dara Khosrowshahi, Chief Executive Officer Prospectus Summary Market, Industry, and Other Data Use of Proceeds Unaudited Pro Forma Consolidated Financial Information Selected Consolidated Financial and Operating Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Letter from Dr. Ronald Sugar, Chairperson of the Board of Directors Certain Relationships and Related Person Transactions Principal and Selling Stockholders Description of Capital Stock Shares Eligible for Future Sale Material U.S. Federal Income Tax Consequences to Non-U.S. Holders Index to Consolidated Financial Statements Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide you with any information other than the information contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders, nor the underwriters take responsibility for, and provide no assurance about the reliability of, any information that others may give you. This prospectus is an offer to sell only the shares offered hereby and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the shares of our common stock. Our business, financial condition, results of operations, and prospects may have changed since that date. No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and observe any restrictions relating to this offering and the distribution of this prospectus applicable to those jurisdictions. Through and including , 2019 (the 25th day after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. Key Terms for Our Business Consumer or end-user. Consumer or end-user refers to a platform user who transacts on our platform to take a Ridesharing or New Mobility ride or to order an Uber Eats meal. Driver. Driver refers to an independent driver or courier who uses our platform to provide Ridesharing services, Uber Eats services, or both. The number of Drivers in a quarterly period is defined as the number of Drivers who provided a ride or delivered a meal on our platform at least once in a given month, averaged over each month in the quarter. Minority-owned affiliates. Minority-owned affiliates refers to Didi, Grab, and our Yandex.Taxi joint venture. New Mobility. New Mobility refers to products in our Personal Mobility offering that provide consumers with access to rides through a variety of modes, including dockless e-bikes and e-scooters. Offerings. Offerings refer to our Personal Mobility, Uber Eats, and Uber Freight offerings. Partner. Partner refers to any one of a Driver, restaurant, or shipper, all of whom are our customers. Personal Mobility. Personal Mobility refers to our offering that includes our Ridesharing and New Mobility products. Platform user. Platform user refers to any user of our platform, including Drivers, consumers, restaurants, shippers, and carriers. Ridesharing. Ridesharing refers to products in our Personal Mobility offering that connect consumers with Drivers who provide rides in a variety of vehicles, such as cars, auto rickshaws, motorbikes, minibuses, or taxis. Key Terms for Our Key Metrics and Non-GAAP Financial Measure Unless otherwise noted, all of our key metrics exclude historical results from China (which are included as discontinued operations in our audited consolidated financial statements), Russia and the Commonwealth of Independent States (“Russia/CIS”), and Southeast Asia, geographies where we previously had operations and where we now participate solely through our minority-owned affiliates. Adjusted EBITDA is a non-GAAP financial measure. For more information about how we use this non-GAAP financial measure in our business, the limitations of this measure, and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, please see the section titled “Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measure.” 2018 Divested Operations. We define 2018 Divested Operations as our operations in (i) Russia/CIS prior to the consummation of our Yandex.Taxi joint venture and (ii) Southeast Asia prior to the sale of those operations to Grab. Adjusted EBITDA. We define Adjusted EBITDA as net income (loss), excluding (i) income (loss) from discontinued operations, net of income taxes, (ii) net income (loss) attributable to redeemable non-controlling interest, net of tax (iii) benefit from (provision for) income taxes, (iv) income (loss) from equity method investment, net of tax, (v) interest expense, (vi) other income (expense), net, (vii) depreciation and amortization, (viii) stock-based compensation expense, (ix) legal, tax, and regulatory reserves and settlements, (x) asset impairment/loss on sale of assets, (xi) acquisition and financing related expenses, and (xii) restructuring charges. Core Platform. Core Platform refers to one of the two operating segments that we use to manage our business. Core Platform consists primarily of Ridesharing and Uber Eats. Core Platform Adjusted Net Revenue. We define Core Platform Adjusted Net Revenue as Core Platform revenue (i) less excess Driver incentives, (ii) less Driver referrals, (iii) excluding the impact of legal, tax, and regulatory reserves and settlements recorded as contra-revenue, and (iv) excluding the impact of our 2018 Divested Operations. We believe that Core Platform Adjusted Net Revenue is informative of our Core Platform top line performance because it measures the total net financial activity generated by our Core Platform after taking into account all Driver and restaurant earnings, Driver incentives, and Driver referrals. Excess Driver incentives are recorded in cost of revenue, exclusive of depreciation and amortization, and Driver referrals are recorded in sales and marketing expenses. These amounts largely depend on our business decisions. We include the impact of these amounts in Core Platform Adjusted Net Revenue to evaluate how increasing or decreasing incentives would impact our Core Platform top line performance, and the overall net financial activity between us and our customers, which ultimately impacts our Take Rate. Core Platform Adjusted Net Revenue is lower than Core Platform revenue in all reported periods in this prospectus. Core Platform Contribution Margin. We define Core Platform Contribution Margin as Core Platform Contribution Profit (Loss) as a percentage of Core Platform Adjusted Net Revenue. Core Platform Contribution Margin demonstrates the margin that we generate after direct expenses. We believe that Core Platform Contribution Margin is a useful indicator of the economics of our Core Platform, as it does not include indirect unallocated research and development and general and administrative expenses (including expenses for our Advanced Technologies Group and Other Technology Programs). Core Platform Contribution Profit (Loss). We define Core Platform Contribution Profit (Loss) as Core Platform revenue less the following direct costs and expenses of our Core Platform: (i) cost of revenue, exclusive of depreciation and amortization; (ii) operations and support; (iii) sales and marketing; (iv) research and development; and (v) general and administrative. Core Platform Contribution Profit (Loss) also reflects any applicable exclusions from Adjusted EBITDA and excludes the impact of our 2018 Divested Operations. Driver or restaurant earnings. Driver or restaurant earnings refer to the net portion of the fare or the net portion of the order value that a Driver or a restaurant retains, respectively. Driver incentives. Driver incentives refer to payments that we make to Drivers, which are separate from and in addition to the Driver’s portion of the fare paid by the consumer. For example, Driver incentives could include payments we make to Drivers should they choose to take advantage of an incentive offer and complete a consecutive number of trips or a cumulative number of trips on the platform over a defined period of time. Driver incentives are recorded as a reduction of revenue to the extent they are not excess Driver incentives (as defined below). Driver referrals. Driver referrals refer to payments that we make to existing Drivers to refer new Drivers onto our platform. Driver referrals are recorded in sales and marketing expenses, as they represent the receipt of a distinct service of customer acquisition for which there is evidence of fair value. Excess Driver incentives. Excess Driver incentives refer to cumulative payments, including incentives but excluding Driver referrals, to a Driver that exceed the cumulative revenue that we recognize from a Driver with no future guarantee of additional revenue. Cumulative payments to a Driver could exceed cumulative revenue from a Driver as a result of Driver incentives or when the amount paid to a Driver for a Trip exceeds the fare charged to the consumer. Excess Driver incentives are recorded in cost of revenue, exclusive of depreciation and amortization. Gross Bookings. We define Gross Bookings as the total dollar value, including any applicable taxes, tolls, and fees, of Ridesharing and New Mobility rides, Uber Eats meal deliveries, and amounts paid by shippers for Uber Freight shipments, in each case without any adjustment for consumer discounts and refunds, Driver and restaurant earnings, and Driver incentives. Gross Bookings do not include tips earned by Drivers. Monthly Active Platform Consumers (“MAPCs”). We define MAPCs as the number of unique consumers who completed a Ridesharing or New Mobility ride or received an Uber Eats meal on our platform at least once in a given month, averaged over each month in the quarter. MAPCs presented for an annual period are MAPCs for the fourth quarter of the year. Other Bets. Other Bets refers to one of the two operating segments that we use to manage our business. Other Bets in 2017 consisted primarily of Uber Freight and in 2018 also included New Mobility. Take Rate. We define Take Rate as Core Platform Adjusted Net Revenue as a percentage of Core Platform Gross Bookings. Trips. We define Trips as the number of completed consumer Ridesharing or New Mobility rides and Uber Eats meal deliveries in a given period. For example, an UberPOOL ride with three paying consumers represents three unique Trips, whereas an UberX ride with three passengers represents one Trip. Letter from Dara Khosrowshahi Chief Executive Officer Ten years ago, Uber was born out of a watershed moment in technology. The rise of smartphones, the advent of app stores, and the desire for on-demand work supercharged Uber’s growth and created an entirely new standard of consumer convenience. What began as “tap a button and get a ride” has become something much more profound: ridesharing and carpooling; meal delivery and freight; electric bikes and scooters; and self-driving cars and urban aviation. Of course, in getting from point A to point B we didn’t get everything right. Some of the attributes that made Uber a wildly successful startup—a fierce sense of entrepreneurialism, our willingness to take risks that others might not, and that famous Uber hustle—led to missteps along the way. In fact, when I joined Uber as CEO, many people asked me why I would leave the stability of my previous job for one that was anything but. My answer was simple: Uber is a once-in-a-generation company, and the opportunity ahead of it is enormous. Today, Uber accounts for less than one percent of all miles driven globally. Just a small percentage of people in countries where Uber is available have ever used our services. And we are still barely scratching the surface when it comes to huge industries like food and logistics, and how the future of urban mobility will reshape cities for the better. Building this platform has required a willingness to challenge orthodoxies and reinvent—sometimes even disrupt—ourselves. Over the last decade, as the needs and preferences of our customers have changed, we’ve changed too. Now, we’re becoming something different once again: a public company. vi Taking this step means that we have even greater responsibilities—to our shareholders, our customers, and our colleagues. That’s why, over the past 18 months, we have improved our governance and Board oversight; built a stronger and more cohesive management team; and made the changes necessary to ensure our company culture rewards teamwork and encourages employees to commit for the long term. Because we are not even one percent done with our work, we will operate with an eye toward the future. We will optimize for the happiness and loyalty of our customers rather than marginal trip or transaction growth. And we will not shy away from making short-term financial sacrifices where we see clear long-term benefits. Our continued success will come from stellar execution and the strength of the platform we have worked so hard to build. Our network spans tens of millions of consumers and partners and represents one of the world’s largest platforms for independent work. Our engineering and product teams are solving some of the most difficult problems at the intersection of the physical and digital worlds. And our regional operations teams let us build and run our business as true citizens of the cities we serve. I want to close with my commitment to you: I won’t be perfect, but I will listen to you; I will ensure that we treat our customers, our colleagues, and our cities with respect; and I will run our business with passion, humility, and integrity. Dara Khosrowshahi vii This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully before making an investment decision. You should carefully consider, among other things, the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Uber,” the “company,” “we,” “our,” “us,” or similar terms in this prospectus to refer to Uber Technologies, Inc. and, where appropriate, our consolidated subsidiaries. Our mission is to ignite opportunity by setting the world in motion. We believe deeply in our bold mission. Every minute of every day, consumers and Drivers on our platform can tap a button and get a ride or tap a button and get work. We revolutionized personal mobility with Ridesharing, and we are leveraging our platform to redefine the massive meal delivery and logistics industries. While we have had unparalleled growth at scale, we are just getting started: only 2% of the population in the 63 countries where we operate used our offerings in the quarter ended December 31, 2018, based on MAPCs. The foundation of our platform is our massive network, leading technology, operational excellence, and product expertise. Together, these elements power movement from point A to point B. Massive network. Our massive, efficient, and intelligent network consists of tens of millions of Drivers, consumers, restaurants, shippers, carriers, and dockless e-bikes and e-scooters, as well as underlying data, technology, and shared infrastructure. Our network becomes smarter with every trip. In over 700 cities around the world, our network powers movement at the touch of a button for millions, and we hope eventually billions, of people. Leading technology. We have built proprietary marketplace, routing, and payments technologies. Marketplace technologies are the core of our deep technology advantage and include demand prediction, matching and dispatching, and pricing technologies. Operational excellence. Our regional on-the-ground operations teams use their extensive market-specific knowledge to rapidly launch and scale products in cities, support Drivers, consumers, restaurants, shippers, and carriers, and build and enhance relationships with cities and regulators. Product expertise. Our products are built with the expertise that allows us to set the standard for powering movement on-demand, provide platform users with a contextual, intuitive interface, continually evolve features and functionality, and deliver safety and trust. Our Personal Mobility, Uber Eats, and Uber Freight platform offerings each address large, fragmented markets. Our Personal Mobility offering includes Ridesharing and New Mobility. Ridesharing refers to products that connect consumers with Drivers who provide rides in a variety of vehicles, such as cars, auto rickshaws, motorbikes, minibuses, or taxis. New Mobility refers to products that provide consumers with access to rides through a variety of modes, including dockless e-bikes and e-scooters. We aim to provide everyone, everywhere on our platform with access to a safe, reliable, affordable, and convenient trip within a few minutes of tapping a button. In the quarter ended December 31, 2018, the average wait time for a rider to be picked up by a Driver was five minutes. In addition to powering movement for riders, our platform powers opportunity for Drivers, fueling the future of independent work by providing Drivers with a reliable and flexible way to earn money. We are committed to providing consumers with access to the best personal mobility options to meet their needs. We are investing in new modes of transportation that enable us to address a wider range of consumer use cases and represent a significant opportunity to bring additional trips onto our platform. For example, according to the U.S. Department of Transportation, trips of less than three miles accounted for 46% of all U.S. vehicle trips in 2017. We believe that dockless e-bikes and e-scooters address many of these use cases and will replace a portion of these vehicle trips over time, particularly in urban environments that suffer from substantial traffic during peak commuting hours. The rapid growth and scale of our Ridesharing products, which to date have accounted for virtually all of our Personal Mobility offering, demonstrates the size of our opportunity: Revenue derived from our Ridesharing products grew from $3.5 billion in 2016 to $9.2 billion in 2018. Gross Bookings derived from our Ridesharing products grew from $18.8 billion in 2016 to $41.5 billion in 2018. Consumers traveled approximately 26 billion miles on our platform in 2018. We believe that Personal Mobility represents a vast, rapidly growing, and underpenetrated market opportunity. We operate our Personal Mobility offering in 63 countries with an aggregate population of 4.1 billion people. Through our Personal Mobility offering, we estimate that our platform served 2% of the population in these countries based on MAPCs in the quarter ended December 31, 2018. We estimate that people traveled 4.7 trillion vehicle miles in trips under 30 miles in these countries in 2018, of which the approximately 26 billion miles traveled on our platform represent less than 1% penetration. We believe that our Personal Mobility market share and ridesharing category position are key indicators of our progress towards our massive market opportunity. We calculate our Personal Mobility market share in a given region by dividing our Personal Mobility miles traveled by our estimates of the addressable market in miles traveled in the region. We estimate the size of the addressable market by multiplying the number of passenger cars in each country by our country-level estimates of miles traveled per car. Our estimates also include an estimated 4.4 trillion public transportation miles, which we allocate to regions based on their share of the population in our addressable market. See the section titled “Business—Our Market Opportunity” for more information. Based on this estimate, our Personal Mobility market share is less than 1% in every major region of the world where we operate. We calculate our ridesharing category position within a given region by dividing our Ridesharing Gross Bookings by our estimates of total ridesharing Gross Bookings generated by us and other companies with similar ridesharing products. Based on these estimates, we have a leading ridesharing category position in every major region of the world where we operate, as shown in the graphic below. We also participate in certain regions through our minority-owned affiliates and intend to maintain our interests in these minority-owned affiliates to participate in the expected growth of ridesharing and other modes of personal mobility in the regions where they operate. Our Global Ridesharing Footprint Does not include any increase in our category position in the Middle East, North Africa, and Pakistan as a result of our pending acquisition of Careem. Percentages are based on our internal estimates of Gross Bookings and miles traveled using our currently available information. For more detail on ownership stakes, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Minority-Owned Affiliates.” Our Uber Eats offering allows consumers to search for and discover local restaurants, order a meal at the touch of a button, and have the meal delivered reliably and quickly. We launched our Uber Eats app just over three years ago, and we believe that Uber Eats has grown to be the largest meal delivery platform in the world outside of China based on Gross Bookings. We believe that our scale enables the average delivery time for Uber Eats to be faster than the average delivery time for our competitors. For the quarter ended December 31, 2018, the average delivery time was approximately 30 minutes. We believe that Uber Eats not only leverages, but also increases, the supply of Drivers on our network. For example, Uber Eats enables Ridesharing Drivers to increase their utilization and earnings by accessing additional demand for trips during non-peak Ridesharing times. Uber Eats also expands the pool of Drivers by enabling people who are not Ridesharing Drivers or who do not have access to Ridesharing-qualified vehicles to deliver meals on our platform. In addition to benefiting Drivers and consumers, Uber Eats provides restaurants with an instant mobile presence and efficient delivery capability, which we believe generates incremental demand and improves margins for restaurants by enabling them to serve more consumers without increasing their existing front-of-house expenses. Of the 91 million MAPCs on our platform, over 15 million received a meal using Uber Eats in the quarter ended December 31, 2018, tapping into our network of more than 220,000 restaurants in over 500 cities globally. In connection with our transactions with Grab and Yandex, we contributed our meal delivery offerings in Southeast Asia and Russia/CIS to Grab and to our Yandex.Taxi joint venture, respectively, including our partnerships with certain significant global restaurant chains with operations in those markets. We expect to benefit from continued growth of the meal delivery industry in the regions where our minority-owned affiliates operate. We believe that Uber Freight is revolutionizing the logistics industry. Uber Freight leverages our proprietary technology, brand awareness, and experience revolutionizing industries to create a transparent, on-demand marketplace that seamlessly connects shippers and carriers. The freight industry today is highly fragmented and deeply inefficient. It can take several hours, sometimes days, for shippers to find a truck and driver for shipments, with most of the process conducted over the phone or by fax. Uber Freight greatly reduces friction in the logistics industry by providing an on-demand platform to automate and accelerate logistics transactions end-to-end. Uber Freight connects carriers with the most appropriate shipments available on our platform, and gives carriers upfront, transparent pricing and the ability to book a shipment with the touch of a button. We serve shippers ranging from small- and medium-sized businesses to global enterprises by enabling them to create and tender shipments with a few clicks, secure capacity on demand with upfront pricing, and track those shipments in real-time from pickup to delivery. We believe that all of these factors represent significant efficiency improvements over traditional freight brokerage providers. Since Uber Freight’s public launch in the United States in May 2017, we have contracted with over 36,000 carriers that in aggregate have more than 400,000 drivers and have served over 1,000 shippers, including global enterprises such as Anheuser-Busch InBev, Niagara, Land O’Lakes, and Colgate-Palmolive. Uber Freight has grown to over $125 million in revenue for the quarter ended December 31, 2018. In March 2019, we announced the expansion of our Uber Freight offering into Europe. Although Europe’s freight market is one of the largest and most sophisticated in the world, we believe that European shippers and carriers experience many of the same pain points in their current operations as U.S. shippers and carriers. Platform Synergies We intend to continue to invest in new platform offerings that we believe will further strengthen our platform and existing offerings and fuel multiple virtuous cycles of growth. We can rapidly launch and scale platform products and offerings by leveraging our massive network, leading technology, operational excellence, and product expertise. Furthermore, each new product adds nodes to our network and strengthens these shared capabilities, enabling us to launch and invest in additional products more efficiently. For example, Uber Eats is used by many of the same consumers who use our Ridesharing products, is built on our existing technology stack, and has grown by leveraging many of the same regional operations teams that built our Ridesharing products. Similarly, in cities where we already operate, we can more efficiently launch other products and offerings, such as dockless e-bikes and e-scooters, by leveraging our existing network of Drivers and consumers and regional on-the-ground operations teams. As evidence of the power of our platform, Uber Eats grew to $2.6 billion in Gross Bookings for the quarter ended December 31, 2018, nearly three years following the launch of the Uber Eats app, which we believe makes our Uber Eats offering the largest meal delivery platform in the world outside of China. In addition, each new product or offering enables us to invest more efficiently because we share innovations and investments across our platform offerings. These synergies effectively lower our costs and allow us to invest in a scalable way that becomes increasingly efficient as we grow with each new product or offering. Each platform offering also increases the value of our platform to platform users, enabling us to attract new platform users and to deepen engagement with existing platform users. Both of these dynamics grow our network scale and liquidity, which further increases the value of our platform to platform users. For example, Uber Eats attracts new consumers to our network – in the quarter ended December 31, 2018, 50% of first-time Uber Eats consumers were new to our platform. Additionally, in the quarter ended December 31, 2018, consumers who used both Personal Mobility and Uber Eats had 11.5 Trips per month on average, compared to 4.9 Trips per month on average for consumers who used a single offering in cities where both Personal Mobility and Uber Eats were offered. Similarly, having multiple offerings increases our engagement with Drivers. For example, with Uber Eats, Ridesharing Drivers can access additional demand for trips during non-peak Ridesharing times to increase their utilization and earnings. We believe that these trends will continue as we further expand Uber Eats from over 500 cities into nearly 700 cities where we already offer Personal Mobility. The strength of our leading platform is demonstrated by our performance: There were 91 million MAPCs for the quarter ended December 31, 2018. There were 1.5 billion Trips on our platform for the quarter ended December 31, 2018. There were 3.9 million Drivers on our platform for the quarter ended December 31, 2018. Drivers have earned over $78.2 billion on our platform since 2015, as well as $1.2 billion in tips since we introduced in-app tipping for Drivers in July 2017, in each case through December 31, 2018. We had a 9% Core Platform Contribution Margin in 2018. See the section titled “Summary Consolidated Financial and Operating Data—Notes about Certain Key Metrics—Core Platform Contribution Margin” for additional information. In 2018, Gross Bookings grew to $49.8 billion, up 45% from $34.4 billion in 2017. Over the same period, revenue reached $11.3 billion, up 42% from $7.9 billion in the prior year. Core Platform Adjusted Net Revenue was $10.0 billion in 2018, up 39% from $7.2 billion in 2017. Net income (loss) was $1.0 billion in 2018 and $(4.0) billion in 2017. Adjusted EBITDA was $(1.8) billion in 2018 and $(2.6) billion in 2017. See the section titled “Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measure” for additional information and a reconciliation of net income (loss) to Adjusted EBITDA. Acquisition of Careem In March 2019, we entered into an asset purchase agreement to acquire substantially all of the assets and assume substantially all of the liabilities of Careem Inc. and its subsidiaries (collectively, “Careem”). Dubai-based Careem, founded in 2012, provides ridesharing, meal delivery, and payments services to millions of users in 115 cities across the Middle East, North Africa, and Pakistan. This acquisition advances our strategy of having a leading ridesharing category position in every major region of the world in which we operate. We expect the acquisition of Careem to significantly expand our presence in the Middle East, North Africa, and Pakistan, which we believe are attractive markets due to their size and growth potential, driven by tech-savvy populations, high smartphone penetration, low rates of car ownership, and communities developing the next generation of transportation options to serve their growing populations. Careem has ridesharing operations in 14 countries excluding Sudan, which business we expect Careem to divest prior to the closing of our acquisition. We estimate that these 14 countries had an aggregate population of over 530 million people and accounted for 331 billion vehicle miles during the year ended December 31, 2018. The purchase price for the acquisition is approximately $3.1 billion, consisting of up to approximately $1.7 billion of our unsecured convertible notes (the “Careem Convertible Notes”) and approximately $1.4 billion in cash, subject to certain adjustments. The acquisition of Careem’s business is subject to applicable regulatory approvals in certain of the countries in which Careem operates. The transaction is expected to close in January 2020. Following the closing of the acquisition, Careem co-founder and Chief Executive Officer Mudassir Sheikha will continue to lead the Careem business, which will report to its own board comprising three representatives from Uber and two representatives from Careem, which will allow Careem to preserve its brand and market-facing operations. How We Approach the Future We are on a new path forward with the hiring of our Chief Executive Officer Dara Khosrowshahi in September 2017 following many challenges regarding our culture, workplace practices, and reputation. In addition to hiring our Chief Executive Officer, we have revamped our senior executive team, hiring respected leaders with extensive public and private sector experience, including our Chief Financial Officer Nelson Chai, Chief Operating Officer Barney Harford, Chief Legal Officer Tony West, Chief People Officer Nikki Krishnamurthy, Chief Marketing Officer Rebecca Messina, Chief Diversity and Inclusion Officer Bo Young Lee, Chief Trust and Security Officer Matt Olsen, and Chief Compliance and Ethics Officer Scott Schools. Our leadership team has sought to reform our culture fundamentally by improving our governance structure, strengthening our compliance program, creating and embracing new cultural norms, committing to diversity and inclusion, and rebuilding our relationships with employees, Drivers, consumers, cities, and regulators. We have significantly improved our governance structure and are adopting policies that are similar to those adopted by leading Fortune 500 companies, and we believe these governance improvements will benefit our performance. We built a seasoned, qualified board of directors with the addition of new independent directors in 2017 and 2018, including Ursula Burns, Wan Ling Martello, Ronald Sugar, and John Thain. We divided the roles of Chairperson and Chief Executive Officer and appointed Dr. Sugar as independent Chairperson. We replaced our supervoting structure with a one-share, one-vote structure. We believe that these continuing governance changes will help us to scale our business responsibly, effectively manage risk, and act with integrity and accountability to all stakeholders. We believe that going public will further enhance our transparency with shareholders, regulators, and government officials. We are committed to building a best-in-class compliance program. We have made tremendous progress in creating a program that is designed to prevent and detect violations of corporate policy, law, and regulations. We continue to enhance our compliance and ethics program by conducting top-down risk assessments and developing policies and practices customized for our growing and evolving global business. We place diversity and inclusion at the core of everything we do. We strive to create a workplace that is inclusive of everyone, where every person can be authentic, and where that authenticity is celebrated as a strength. In pursuit of that goal, our senior leadership team sponsors and provides resources to our employee resource groups (“ERGs”), which are created and operated by our employees, and which are constantly working to further build and improve our culture. We embrace the future with optimism, and we work towards our mission based on eight cultural norms. Our team came together to write these norms from the ground up to reflect who we are and where we are going. We do the right thing. Period. We build globally, we live locally. We harness the power and scale of our global operations to deeply connect with the cities, communities, drivers, and riders that we serve every day. We are customer obsessed. We work tirelessly to earn our customers’ trust and business by solving their problems, maximizing their earnings, or lowering their costs. We surprise and delight them. We make short-term sacrifices for a lifetime of loyalty. We celebrate differences. We stand apart from the average. We ensure people of diverse backgrounds feel welcome. We encourage different opinions and approaches to be heard, and then we come together and build. We act like owners. We seek out problems, and we solve them. We help each other and those who matter to us. We have a bias for action and accountability. We finish what we start, and we build Uber to last. And when we make mistakes, we’ll own up to them. We persevere. We believe in the power of grit. We don’t seek the easy path. We look for the toughest challenges, and we push. Our collective resilience is our secret weapon. We value ideas over hierarchy. We believe that the best ideas can come from anywhere, both inside and outside our company. Our job is to seek out those ideas, to shape and improve them through candid debate, and to take them from concept to action. We make big bold bets. Sometimes we fail, but failure makes us smarter. We get back up, we make the next bet, and we go! We are committed to using a proactive and collaborative approach with regulators. As a result, we are rebuilding and strengthening our relationships with regulators around the world and engaging in an ongoing, constructive dialogue. For example, in Berlin and Munich, we have actively worked with regulators to introduce eco-friendly products, such as dockless e-bikes and our all-electric vehicle product, Uber Green, to help those cities decrease air pollution, reduce urban congestion, and increase access to clean transportation options. Additionally, in 2018, we partnered with officials in the province of Mendoza, Argentina to design the country’s first ridesharing regulations. We believe that this long-term collaborative approach will enable us to drive positive legislative change and allow people all over the globe to benefit from modern and efficient transportation options. We strengthened our commitment to Drivers as part of our new path forward. In June 2017, we launched our Driver-focused “180 Days of Change” campaign, during which we created 38 new features and improvements for Drivers, crafted specifically to address their feedback. These improvements, which include tipping, two-minute cancellation times, 24/7 phone support, long-trip notifications, and live rider locations, were initially launched in the United States and we are continuing to roll these improvements out globally. We have created an “Early Tester Program” for Drivers to try features and updates before they are widely available, and we continue to prioritize and promote good Driver relations. In November 2018, we introduced a Driver rewards program, Uber Pro, in beta mode in eight cities in the United States. We expect Uber Pro to provide Drivers with the opportunity to increase their earnings, receive discounts on vehicle maintenance and gas, and receive full tuition reimbursement to complete courses toward an undergraduate degree or a non-degree certificate through Arizona State University Online. It is a new day at Uber. Massive Network We have a massive, efficient, and intelligent network consisting of tens of millions of Drivers, consumers, restaurants, shippers, carriers, and dockless e-bikes and e-scooters, as well as underlying data, technology, and shared infrastructure. Our network becomes smarter with every trip. In over 700 cities around the world, our network powers movement at the touch of a button for millions, and we hope eventually billions, of people. We have massive network scale and liquidity, with 1.5 billion Trips and an average wait time of five minutes for a rider to be picked up by a Driver in the quarter ended December 31, 2018. Every node we add to our network increases liquidity, and we intend to continue to add more Drivers, consumers, restaurants, shippers, carriers, and dockless e-bikes and e-scooters. We also hope to add autonomous vehicles, delivery drones, and vertical takeoff and landing vehicles to our network, along with other future innovations. Our strategy is to create the largest network in each market so that we can have the greatest liquidity network effect, which we believe leads to a margin advantage. Starting with supply to create a liquidity network effect. Liquidity Network Effect More Drivers Driver Supply More Rides Per Hour and Higher Earnings For Drivers More Riders Lower Wait Times And Fares More Liquidity Increasing scale, creating category leadership and a margin advantage. We can choose to use incentives, such as promotions for Drivers and consumers, to attract platform users on both sides of our network, which can result in a negative margin until we reach sufficient scale to reduce incentives. In certain markets, other operators may use incentives to attempt to mitigate the advantages of our more liquid network, and we will generally choose to match these incentives, even if it results in a negative margin, to compete effectively and grow our business. Generally, for a given geographic market, we believe that the operator with the larger network will have a higher margin than the operator with the smaller network. To the extent that competing ridesharing category participants choose to shift their strategy towards shorter-term profitability by reducing their incentives or employing other means of increasing their take rate, we believe that we would not be required to invest as heavily in incentives given the impact of price and Driver earnings on consumer and Driver behavior, respectively. In addition to competing against ridesharing category participants, we also expect to continue to use Driver incentives and consumer discounts and promotions to grow our business relative to lower-priced alternatives, such as personal vehicle ownership, and to maintain balance between Driver supply and consumer demand. Our technology manages dynamic, real-world interactions every second of every day. We have built proprietary marketplace, routing, and payments technologies. Marketplace technologies. Our marketplace technologies comprise the real-time algorithmic decision engine that matches supply and demand for our Personal Mobility, Uber Eats, and Uber Freight offerings. Demand prediction. Our proprietary demand prediction engine uses data to predict when and where peak ride and meal order volume will occur, allowing us to manage supply and demand in a city efficiently. Matching and dispatching. Our proprietary matching and dispatching algorithms generate more than 30 million match pair predictions per minute. Pricing. Our technology sets product pricing in real-time at a local level. In areas and times of high demand, we deploy dynamic pricing to help restore balance between Driver supply and consumer demand. Dynamic pricing helps to balance demand during our busiest times so that a reliable ride is always within reach. Routing technologies. We use advanced routing algorithms to build a carefully optimized system capable of handling hundreds of thousands of ETA requests per second. Payments technologies. We have developed a robust payments infrastructure that includes flexible, secure, and trusted payment options. Artificial intelligence and machine learning. We have built a machine learning software platform that powers hundreds of models behind our data-driven services across our offerings and in customer service and safety. Our regional on-the-ground operations teams use their extensive market-specific knowledge to rapidly launch and scale products, support Drivers, consumers, and restaurants, and build and enhance relationships with cities and regulators. Regional presence, global scale. We have regional operations teams in all of our markets. These regional on-the-ground teams enable us to better understand and contribute to communities that we serve. For example, as we expand dockless e-bikes and e-scooters into new cities, we can leverage our regional operations teams to more efficiently launch in a given market. Platform user support. We are committed to providing reliable, regional, on-the-ground support for Drivers and consumers, including 24/7 phone support in the United States and certain other markets for Drivers and in-app support for consumers. Product Expertise Our products are built with the expertise that allows us to set the standard for powering movement on-demand, provide platform users with a contextual, intuitive interface, continually evolve features and functionality, and deliver safety and trust. On-demand experience. We design mobile-native products that have defined the on-demand experience to power movement. Contextual, intuitive interface. We aim to provide products that are consistent and easy-to-use for all platform users. We combine a sleek and seamless user interface with our artificial intelligence and machine learning capabilities to create a sophisticated yet user-friendly experience. Continuous, iterative feature and function development. By leveraging our network scale, we rapidly introduce and iterate new products and features in multiple markets across the globe. Safety and trust. We design our products to include robust safety tools for all platform users. For example, in 2018, we launched our Safety Toolkit, which allows both Drivers and consumers to access a menu of safety features directly from the home screen of our app. We have a two-way ratings system that enables both Drivers and consumers to rate each other, which increases accountability on our platform. Our Autonomous Driving Strategy We are investing in technology to power the next generation of transportation. Our Advanced Technologies Group (“ATG”) focuses on developing autonomous vehicle technologies, which we believe have the long-term potential to provide safer and more efficient rides and deliveries to consumers, as well as lower prices. ATG was established in 2015 in Pittsburgh with 40 researchers from Carnegie Robotics and Carnegie Mellon University. ATG has primary engineering offices in Pittsburgh, San Francisco, and Toronto with over 1,000 employees. ATG has built over 250 self-driving vehicles, collected data from millions of autonomous vehicle testing miles, and completed tens of thousands of passenger trips. Along the way to a potential future autonomous vehicle world, we believe that there will be a long period of hybrid autonomy, in which autonomous vehicles will be deployed gradually against specific use cases while Drivers continue to serve most consumer demand. As we solve specific autonomous use cases, we will deploy autonomous vehicles against them. Such situations may include trips along a standard, well-mapped route in a predictable environment in good weather. In other situations, such as those that involve substantial traffic, complex routes, or unusual weather conditions, we will continue to rely on Drivers. Moreover, high-demand events, such as concerts or sporting events, will likely exceed the capacity of a highly utilized, fully autonomous vehicle fleet and require the dynamic addition of Drivers to the network in real time. Our regional on-the-ground operations teams will be critical to maintaining reliable supply for such high-demand events. Deciding which trip receives a vehicle driven by a Driver and which receives an autonomous vehicle, and deploying both in real time while maintaining liquidity in all situations, is a dynamic that we believe is imperative for the success of an autonomous vehicle future. Accordingly, we believe that we will be uniquely suited for this dynamic during the expected long hybrid period of co-existence of Drivers and autonomous vehicles. Drivers are therefore a critical and differentiating advantage for us and will continue to be our valued partners for the long-term. We will continue to partner with original equipment manufacturers (“OEMs”) and other technology companies to determine how to most effectively leverage our network during the transition to autonomous vehicle technologies. Our Market Opportunity We address a massive opportunity in powering movement from point A to point B. The scope of our bold mission, unparalleled size of our global network, and breadth of our platform offerings lead to a very large market opportunity for us. We view our market opportunity in terms of a total addressable market (“TAM”), which we believe that we can address over the long-term, and a serviceable addressable market (“SAM”), which we currently address. As of the quarter ended December 31, 2018, we had Ridesharing operations in 63 countries with an aggregate population of 4.1 billion people. For additional information regarding our estimates and calculations, see the section titled “Market, Industry, and Other Data.” Our Personal Mobility TAM consists of 11.9 trillion miles per year, representing an estimated $5.7 trillion market opportunity in 175 countries. We include all passenger vehicle miles and all public transportation miles in all countries globally in our TAM, including those we have yet to enter, except for the 20 countries that we address through our ownership positions in our minority-owned affiliates, over which we have no operational control other than approval rights with respect to certain material corporate actions. We estimate that these 20 countries represent an additional estimated market opportunity of approximately $0.5 trillion. Our current Personal Mobility SAM consists of 3.9 trillion miles per year, representing an estimated $2.5 trillion market opportunity in 57 countries. We include only these 57 countries in our SAM as they are the countries where we operate today, other than the six countries identified below where we experience significant regulatory restrictions. We also include all miles traveled in passenger vehicles for trips under 30 miles in our SAM. We do not include miles from trips greater than 30 miles, as the vast majority of our trips are shorter than this distance. While we believe that a portion of our trips can be a substitute for public transportation, we exclude public transportation miles from our SAM given the price differential between the two modes of transportation. We plan to grow our current SAM by expanding further into our six near-term priority countries, Argentina, Germany, Italy, Japan, South Korea, and Spain, where our ability to grow our Ridesharing operations to scale is currently and may continue to be limited by significant regulatory restrictions. We already offer certain Personal Mobility products such as livery vehicles, taxi partnerships, and dockless e-bikes in several of these countries, and hope to grow our presence in these six countries in the near future to the extent regulatory restrictions are reduced. For trips under 30 miles, we estimate that these six countries account for 0.8 trillion vehicle miles. We calculate the market opportunity of these 0.8 trillion vehicle miles to be $0.5 trillion. We refer to this opportunity, together with our current SAM, as our near-term SAM. Our near-term SAM consists of 4.7 trillion miles per year, representing an estimated $3.0 trillion market opportunity in 63 countries. We believe that we are just getting started: consumers only traveled approximately 26 billion miles on our platform in 2018, implying a less than 1% penetration rate of our near-term SAM. TAM: 175 Countries All Passenger Vehicle and Public Transport Trips 11.9Tn Miles $5.7Tn Passenger Vehicle Trips: 7.5Tn Miles $4.7Tn Public Transport: 4.4Tn Miles $1.0Tn Near-Term SAM: 63 Countries Passenger Vehicle Trips<30 Miles 4.7Tn Miles $3.0Tn Current SAM: 57 Countries Passenger Vehicle Trips< 30 Miles 3.9Tn Miles $2.5Tn Uber Personal Mobility Near-Term SAM Miles Penetration: less than 1% According to Euromonitor International, the global spend for consumer food services, which includes full-service restaurants, limited-service restaurants, cafés and bars, and other consumer foodservice, was $2.8 trillion in 2017. Of this amount, we believe that our Uber Eats offering addresses a SAM of $795 billion, the amount that consumers spent in 2017 on meals from home delivery, takeaway, and drive-through worldwide from these consumer food services, including in the 19 countries we address through our ownership positions in our minority-owned affiliates. The home delivery market, which accounts for $161 billion of the global spend for consumer food services, has grown 77% year-over-year since 2013, significantly faster than the growth rate of the consumer food service market, which grew 5% over the same period. We expect that the home delivery market will continue to grow as a result of the convenience that it provides consumers. We believe that we penetrated 1.0% of this $795 billion market given our $7.9 billion of Uber Eats Gross Bookings for the year ended December 31, 2018. We also believe that home delivery can address a portion of the $2.0 trillion eat-in restaurant spend, as more consumers choose to have prepared meals from restaurants delivered. Therefore, we estimate our TAM to be the entire $2.8 trillion consumer spend at retail restaurants. However, given that spend at eat-in restaurants is often tied to the dining experience, we do not expect to address all of the eat-in spending included in our TAM. Euromonitor International estimated spend through store-based grocery retailers was $6.3 trillion in 2017. While we do not include this spend in the estimates for our TAM, we believe that Uber Eats can address a portion of the spending on groceries with our existing meal delivery product. According to the American Trucking Associations, businesses spent $700 billion on trucking in the United States in 2017, a total that we believe represents the SAM for our Uber Freight offering. Uber Freight currently addresses the brokerage portion of the United States market, which Armstrong & Associates estimates was $72 billion in 2017. We believe the business logistics market is moving towards an on-demand logistics model, as evidenced by the brokerage segment growing at a compound annual growth rate of over 11% from 1995 to 2017. We believe that we penetrated less than 0.1% of this $700 billion market given our $359 million of Uber Freight Gross Bookings for the year ended December 31, 2018. While Uber Freight currently operates only in the United States, in March 2019, we announced the expansion of our Uber Freight offering into Europe. According to Armstrong & Associates, the European market for freight trucking was $600 billion in 2017. Globally, Armstrong & Associates estimates the market for freight trucking represented a $3.8 trillion opportunity in 2017, representing our TAM as we believe that we will address an increasing portion of the market over time. Our Growth Strategy Key elements of our growth strategy include: Increasing Ridesharing penetration in existing markets; Expanding Personal Mobility into new markets; Continuing to invest in and expand Uber Eats; Pursuing targeted investments and acquisitions; Leveraging our platform to launch new products; Increasing Driver and consumer engagement; Continuing to invest in and expand Uber Freight; Continuing to innovate and transform our products to meet platform user needs; and Investing in advanced technologies, including autonomous vehicle technologies. Summary Risk Factors Investing in our common stock involves numerous risks, including the risks described in the section titled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. The following are some of these risks, any of which could have an adverse effect on our business financial condition, operating results, or prospects. The personal mobility, meal delivery, and logistics industries are highly competitive, with well-established and low-cost alternatives that have been available for decades, low barriers to entry, low switching costs, and well-capitalized competitors in nearly every major geographic region. To remain competitive in certain markets, we have in the past lowered, and may continue to lower, fares or service fees, and we have in the past offered, and may continue to offer, significant Driver incentives and consumer discounts and promotions. We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability. Our business would be adversely affected if Drivers were classified as employees instead of independent contractors. If we are unable to attract or maintain a critical mass of Drivers, consumers, restaurants, shippers, and carriers, whether as a result of competition or other factors, our platform will become less appealing to platform users. Our workplace culture and forward-leaning approach created operational, compliance, and cultural challenges and our efforts to address these challenges may not be successful. Maintaining and enhancing our brand and reputation is critical to our business prospects. We have previously received significant media coverage and negative publicity, particularly in 2017, regarding our brand and reputation, and a failure to rehabilitate our brand and reputation will cause our business to suffer. Our workforce and operations have grown substantially since our inception and we expect that they will continue to do so. If we are unable to effectively manage that growth, our financial performance and future prospects will be adversely affected. Platform users may engage in, or be subject to, criminal, violent, inappropriate, or dangerous activity that results in major safety incidents, which may harm our ability to attract and retain Drivers, consumers, restaurants, shippers, and carriers. We are making substantial investments in new offerings and technologies, and expect to increase such investments in the future. These new ventures are inherently risky, and we may never realize any expected benefits from them. We generate a significant percentage of our Gross Bookings from trips in large metropolitan areas and trips to and from airports, and these operations may be negatively affected. We may fail to develop and successfully commercialize autonomous vehicle technologies and expect that our competitors will develop such technologies before us, and such technologies may fail to perform as expected, or may be inferior to those developed by our competitors. Our potential acquisition of Careem is subject to a number of risks and uncertainties. We may experience security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data, or platform user data. We may continue to be blocked from or limited in providing or operating our products and offerings in certain jurisdictions, and may be required to modify our business model in those jurisdictions as a result. Our business is subject to numerous legal and regulatory risks that could have an adverse impact on our business and future prospects. We were founded in 2009 and incorporated as Ubercab, Inc., a Delaware corporation, in July 2010. In February 2011, we changed our name to Uber Technologies, Inc. Our principal executive offices are located at 1455 Market Street, 4th Floor, San Francisco, California 94103, and our telephone number is (415) 612-8582. Our website address is www.uber.com. Information contained on or accessible through our website is not a part of this prospectus or the registration statement of which it forms a part. Uber, Uber Technologies, the Uber logo, and other trade names, trademarks, or service marks of Uber appearing in this prospectus are the property of Uber. Trade names, trademarks, and service marks of other companies appearing in this prospectus are the property of their respective holders. Common stock offered by us Common stock offered by the selling stockholders Common stock to be outstanding after this offering Underwriters’ over-allotment option We estimate that net proceeds from the sale of our common stock that we are offering will be approximately $ billion (or approximately $ billion if the underwriters exercise their over-allotment option in full), based on the assumed initial public offering price of $ per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock in this offering by the selling stockholders. The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our common stock. We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. We expect to use a portion of the net proceeds we receive to satisfy a portion of the anticipated tax withholding and remittance obligations related to the settlement of our outstanding restricted stock units (“RSUs”). We may also use a portion of the net proceeds to acquire or make investments in businesses, products, offerings, and technologies, although we do not have agreements or commitments for any material acquisitions or investments at this time. See the section titled “Use of Proceeds” for additional information. See the section titled “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock. Driver appreciation reward To acknowledge Drivers who have participated in our success, we are paying a one-time cash Driver appreciation reward to qualifying Drivers in jurisdictions where we operate through owned operations, in an aggregate amount of approximately $300 million to over 1.1 million qualifying Drivers around the world. We expect to pay the Driver appreciation reward to qualifying Drivers on or around April 27, 2019. In the United States, each qualifying Driver will receive a Driver appreciation reward in an amount equal to $100, $500, $1,000, or $10,000, based on the number of lifetime Trips completed by the qualifying Driver. The amount of the Driver appreciation reward paid to qualifying Drivers outside of the United States will be based on the same Trip criteria, but may be adjusted on a region-by-region basis to account for differences in average hourly earnings by region. Whether a Driver qualifies for a Driver appreciation reward will be based on the following criteria: • one Trip completed in 2019 as of April 7, 2019; • (i) 2,500, (ii) 5,000, (iii) 10,000, or (iv) 20,000 lifetime Trips completed as of April 7, 2019; and • the Driver is in good standing. Qualifying Drivers will receive only one Driver appreciation reward, which will be the largest Driver appreciation reward for which they are eligible. Directed share program At our request, the underwriters have reserved up to shares of common stock, or up to % of the shares offered by this prospectus, for sale at the initial public offering price through a directed share program to certain qualifying Drivers in the United States. To qualify for the directed share program, a Driver must meet the minimum criteria for the Driver appreciation reward. The sales will be made at our direction by Morgan Stanley & Co. LLC and its affiliates through a directed share program. The number of shares of our common stock available for sale to the general public in this offering will be reduced to the extent that such qualifying Drivers purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock offered by this prospectus. Participants in this directed share program will not be subject to lockup or market standoff restrictions with the underwriters or with us with respect to any shares purchased through the directed share program. For additional information, see the section titled “Underwriters—Directed Share Program.” Proposed NYSE trading symbol The number of shares of our common stock to be outstanding after this offering is based on million shares of common stock outstanding as of December 31, 2018, and excludes: 42.9 million shares of our common stock issuable upon the exercise of stock options outstanding as of December 31, 2018, with a weighted-average exercise price of $9.08 per share; million shares of our common stock subject to RSUs outstanding as of December 31, 2018, for which the liquidity event-based vesting condition will be satisfied in connection with this offering, but for which the service-based vesting condition was not satisfied as of December 31, 2018 (we expect that additional vesting of these RSUs through , 2019 will result in the net issuance of shares in connection with this offering, after withholding shares to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $ per share and an assumed % tax withholding rate)); million shares of our common stock subject to RSUs granted after December 31, 2018 (we expect that the service-based vesting condition will be satisfied as of , 2019 and the liquidity event-based vesting condition will be satisfied in connection with this offering with respect to certain of these RSUs, resulting in the net issuance of shares in connection with this offering, after withholding shares to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $ per share and an assumed % tax withholding rate)); 217,359 shares of our common stock issuable upon the exercise of warrants outstanding as of December 31, 2018, with a weighted-average exercise price of $10.44 per share (excluding warrants that are assumed to be exercised prior to the closing of this offering discussed in detail below); up to 30.4 million shares of our common stock issuable upon the conversion of up to approximately $1.7 billion aggregate principal amount of the Careem Convertible Notes that we may issue in connection with the acquisition of Careem, which will be convertible at a conversion price of $55.00 per share. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Careem Convertible Notes” for more information; 130.0 million shares of our common stock reserved for future issuance under our 2019 Equity Incentive Plan (“2019 Plan”), which will become effective on the date of the underwriting agreement between us and the underwriters for this offering; and 25.0 million shares of our common stock reserved for issuance under our 2019 Employee Stock Purchase Plan (“ESPP”), which will become effective on the date of the underwriting agreement between us and the underwriters for this offering. In addition, unless we specifically state otherwise, the information in this prospectus assumes: the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus; the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each of which will be in effect prior to the closing of this offering; the automatic conversion of 903.6 million shares of our redeemable convertible preferred stock outstanding as of December 31, 2018 into 903.6 million shares of our common stock immediately prior to the closing of this offering; the net issuance of million shares of our common stock subject to RSUs outstanding as of December 31, 2018, for which the service-based vesting condition was satisfied as of December 31, 2018 and the liquidity event-based vesting condition will be satisfied in connection with this offering, after withholding million shares to satisfy associated estimated income tax obligations (based on the assumed initial public offering price of $ per share and an assumed % tax withholding rate); the cash exercise of a warrant to purchase 150,071 shares of our Series E redeemable convertible preferred stock outstanding as of December 31, 2018, which will result in the issuance of 150,071 shares of common stock in connection with this offering; 922,655 shares of our Series G redeemable convertible preferred stock issued in February 2019 upon the exercise of a warrant that was outstanding as of December 31, 2018, which will automatically convert into 922,655 shares of common stock in connection with this offering; shares of our common stock issuable upon the conversion of $2.9 billion aggregate principal amount of our outstanding unsecured paid-in-kind (“PIK”) convertible notes due 2021 (the “2021 Convertible Notes”) and unsecured PIK convertible notes due 2022 (the “2022 Convertible Notes,” and together with the 2021 Convertible Notes, the “Convertible Notes”) outstanding as of December 31, 2018, plus additional accrued principal of $ (through an assumed conversion date of , 2019 and based on the assumed initial public offering price of $ per share) in connection with the closing of this offering; no exercise of outstanding stock options or settlement of outstanding RSUs subsequent to December 31, 2018; and no exercise of the underwriters’ over-allotment option. SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The following tables summarize our consolidated financial and operating data. The summary consolidated statements of operations data for the years ended December 31, 2016, 2017, and 2018 (except the pro forma share and pro forma net income per share information) and the summary consolidated balance sheet data as of December 31, 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read the following summary consolidated financial and operating data together with the sections titled “Selected Consolidated Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The summary consolidated financial and operating data in this section are not intended to replace our audited consolidated financial statements and the related notes and are qualified in their entirety by our audited consolidated financial statements and the related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results in any future period. Year Ended December 31, 2016(1) 2017 2018 (in millions, except share amounts which are reflected in thousands and per share amounts) $ 3,845 $ 7,932 $ 11,270 Costs and expenses Cost of revenue, exclusive of depreciation and amortization shown separately below Operations and support(2) 881 1,354 1,516 Sales and marketing(2) Research and development(2) General and administrative(2) Depreciation and amortization(2) Total costs and expenses Loss from operations (3,023 ) (4,080 ) (3,033 ) (334 ) (479 ) (648 ) Other income (expense), net(3) 139 (16 ) 4,993 Income (loss) from continuing operations before income taxes and loss from equity method investment (3,218 ) (4,575 ) 1,312 Provision for (benefit from) income taxes 28 (542 ) 283 Loss from equity method investment, net of tax — — (42 ) Net income (loss) from continuing operations (3,246 ) (4,033 ) 987 Income from discontinued operations, net of income taxes (including gain on disposition in 2016)(4) 2,876 — — Net income (loss) including redeemable non-controlling interest (370 ) (4,033 ) 987 Less: net loss attributable to redeemable non-controlling interest, net of tax Net income (loss) attributable to Uber Technologies, Inc. $ (370 ) $ (4,033 ) $ 997 Net income (loss) per share attributable to Uber Technologies, Inc. common stockholders, basic and diluted(5): Basic and diluted net income (loss) per common share: Continuing operations $ (7.89 ) $ (9.46 ) $ — Discontinued operations 6.99 — — Basic and diluted net income (loss) per common share Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: Pro forma net income per share attributable to common stockholders (unaudited): Weighted-average shares used to compute pro forma net income per share attributable to common stockholders (unaudited): On January 1, 2017, we adopted Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“Topic 606”), on a full retrospective basis. Accordingly, our audited consolidated financial statements for 2016 were recast to conform to Topic 606. See Notes 1 and 2 to our audited consolidated financial statements included elsewhere in this prospectus. Includes stock-based compensation expense as follows: Operations and support $ 21 $ 30 $ 15 General and administrative Total stock-based compensation expense $ 128 $ 137 $ 172 The components of other income (expense), net, were as follows: Foreign currency exchange gains (losses), net (91 ) 42 (45 ) Gain on divestiture — — 3,214 Unrealized gain on investments Change in fair value of embedded derivatives 142 (173 ) (501 ) Total other income (expense), net $ 139 $ (16 ) $ 4,993 See Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of our discontinued operations. See Notes 1 and 12 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net income (loss) per share attributable to common stockholders and basic and diluted pro forma net income (loss) per share attributable to common stockholders, and the weighted-average number of shares used in the computation of the per share amounts. As of December 31, 2018 Actual Pro Forma(1)(2) Pro Forma As Adjusted(2)(3) Consolidated Balance Sheet Data: $ 6,406 $ $ Working capital(4) Long-term debt, net of current portion Redeemable convertible preferred stock warrant liability Redeemable convertible preferred stock (7,865 ) Total stockholders’ deficit The pro forma consolidated balance sheet data gives effect to (i) the automatic conversion of 903.6 million shares of redeemable convertible preferred stock outstanding as of December 31, 2018 into 903.6 million shares of our common stock immediately prior to the closing of this offering, (ii) the net issuance of shares of our common stock upon the vesting and settlement of RSUs for which the service-based vesting condition was satisfied as of December 31, 2018 and the liquidity event-based vesting condition will be satisfied in connection with this offering, after giving effect to shares withheld to satisfy the associated withholding tax obligations (based on the assumed initial public offering price of $ per share and an assumed % tax withholding rate) and the related increase in liabilities and corresponding decrease in additional paid-in capital, (iii) stock-based compensation expense of $ associated with restricted stock awards, RSUs, SARs, and stock options for which the service-based vesting condition was satisfied or partially satisfied as of December 31, 2018 and the liquidity event-based vesting condition will be satisfied in connection with this offering, reflected as an increase in accumulated deficit, and an increase in additional paid-in capital for equity-settled awards or an increase in liabilities for cash-settled awards, (iv) the assumed cash exercise of a warrant to purchase 150,071 shares of our Series E redeemable convertible preferred stock outstanding as of December 31, 2018, which will result in the issuance of 150,071 shares of our common stock in connection with this offering, and the related reclassification of the redeemable convertible preferred stock warrant liability to additional paid-in capital for this exercise; (v) the automatic conversion of 922,655 shares of our Series G redeemable convertible preferred stock issued upon the exercise of a warrant in February 2019 into 922,655 shares of our common stock in connection with this offering, and the related reclassification of the redeemable convertible preferred stock warrant liability to additional paid-in capital for this exercise, (vi) shares of our common stock issuable upon the conversion of $2.9 billion aggregate principal amount of Convertible Notes outstanding as of December 31, 2018, plus additional accrued principal of $ (through an assumed conversion date of , 2019 and based on the assumed initial public offering price of $ per share) in connection with the closing of this offering, and (vii) the filing and effectiveness of our amended and restated certificate of incorporation that will be in effect immediately prior to the closing of this offering. For additional information, see Note 1 to our audited consolidated financial statements included elsewhere in this prospectus. The pro forma as adjusted consolidated balance sheet data gives effect to (i) the pro forma items described in footnote (1) above and (ii) the issuance and sale by us of shares of our common stock in this offering at the assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the use of proceeds to satisfy the withholding tax obligations described in the footnote above. Pro forma (items (ii)(b) and (vi)) and pro forma as adjusted consolidated balance sheet data are illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, working capital, total assets, additional paid-in capital, and total stockholders’ deficit by $ million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, working capital, total assets, additional paid-in capital, and total stockholders’ deficit by approximately $ million, assuming the assumed initial public offering price of $ per share remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Working capital is defined as total current assets less total current liabilities. See our audited consolidated financial statements and the related notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities. (in millions, except %) Other Financial and Operating Data: Monthly Active Platform Consumers(1) Trips(2) Gross Bookings(3) $ 19,236 $ 34,409 $ 49,799 Core Platform Adjusted Net Revenue(4) Core Platform Contribution Margin(5) (23 )% 0 % 9 % $ (2,517 ) $ (2,642 ) $ (1,847 ) MAPCs represent the number of unique consumers who completed a Ridesharing or New Mobility ride or received an Uber Eats meal on our platform at least once in a given month, averaged over each month in the quarter. MAPCs presented for an annual period are MAPCs for the fourth quarter of the year. Trips represent the number of completed consumer Ridesharing or New Mobility rides and Uber Eats meal deliveries in a given period. For example, an UberPOOL ride with three paying consumers represents three unique Trips, whereas an UberX ride with three passengers represents one Trip. Gross Bookings represent the total dollar value, including any applicable taxes, tolls, and fees, of Ridesharing and New Mobility rides, Uber Eats meal deliveries, and amounts paid by shippers for Uber Freight shipments, in each case without any adjustment for consumer discounts and refunds, Driver and restaurant earnings, and Driver incentives. Gross Bookings do not include tips earned by Drivers. See the section titled “—Notes about Certain Key Metrics—Core Platform Adjusted Net Revenue” below for more information. See the section titled “—Notes about Certain Key Metrics—Core Platform Contribution Margin” below for more information. See the section titled “—Non-GAAP Financial Measure—Adjusted EBITDA” below for more information and for a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA. Notes about Certain Key Metrics Core Platform Adjusted Net Revenue We define Core Platform Adjusted Net Revenue as Core Platform revenue (i) less excess Driver incentives, (ii) less Driver referrals, (iii) excluding the impact of legal, tax, and regulatory reserves and settlements recorded as contra-revenue, and (iv) excluding the impact of our 2018 Divested Operations. We believe that Core Platform Adjusted Net Revenue is informative of our Core Platform top line performance because it measures the total net financial activity generated by our Core Platform after taking into account all Driver and restaurant earnings, Driver incentives, and Driver referrals. Excess Driver incentives are recorded in cost of revenue, exclusive of depreciation and amortization, and Driver referrals are recorded in sales and marketing expenses. These amounts largely depend on our business decisions based on market conditions. We include the impact of these amounts in Core Platform Adjusted Net Revenue to evaluate how increasing or decreasing incentives would impact our Core Platform top line performance, and the overall net financial activity between us and our customers, which ultimately impacts our Take Rate. Core Platform Adjusted Net Revenue is lower than Core Platform revenue in all reported periods in this prospectus. Excess Driver incentives refer to cumulative payments, including incentives but excluding Driver referrals, to a Driver that exceed the cumulative revenue that we recognize from a Driver with no future guarantee of additional revenue. Cumulative payments to a Driver could exceed cumulative revenue from a Driver as a result of Driver incentives or when the amount paid to a Driver for a Trip exceeds the fare charged to the consumer. Further, cumulative payments to Drivers for Uber Eats deliveries historically have exceeded the cumulative delivery fees paid by consumers. Management views Driver incentives and Driver referrals as Driver payments in the aggregate, whether they are classified as Driver incentives, excess Driver incentives, or Driver referrals. We believe that Core Platform Adjusted Net Revenue is a useful measure of our top line performance because it presents our Core Platform revenue after taking into account all such Driver payments, and because it is a way that management views the top line performance of our business. Core Platform Contribution Margin We define Core Platform Contribution Profit (Loss) as Core Platform revenue less the following direct costs and expenses of our Core Platform: (i) cost of revenue, exclusive of depreciation and amortization; (ii) operations and support; (iii) sales and marketing; (iv) research and development; and (v) general and administrative. Core Platform Contribution Profit (Loss) also reflects any applicable exclusions from Adjusted EBITDA and excludes the impact of our 2018 Divested Operations. We define Core Platform Contribution Margin as Core Platform Contribution Profit (Loss) as a percentage of Core Platform Adjusted Net Revenue. Core Platform Contribution Margin demonstrates the margin that we generate after direct expenses. We believe that Core Platform Contribution Margin is a useful indicator of the economics of our Core Platform, as it does not include indirect unallocated research and development and general and administrative expenses (including expenses for ATG and Other Technology Programs). However, Core Platform Contribution Margin is not a financial measure of, nor does it imply, profitability. We have not yet achieved profitability, and even if our revenue exceeds our direct expenses over time, we may not be able to achieve or maintain profitability. The relationship of revenue to direct expenses is not necessarily indicative of future performance. Other companies that present contribution margin calculate it differently and, therefore, similarly titled measures presented by other companies may not be directly comparable to ours. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segments” for additional information regarding our segment measures. Non-GAAP Financial Measure We collect and analyze operating and financial data to evaluate the health of our business and assess our performance. In addition to revenue, net income (loss), loss from operations, and other results under GAAP, we use Adjusted EBITDA, which is described below, to evaluate our business. We have included this non-GAAP financial measure in this prospectus because it is a key measure used by our management to evaluate our operating performance. Accordingly, we believe that this non-GAAP financial measure provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors. Our calculation of this non-GAAP financial measure may differ from similarly-titled non-GAAP measures, if any, reported by our peer companies. This non-GAAP financial measure should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors. In addition, it provides a useful measure for period-to-period comparisons of our business, as it removes the effect of certain non-cash expenses and certain variable charges. Adjusted EBITDA has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following: Adjusted EBITDA excludes certain recurring, non-cash charges, such as depreciation of property and equipment and amortization of intangible assets, and although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect all cash capital expenditure requirements for such replacements or for new capital expenditure requirements; Adjusted EBITDA excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy; Adjusted EBITDA does not reflect period to period changes in taxes, income tax expense or the cash necessary to pay income taxes; Adjusted EBITDA does not reflect the components of other income (expense), net, which includes interest income, foreign currency exchange gains (losses), net, gain on divestitures, unrealized gain on investments, and change in fair value of embedded derivatives; and Adjusted EBITDA excludes legal, tax, and regulatory reserves and settlements that may reduce cash available to us. The following table presents a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA for each of the periods indicated: Adjusted EBITDA Reconciliation: Add (deduct): (Income) loss from discontinued operations, net of income taxes (2,876 ) — — Net income (loss) attributable to non-controlling interest, net of tax Benefit from (provision for) income taxes Income (loss) from equity method investment, net of tax — — 42 Other income (expense), net (139 ) 16 (4,993 ) Legal, tax, and regulatory reserves and settlements Asset impairment/loss on sale of assets Acquisition and financing related expenses — 4 15 Restructuring charges — 7 (4 ) Investing in our common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus, before making a decision to invest in our common stock. Any of the following risks could have an adverse effect on our business, financial condition, operating results, or prospects and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. Our business, financial condition, operating results, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. Risks Related to Our Business The personal mobility, meal delivery, and logistics industries are highly competitive, with well-established and low-cost alternatives that have been available for decades, low barriers to entry, low switching costs, and well-capitalized competitors in nearly every major geographic region. If we are unable to compete effectively in these industries, our business and financial prospects would be adversely impacted. Our platform provides offerings in the personal mobility, meal delivery, and logistics industries. We compete on a global basis, and the markets in which we compete are highly fragmented. We face significant competition in each of the personal mobility, meal delivery, and logistics industries globally from existing, well-established, and low-cost alternatives, and in the future we expect to face competition from new market entrants given the low barriers to entry that characterize these industries. In addition, within each of these markets, the cost to switch between products is low. Consumers have a propensity to shift to the lowest-cost or highest-quality provider; Drivers have a propensity to shift to the platform with the highest earnings potential; restaurants have a propensity to shift to the delivery platform that offers the lowest service fee for their meals and provides the highest volume of orders; and shippers and carriers have a propensity to shift to the platform with the best price and most convenient service for hauling shipments. Further, while we work to expand globally and introduce new products and offerings across a range of industries, many of our competitors remain focused on a limited number of products or on a narrow geographic scope, allowing them to develop specialized expertise and employ resources in a more targeted manner than we do. As we and our competitors introduce new products and offerings, and as existing products evolve, we expect to become subject to additional competition. In addition, our competitors may adopt certain of our product features, or may adopt innovations that Drivers, consumers, restaurants, shippers, and carriers value more highly than ours, which would render our products less attractive or reduce our ability to differentiate our products. Increased competition could result in, among other things, a reduction of the revenue we generate from the use of our platform, the number of platform users, the frequency of use of our platform, and our margins. We face competition in each of our offerings, including: Personal Mobility: Our Personal Mobility offering competes with personal vehicle ownership and usage, which accounts for the majority of passenger miles in the markets that we serve, and traditional transportation services, including taxicab companies and taxi-hailing services, livery services, and public transportation, which typically provides the lowest-cost transportation option in many cities. In Ridesharing, we compete with companies, including certain of our minority-owned affiliates, for Drivers and riders, including Lyft, OLA, Careem, Didi, Taxify, and our Yandex.Taxi joint venture. Our New Mobility products compete for riders in the bike and scooter space, including Motivate (an affiliate of Lyft), Lime, Bird, and Skip. We also compete with OEMs and other technology companies in the development of autonomous vehicle technologies and the deployment of autonomous vehicles, including Waymo, Cruise Automation, Tesla, Apple, Zoox, Aptiv, May Mobility, Pronto.ai, Aurora, and Nuro, whose offerings may prove more effective than our autonomous vehicle technologies. Waymo has already introduced a commercialized ridehailing fleet of autonomous vehicles, and it is possible that our other competitors could introduce autonomous vehicle offerings earlier than we will. Uber Eats: Our Uber Eats offering competes with numerous companies in the meal delivery space in various regions for Drivers, consumers, and restaurants, including GrubHub, DoorDash, Deliveroo, Swiggy, Postmates, Zomato, Delivery Hero, Just Eat, Takeaway.com, and Amazon. Our Uber Eats offering also competes with restaurants, meal kit delivery services, grocery delivery services, and traditional grocers. Uber Freight: Our Uber Freight offering competes with global and North American freight brokers such as C.H. Robinson, Total Quality Logistics, XPO Logistics, Convoy, Echo Global Logistics, Coyote, Transfix, DHL, and NEXT Trucking. Many of our competitors are well-capitalized and offer discounted services, Driver incentives, consumer discounts and promotions, innovative products and offerings, and alternative pricing models, which may be more attractive to consumers than those that we offer. Further, some of our current or potential competitors have, and may in the future continue to have, greater resources and access to larger Driver, consumer, restaurant, shipper, or carrier bases in a particular geographic market. In addition, our competitors in certain geographic markets enjoy substantial competitive advantages such as greater brand recognition, longer operating histories, larger marketing budgets, better localized knowledge, and more supportive regulatory regimes. In India, for example, our Uber Eats offering competes with Swiggy and Zomato, each of which has substantial market-specific knowledge and established relationships with local restaurants, affording them significant product advantages. As a result, such competitors may be able to respond more quickly and effectively than us in such markets to new or changing opportunities, technologies, consumer preferences, regulations, or standards, which may render our products or offerings less attractive. In addition, future competitors may share in the effective benefit of any regulatory or governmental approvals and litigation victories we may achieve, without having to incur the costs we have incurred to obtain such benefits. We are contractually restricted from competing with our minority-owned affiliates with respect to certain aspects of our business, including in China through August 2023, Russia/CIS through February 2025, and Southeast Asia through the longer of March 2023 or one year after we dispose of all interests in Grab, while none of our minority-owned affiliates are restricted from competing with us anywhere in the world. Didi currently competes with us in certain countries in Latin America and in Australia, and in 2018 made significant investments to gain or maintain category position in certain markets in Latin America. In addition, our Yandex.Taxi joint venture currently competes with us in certain countries in Europe. As Didi and our other minority-owned affiliates continue to expand their businesses, they may in the future compete with us in additional geographic markets. Additionally, although we have entered into an asset purchase agreement to acquire Careem, we may not ultimately consummate the transaction. Further, because we may not receive local competition authority approval to consummate the transaction in some or all of the markets where such approval is required, we may be required in some or all of such markets to divest all or part of our or Careem’s operations. Any such divestiture would bring additional competition to these markets. For all of these reasons, we may not be able to compete successfully against our current and future competitors. Our inability to compete effectively would have an adverse effect on, or otherwise harm, our business, financial condition, and operating results. To remain competitive in certain markets, we have in the past lowered, and may continue to lower, fares or service fees, and we have in the past offered, and may continue to offer, significant Driver incentives and consumer discounts and promotions, which may adversely affect our financial performance. To remain competitive in certain markets and generate network scale and liquidity, we have in the past lowered, and expect in the future to continue to lower, fares or service fees, and we have offered and expect to continue to offer significant Driver incentives and consumer discounts and promotions. At times, in certain geographic markets, we have offered, and expect to continue to offer, Driver incentives that cause the total amount of the fare that a Driver retains, combined with the Driver incentives a Driver receives from us, to exceed the amount of Gross Bookings we generate for a given Trip. In certain geographic markets and regions, we do not have a leading category position, which may result in us choosing to further increase the amount of Driver incentives and consumer discounts and promotions that we offer in those geographic markets and regions. We cannot assure you that offering such Driver incentives and consumer discounts and promotions will be successful. Driver incentives, consumer discounts, promotions, and reductions in fares and our service fee have negatively affected, and will continue to negatively affect, our financial performance. Additionally, we rely on a pricing model to calculate consumer fares and Driver earnings, and we may in the future modify our pricing model and strategies. We cannot assure you that our pricing model or strategies will be successful in attracting consumers and Drivers. In 2017, our ridesharing category position in the United States and Canada was significantly impacted by adverse publicity events. Although the rate of decline in our ridesharing category position has since moderated, our ridesharing category position generally declined in 2018 in the substantial majority of the regions in which we operate, impacted in part by heavy subsidies and discounts by our competitors in various markets that we felt compelled to match or exceed in order to remain competitive. The markets in which we compete have attracted significant investments from a wide range of funding sources, and we anticipate that many of our competitors will continue to be highly capitalized. Moreover, certain of our stockholders, including SoftBank (our largest stockholder), Alphabet, and Didi, have made substantial investments in certain of our competitors and may increase such investments, make new investments in other competitors, or enter into strategic transactions with competitors in the future. These investments or strategic transactions, along with other competitive advantages discussed above, may allow our competitors to compete more effectively against us and continue to lower their prices, offer Driver incentives or consumer discounts and promotions, or otherwise attract Drivers, consumers, restaurants, shippers, and carriers to their platform and away from ours. Such competitive pressures may lead us to maintain or lower fares or service fees or maintain or increase our Driver incentives and consumer discounts and promotions. Ridesharing and other categories in which we compete are nascent, and we cannot guarantee that they will stabilize at a competitive equilibrium that will allow us to achieve profitability. We have incurred significant losses since inception. We incurred operating losses of $4.0 billion and $3.0 billion in the years ended December 31, 2017 and 2018, and as of December 31, 2018, we had an accumulated deficit of $7.9 billion. We will need to generate and sustain increased revenue levels and decrease proportionate expenses in future periods to achieve profitability in many of our largest markets, including in the United States, and even if we do, we may not be able to maintain or increase profitability. We anticipate that we will continue to incur losses in the near term as a result of expected substantial increases in our operating expenses, as we continue to invest in order to: increase the number of Drivers, consumers, restaurants, shippers, and carriers using our platform through incentives, discounts, and promotions; expand within existing or into new markets; increase our research and development expenses; invest in ATG and Other Technology Programs; expand marketing channels and operations; hire additional employees; and add new products and offerings to our platform. These efforts may prove more expensive than we anticipate, and we may not succeed in increasing our revenue sufficiently to offset these expenses. Many of our efforts to generate revenue are new and unproven, and any failure to adequately increase revenue or contain the related costs could prevent us from attaining or increasing profitability. In addition, we sometimes introduce new products, such as UberPOOL, that we expect to add value to our overall platform and network but which we expect will generate lower Gross Bookings per Trip or a lower Take Rate. Further, we charge a lower service fee to certain of our largest chain restaurant partners on our Uber Eats offering to grow the number of Uber Eats consumers, which may at times result in a negative take rate with respect to those transactions after considering amounts collected from consumers and paid to Drivers. As we expand our offerings to additional cities, our offerings in these cities may be less profitable than the markets in which we currently operate. As such, we may not be able to achieve or maintain profitability in the near term or at all. Additionally, we may not realize the operating efficiencies we expect to achieve as a result of our acquisition of Careem and may continue to incur significant operating losses in the Middle East, North Africa, and Pakistan in the future. Even if we do experience operating efficiencies, we do not expect improvements to our operating results, at least in the near term. The independent contractor status of Drivers is currently being challenged in courts and by government agencies in the United States and abroad. We are involved in numerous legal proceedings globally, including putative class and collective class action lawsuits, demands for arbitration, charges and claims before administrative agencies, and investigations or audits by labor, social security, and tax authorities that claim that Drivers should be treated as our employees (or as workers or quasi-employees where those statuses exist), rather than as independent contractors. We believe that Drivers are independent contractors because, among other things, they can choose whether, when, and where to provide services on our platform, are free to provide services on our competitors’ platforms, and provide a vehicle to perform services on our platform. Nevertheless, we may not be successful in defending the independent contractor status of Drivers in some or all jurisdictions. Furthermore, the costs associated with defending, settling, or resolving pending and future lawsuits (including demands for arbitration) relating to the independent contractor status of Drivers could be material to our business. For example, in March 2019, we reached a preliminary settlement in the O’Connor, et al., v. Uber Technologies, Inc. and Yucesoy v. Uber Technologies, Inc., et al., class actions, pursuant to which we agreed to pay $20 million to Drivers who contracted with us in California and Massachusetts but with whom we have not entered into arbitration agreements, and who sought damages against us based on independent contractor misclassification, among other claims. The preliminary settlement is subject to a final approval hearing in July 2019. In addition, more than 60,000 Drivers who had entered into arbitration agreements with us have filed (or expressed an intention to file) arbitration demands against us that assert similar claims. These arbitration demands could result in significant costs to us, which could include filing fees of up to $1,500 for each arbitration demand for which we are found to be responsible, the legal costs incurred by us in connection with defending such arbitrations, and any adverse judgments issued in any arbitration. Changes to foreign, state, and local laws governing the definition or classification of independent contractors, or judicial decisions regarding independent contractor classification, could require classification of Drivers as employees (or workers or quasi-employees where those statuses exist). Examples of recent judicial decisions relating to independent contractor classification include the California Supreme Court’s recent decision in Dynamex Operations West, Inc. v. Superior Court, which established a new standard for determining employee or independent contractor status in the context of California wage orders, the Aslam, Farrar, Hoy and Mithu v. Uber BV, et al. ruling by the Employment Appeal Tribunal in the United Kingdom that found Drivers are workers (rather than self-employed), and a decision by the French Supreme Court that a driver for a third-party meal delivery service was under a “subordinate relationship” of the service, indicating an employment relationship. In Razak v. Uber Technologies, Inc., the Third Circuit Court of Appeals is reviewing misclassification claims by UberBLACK Drivers in Philadelphia following a summary judgment order in our favor at the district court level, and we expect a decision in the near term. If, as a result of legislation or judicial decisions, we are required to classify Drivers as employees (or as workers or quasi-employees where those statuses exist), we would incur significant additional expenses for compensating Drivers, potentially including expenses associated with the application of wage and hour laws (including minimum wage, overtime, and meal and rest period requirements), employee benefits, social security contributions, taxes, and penalties. Further, any such reclassification would require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition. If we are unable to attract or maintain a critical mass of Drivers, consumers, restaurants, shippers, and carriers, whether as a result of competition or other factors, our platform will become less appealing to platform users, and our financial results would be adversely impacted. Our success in a given geographic market significantly depends on our ability to maintain or increase our network scale and liquidity in that geographic market by attracting Drivers, consumers, restaurants, shippers, and carriers to our platform. If Drivers choose not to offer their services through our platform, or elect to offer them through a competitor’s platform, we may lack a sufficient supply of Drivers to attract consumers and restaurants to our platform. We have experienced and expect to continue to experience Driver supply constraints in most geographic markets in which we operate. To the extent that we experience Driver supply constraints in a given market, we may need to increase or may not be able to reduce the Driver incentives that we offer without adversely affecting the liquidity network effect that we experience in that market. Similarly, if carriers choose not to offer their services through our platform or elect to use other freight brokers, we may lack a sufficient supply of carriers in specific geographic markets to attract shippers to our platform. Furthermore, if restaurants choose to partner with other meal delivery services in a specific geographic market, or if restaurants choose to engage exclusively with our competitors, other restaurant marketing websites, or other delivery services, we may lack a sufficient variety and supply of restaurant options, or lack access to the most popular restaurants, such that our Uber Eats offering will become less appealing to consumers and restaurants. A significant amount of our Uber Eats Gross Bookings come from a limited number of restaurant chains, and this concentration increases the risk of fluctuations in our operating results and our sensitivity to any material adverse developments experienced by our significant restaurant partners. If platform users choose to use other ridesharing, meal delivery, or logistics services, we may lack sufficient opportunities for Drivers to earn a fare, carriers to book a shipment, or restaurants to provide a meal, which may reduce the perceived utility of our platform. An insufficient supply of platform users would decrease our network liquidity and adversely affect our revenue and financial results. Although we may benefit from having larger network scale and liquidity than some competitors, those network effects may not result in competitive advantages or may be overcome by smaller competitors. Maintaining a balance between supply and demand for rides in any given area at any given time and our ability to execute operationally may be more important to service quality than the absolute size of the network. If our service quality diminishes or our competitors’ products achieve greater market adoption, our competitors may be able to grow at a quicker rate than we do and may diminish our network effect. Our number of platform users may decline materially or fluctuate as a result of many factors, including, among other things, dissatisfaction with the operation of our platform, the price of fares, meals, and shipments (including a reduction in incentives), dissatisfaction with the quality of service provided by the Drivers and restaurants on our platform, quality of platform user support, dissatisfaction with the restaurant selection on Uber Eats, negative publicity related to our brand, including as a result of safety incidents and corporate reporting related to safety, perceived political or geopolitical affiliations, treatment of Drivers, perception of a toxic work culture, perception that our culture has not fundamentally changed, or dissatisfaction with our products and offerings in general. For example, in January 2017, a backlash against us in response to accusations that we intended to profit from a protest against an executive order banning certain refugees and immigrants from entering the United States spurred #DeleteUber, a social media campaign that encouraged platform users to delete our app and cease use of our platform. As a result of the #DeleteUber campaign, hundreds of thousands of consumers stopped using the Uber platform within days of the campaign. In addition, if we are unable to provide high-quality support to platform users or respond to reported incidents, including safety incidents, in a timely and acceptable manner, our ability to attract and retain platform users could be adversely affected. If Drivers, consumers, restaurants, shippers, and carriers do not establish or maintain active accounts with us, if a campaign similar to #DeleteUber occurs, if we fail to provide high-quality support, or if we cannot otherwise attract and retain a large number of Drivers, consumers, restaurants, shippers, and carriers, our revenue would decline, and our business would suffer. The number of Drivers and restaurants on our platform could decline or fluctuate as a result of a number of factors, including Drivers ceasing to provide their services through our platform, passage or enforcement of local laws limiting our products and offerings, the low switching costs between competitor platforms or services, and dissatisfaction with our brand or reputation, pricing model (including potential reductions in incentives), ability to prevent safety incidents, or other aspects of our business. While we aim to provide an earnings opportunity comparable to that available in retail, wholesale, or restaurant services or other similar work, we continue to experience dissatisfaction with our platform from a significant number of Drivers. In particular, as we aim to reduce Driver incentives to improve our financial performance, we expect Driver dissatisfaction will generally increase. Often, we are forced to make tradeoffs between the satisfaction of various platform users, as a change that one category of users views as positive will likely be viewed as negative to another category of users. We also take certain measures to protect against fraud, help increase safety, and prevent privacy and security breaches, including terminating access to our platform for users with low ratings or reported incidents, and imposing certain qualifications for Drivers and restaurants, which may damage our relationships with platform users or discourage or diminish their use of our platform. Further, we are investing in our autonomous vehicle strategy, which may add to Driver dissatisfaction over time, as it may reduce the need for Drivers. Driver dissatisfaction has in the past resulted in protests by Drivers, most recently in India, the United Kingdom, and the United States. Such protests have resulted, and any future protests may result, in interruptions to our business. Continued Driver dissatisfaction may also result in a decline in our number of platform users, which would reduce our network liquidity, and which in turn may cause a further decline in platform usage. Any decline in the number of Drivers, consumers, restaurants, shippers, or carriers using our platform would reduce the value of our network and would harm our future operating results. In addition, changes in Driver qualification and background-check requirements may increase our costs and reduce our ability to onboard additional Drivers to our platform. Our Driver qualification and background check process varies by jurisdiction, and there have been allegations, including from regulators, legislators, prosecutors, taxicab owners, and consumers, that our background check process is insufficient or inadequate. With respect to Drivers who are only eligible to make deliveries through Uber Eats, our qualification and background check standards are generally less extensive than the standards for Drivers who are eligible to provide rides through our Ridesharing products. Legislators and regulators may pass laws or adopt regulations in the future requiring Drivers to undergo a materially different type of qualification, screening, or background check process, or that limit our ability to access information used in the background check process in an efficient manner, which could be costly and time-consuming. Required changes in the qualification, screening, and background check process (including, following the closing of our acquisition of Careem, any changes to such processes of Careem) could also reduce the number of Drivers in those markets or extend the time required to recruit new Drivers to our platform, which would adversely impact our business and growth. Furthermore, we rely on a single background-check provider in certain jurisdictions, and we may not be able to arrange for adequate background checks from a different provider on commercially reasonable terms or at all. The failure of this provider to provide background checks on a timely basis would result in our inability to onboard new Drivers or retain existing Drivers undergoing periodic background checks that are required to continue using our platform. Our workplace culture and forward-leaning approach created operational, compliance, and cultural challenges, and a failure to address these challenges would adversely impact our business, financial condition, operating results, and prospects. Our workplace culture and forward-leaning approach created significant operational and cultural challenges that have in the past harmed, and may in the future continue to harm, our business results and financial condition. Our focus on aggressive growth and intense competition, and our prior failure to prioritize compliance, has led to increased regulatory scrutiny globally. Recent changes in our company’s cultural norms and composition of our leadership team, together with our ongoing commitment to address and resolve our historical cultural and compliance problems and promote transparency and collaboration, may not be successful, and regulators may continue to perceive us negatively, which would adversely impact our business, financial condition, operating results, and prospects. Our workplace culture also created a lack of transparency internally, which has resulted in siloed teams that lack coordination and knowledge sharing, causing misalignment and inefficiencies in operational and strategic objectives. Furthermore, many of our regional operations are not centrally managed, such that key policies may not be adequately communicated or managed to achieve consistent business objectives across functions and regions. Although we have reorganized some of our teams to address such issues, such reorganizations may not be successful in aligning operational or strategic objectives across our company. Maintaining and enhancing our brand and reputation is critical to our business prospects. We have previously received significant media coverage and negative publicity, particularly in 2017, regarding our brand and reputation, and failure to rehabilitate our brand and reputation will cause our business to suffer. Maintaining and enhancing our brand and reputation is critical to our ability to attract new employees and platform users, to preserve and deepen the engagement of our existing employees and platform users, and to mitigate legislative or regulatory scrutiny, litigation, government investigations, and adverse platform user sentiment. We have previously received a high degree of negative media coverage around the world, which has adversely affected our brand and reputation and fueled distrust of our company. In 2017, the #DeleteUber campaign prompted hundreds of thousands of consumers to stop using our platform within days. Subsequently, our reputation was further harmed when an employee published a blog post alleging, among other things, that we had a toxic culture and that certain sexual harassment and discriminatory practices occurred in our workplace. Shortly thereafter, we had a number of highly publicized events and allegations, including investigations related to a software tool allegedly designed to evade and deceive authorities, a high-profile lawsuit filed against us by Waymo, and our disclosure of a data security breach. These events and the public response to such events, as well as other negative publicity we have faced in recent years, have adversely affected our brand and reputation, which makes it difficult for us to attract and retain platform users, reduces confidence in and use of our products and offerings, invites legislative and regulatory scrutiny, and results in litigation and governmental investigations. Concurrently with and after these events, our competitors raised additional capital, increased their investments in certain markets, and improved their category positions and market shares, and may continue to do so. In 2019, we plan to release a transparency report, which will provide the public with data related to reports of sexual assaults and other safety incidents claimed to have occurred on our platform in the United States. The public responses to this transparency report or similar public reporting of safety incidents claimed to have occurred on our platform, which may include disclosure of reports provided to regulators, may result in negative media coverage and increased regulatory scrutiny and could adversely affect our reputation with platform users. Further unfavorable media coverage and negative publicity could adversely impact our financial results and future prospects. As our platform continues to scale and becomes increasingly interconnected, resulting in increased media coverage and public awareness of our brand, future damage to our brand and reputation could have an amplified effect on our various platform offerings. Additionally, following the closing of our acquisition of Careem, the Careem brand and its apps will continue to operate in parallel with our brand and apps, and any damage or reputational harm to the Careem brand could adversely impact our brand and reputation. Our brand and reputation might also be harmed by events outside of our control. For example, we faced negative press related to suicides of taxi drivers in New York City reportedly related to the impact of ridesharing on the taxi cab industry. In addition, we have licensed our brand to Didi in China and to our Yandex.Taxi joint venture in Russia/CIS, and while we have certain contractual protections in place governing the use of our brand by these companies, we do not control these businesses, we are not able to anticipate their actions, and consumers may not be aware that these service providers are not controlled by us. Furthermore, if Drivers, restaurants, or carriers provide diminished quality of service, are involved in incidents regarding safety or privacy, engage in malfeasance, or otherwise violate the law, we may receive unfavorable press coverage and our reputation and business may be harmed. As a result, any of these third parties could take actions that result in harm to our brand, reputation, and consequently our business. While we have taken significant steps to rehabilitate our brand and reputation, the successful rehabilitation of our brand will depend largely on maintaining a good reputation, minimizing the number of safety incidents, improving our culture and workplace practices, improving our compliance programs, maintaining a high quality of service and ethical behavior, and continuing our marketing and public relations efforts. Our brand promotion, reputation building, and media strategies have involved significant costs and may not be successful. We anticipate that other competitors and potential competitors will expand their offerings, which will make maintaining and enhancing our reputation and brand increasingly more difficult and expensive. If we fail to successfully rehabilitate our brand in the current or future competitive environment or if events similar to those that occurred in 2017 occur in the future, our brand and reputation would be further damaged and our business may suffer. Since our inception, we have experienced rapid growth in the United States and internationally. This expansion increases the complexity of our business and has placed, and will continue to place, significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. We may not be able to manage our growth effectively, which could damage our reputation and negatively affect our operating results. As our operations have expanded, we have grown from 159 employees as of December 31, 2012 to 22,263 global employees as of December 31, 2018, of whom 11,488 were located outside the United States. We expect the total number of our employees located outside the United States to increase significantly as we expand globally, including as a result of our acquisition of Careem. Properly managing our growth will require us to continue to hire, train, and manage qualified employees and staff, including engineers, operations personnel, financial and accounting staff, and sales and marketing staff, and to improve and maintain our technology. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing, and integrating these new employees and staff, or if we are not successful in retaining our existing employees and staff, our business may be harmed. For example, we operated without key leadership positions filled, including our chief operating officer and chief financial officer, for sustained periods of time. Properly managing our growth will require us to establish consistent policies across regions and functions, and a failure to do so could likewise harm our business. Our failure to upgrade our technology or network infrastructure effectively to support our growth could result in unanticipated system disruptions, slow response times, or poor experiences for Drivers, consumers, restaurants, shippers, and carriers. To manage the growth of our operations and personnel and improve the technology that supports our business operations, as well as our financial and management systems, disclosure controls and procedures, and internal controls over financial reporting, we will be required to commit substantial financial, operational, and technical resources. In particular, we will need to improve our transaction processing and reporting, operational, and financial systems, procedures, and controls. For example, due to our significant growth, especially with respect to our high-growth emerging offerings like Uber Eats and Uber Freight, we face challenges in timely and appropriately designing controls in response to evolving risks of material misstatement. These improvements will be particularly challenging if we acquire new businesses with different systems, such as Careem. Our current and planned personnel, systems, procedures, and controls may not be adequate to support our future operations. If we are unable to expand our operations and hire additional qualified personnel in an efficient manner, or if our operational technology is insufficient to reliably service Drivers, consumers, restaurants, shippers, or carriers, platform user satisfaction will be adversely affected and may cause platform users to switch to our competitors’ platforms, which would adversely affect our business, financial condition, and operating results. Our organizational structure is complex and will continue to grow as we add additional Drivers, consumers, restaurants, carriers, shippers, employees, products and offerings, and technologies, and as we continue to expand globally (including as a result of our acquisition of Careem). We will need to improve our operational, financial, and management controls as well as our reporting systems and procedures to support the growth of our organizational structure. We will require capital and management resources to grow and mature in these areas. If we are unable to effectively manage the growth of our business, the quality of our platform may suffer, and we may be unable to address competitive challenges, which would adversely affect our overall business, operations, and financial condition. If platform users engage in, or are subject to, criminal, violent, inappropriate, or dangerous activity that results in major safety incidents, our ability to attract and retain Drivers, consumers, restaurants, shippers, and carriers may be harmed, which could have an adverse impact on our reputation, business, financial condition, and operating results. We are not able to control or predict the actions of platform users and third parties, either during their use of our platform or otherwise, and we may be unable to protect or provide a safe environment for Drivers and consumers as a result of certain actions by Drivers, consumers, restaurants, carriers, and third parties. Such actions may result in injuries, property damage, or loss of life for consumers and third parties, or business interruption, brand and reputational damage, or significant liabilities for us. Although we administer certain qualification processes for users of the platform, including background checks on Drivers through third-party service providers, these qualification processes and background checks may not expose all potentially relevant information and are limited in certain jurisdictions according to national and local laws, and our third-party service providers may fail to conduct such background checks adequately or disclose information that could be relevant to a determination of eligibility. Further, the qualification and background check standards for Uber Eats Drivers are generally less extensive than those conducted for Ridesharing Drivers. In addition, we do not independently test Drivers’ driving skills. Consequently, we expect to continue to receive complaints from riders and other consumers, as well as actual or threatened legal action against us related to Driver conduct. We have also faced civil litigation alleging, among other things, inadequate Driver qualification processes and background checks, and general misrepresentations regarding the safety of our platform. If Drivers or carriers, or individuals impersonating Drivers or carriers, engage in criminal activity, misconduct, or inappropriate conduct or use our platform as a conduit for criminal activity, consumers and shippers may not consider our products and offerings safe, and we may receive negative press coverage as a result of our business relationship with such Driver or carrier, which would adversely impact our brand, reputation, and business. There have been numerous incidents and allegations worldwide of Drivers, or individuals impersonating Drivers, sexually assaulting, abusing, and kidnapping consumers, or otherwise engaging in criminal activity while using our platform. For example, in December 2014, a Driver in New Delhi, India kidnapped and raped a female consumer, and was convicted in October 2015. Furthermore, if consumers engage in criminal activity or misconduct while using our platform, Drivers and restaurants may be unwilling to continue using our platform. In addition, certain regions where we operate have high rates of violent crime, which has impacted Drivers and consumers in those regions. For example, in Latin America, there have been numerous and increasing reports of Drivers and consumers being victimized by violent crime, such as armed robbery, violent assault, and rape, while taking or providing a trip on our platform. If other criminal, inappropriate, or other negative incidents occur due to the conduct of platform users or third parties, our ability to attract platform users may be harmed, and our business and financial results could be adversely affected. Public reporting or disclosure of reported safety information, including information about safety incidents reportedly occurring on or related to our platform, whether generated by us or third parties such as media or regulators, may adversely impact our business and financial results. Further, we may be subject to claims of significant liability based on traffic accidents, deaths, injuries, or other incidents that are caused by Drivers, consumers, or third parties while using our platform, or even when Drivers, consumers, or third parties are not actively using our platform. On a smaller scale, we may face litigation related to claims by Drivers for the actions of consumers or third parties. Our auto liability and general liability insurance policies may not cover all potential claims to which we are exposed, and may not be adequate to indemnify us for all liability. These incidents may subject us to liability and negative publicity, which would increase our operating costs and adversely affect our business, operating results, and future prospects. Even if these claims do not result in liability, we will incur significant costs in investigating and defending against them. As we expand our products and offerings, such as Uber Freight and dockless e-bikes and e-scooters, this insurance risk will grow. We have made substantial investments to develop new offerings and technologies, including autonomous vehicle technologies, dockless e-bikes and e-scooters, Uber Freight, and Uber Elevate, and we intend to continue investing significant resources in developing new technologies, tools, features, services, products and offerings. For example, we believe that autonomous vehicles will be an important part of our offerings over the long term, and in 2018, we incurred $457 million of research and development expenses for our ATG and Other Technology Programs initiatives. We expect to increase our investments in these new initiatives in the near term. Additionally, following the closing of our acquisition of Careem, we plan to invest significant resources to develop and expand new offerings and technologies in the markets in which Careem operates. We also expect to spend substantial amounts to purchase additional dockless e-bikes and e-scooters, which are susceptible to theft and destruction, as we seek to build our network and increase our scale, and to expand these products to additional markets. If we do not spend our development budget efficiently or effectively on commercially successful and innovative technologies, we may not realize the expected benefits of our strategy. Our new initiatives also have a high degree of risk, as each involves nascent industries and unproven business strategies and technologies with which we have limited or no prior development or operating experience. Because such offerings and technologies are new, they will likely involve claims and liabilities (including, but not limited to, personal injury claims), expenses, regulatory challenges, and other risks, some of which we do not currently anticipate. For example, we discontinued certain products, such as Xchange Leasing, our vehicle leasing business in the United States because we failed to operate it efficiently. There can be no assurance that consumer demand for such initiatives will exist or be sustained at the levels that we anticipate, or that any of these initiatives will gain sufficient traction or market acceptance to generate sufficient revenue to offset any new expenses or liabilities associated with these new investments. It is also possible that products and offerings developed by others will render our products and offerings noncompetitive or obsolete. Further, our development efforts with respect to new products, offerings and technologies could distract management from current operations, and will divert capital and other resources from our more established products, offerings and technologies. Even if we are successful in developing new products, offerings or technologies, regulatory authorities may subject us to new rules or restrictions in response to our innovations that could increase our expenses or prevent us from successfully commercializing new products, offerings or technologies. If we do not realize the expected benefits of our investments, our business, financial condition, operating results, and prospects may be harmed. Our business is substantially dependent on operations outside the United States, including those in markets in which we have limited experience, and if we are unable to manage the risks presented by our business model internationally, our financial results and future prospects will be adversely impacted. As of the quarter ended December 31, 2018, we operated in over 63 countries, and markets outside the United States accounted for approximately 74% of all Trips. We have limited experience operating in many jurisdictions outside of the United States and have made, and expect to continue to make, significant investments to expand our international operations and compete with local competitors. For example, we have been making significant investments in incentives and promotions to help drive growth in India, a country in which local competitors, particularly Ola, Swiggy, and Zomato, are well capitalized and have local operating expertise. In addition, in March 2019, we announced our agreement to acquire Careem and the expansion of our Uber Freight offering into Europe. Such investments may not be successful and may negatively affect our operating results. Conducting our business internationally, particularly in countries in which we have limited experience, subjects us to risks that we do not face to the same degree in the United States. These risks include, among others: operational and compliance challenges caused by distance, language, and cultural differences; the resources required to localize our business, which requires the translation of our mobile app and website into foreign languages and the adaptation of our operations to local practices, laws, and regulations and any changes in such practices, laws, and regulations; laws and regulations more restrictive than those in the United States, including laws governing competition, pricing, payment methods, Internet activities, transportation services (such as taxis and vehicles for hire), transportation network companies (such as ridesharing), logistics services, payment processing and payment gateways, real estate tenancy laws, tax and social security laws, employment and labor laws, driver screening and background checks, licensing regulations, email messaging, privacy, location services, collection, use, processing, or sharing of personal information, ownership of intellectual property, and other activities important to our business; competition with companies or other services (such as taxis or vehicles for hire) that understand local markets better than we do, that have pre-existing relationships with potential platform users in those markets, or that are favored by government or regulatory authorities in those markets; differing levels of social acceptance of our brand, products, and offerings; differing levels of technological compatibility with our platform; exposure to business cultures in which improper business practices may be prevalent; legal uncertainty regarding our liability for the actions of platform users and third parties, including uncertainty resulting from unique local laws or a lack of clear legal precedent; difficulties in managing, growing, and staffing international operations, including in countries in which foreign employees may become part of labor unions, employee representative bodies, or collective bargaining agreements, and challenges relating to work stoppages or slowdowns; fluctuations in currency exchange rates; managing operations in markets in which cash transactions are favored over credit or debit cards; regulations governing the control of local currencies that impact our ability to collect fares on behalf of Drivers and remit those funds to Drivers in the same currencies, as well as higher levels of credit risk and payment fraud; adverse tax consequences, including the complexities of foreign value added tax systems, and restrictions on the repatriation of earnings; increased financial accounting and reporting burdens, and complexities associated with implementing and maintaining adequate internal controls; difficulties in implementing and maintaining the financial systems and processes needed to enable compliance across multiple offerings and jurisdictions; import and export restrictions and changes in trade regulation; political, social, and economic instability abroad, terrorist attacks and security concerns in general, and societal crime conditions that can directly impact platform users; and reduced or varied protection for intellectual property rights in some markets. These risks could adversely affect our international operations, which could in turn adversely affect our business, financial condition, and operating results. We have limited influence over our minority-owned affiliates, which subjects us to substantial risks, including potential loss of value. Our international growth strategy has included the restructuring of our business and assets in certain jurisdictions by partnering with and investing in local ridesharing and meal delivery companies to participate in those markets rather than operate in those markets independently. As a result, a significant portion of our assets includes minority ownership positions in each of Didi, Grab, and our Yandex.Taxi joint venture, each of which operate ridesharing, meal delivery, and related logistics businesses in their respective primary markets in China, Southeast Asia, and Russia/CIS. Our ownership in these entities involves significant risks that are outside our control. We are not represented on the management team or board of directors of Didi, and therefore we do not participate in the day-to-day management of Didi or the actions taken by its board of directors. We are not represented on the management teams of Grab or our Yandex.Taxi joint venture, and therefore do not participate in the day-to-day management of Grab or our Yandex.Taxi joint venture. Although we are represented on each of the boards of directors of Grab and our Yandex.Taxi joint venture, we do not have a controlling influence on those boards, other than with respect to certain approval rights over material corporate actions. As a result, the boards of directors or management teams of these companies may make decisions or take actions with which we disagree or that may be harmful to the value of our ownership in these companies. Additionally, these companies have expanded their offerings, and we expect them to continue to expand their offerings in the future, to compete with us in various markets throughout the world such as in certain countries in Latin America and in Australia where we compete with Didi and certain countries in Europe where we compete with our Yandex.Taxi joint venture. While this could enhance the value of our ownership interest in these companies, our business, financial condition, operating results, and prospects would be adversely affected by such expansion into markets in which we operate. Any material decline in the business of these entities would adversely affect the value of our assets and our financial results. Furthermore, the value of these assets is based in part on the market valuations of these entities, and weakened financial markets may adversely affect such valuations. These positions could expose us to risks, litigation, and unknown liabilities because, among other things, these companies have limited operating histories in an evolving industry and may have less predictable operating results; are privately owned and, as a result, limited public information is available and we may not learn all the material information regarding these businesses; are domiciled and operate in countries with particular economic, tax, political, legal, safety, and regulatory risks; depend on the management talents and efforts of a small group of individuals, and, as a result, the death, disability, resignation, or termination of one or more of these individuals could have an adverse effect on the relevant company’s operations; and will likely require substantial additional capital to support their operations and expansion and to maintain their competitive positions. Any of these risks could materially affect the value of our assets, which could have an adverse effect on our business, financial condition, operating results, or the trading price of our common stock. Further, we are contractually limited in our ability to sell or transfer these assets. Until February 2021, we are prohibited from transferring any shares in our Yandex.Taxi joint venture without the consent of Yandex, and for a period of time thereafter any transfer is subject to a right of first refusal in favor of Yandex. While we are not prohibited from transferring our shares in Didi or Grab, the transferability of such shares are subject to both a right of first refusal and a co-sale right in favor of certain shareholders of each of Didi and Grab. There is currently no public market for any of these securities, and there may be no market in the future if and when we decide to sell such assets. Furthermore, we may be required to sell these assets at a time at which we would not be able to realize what we believe to be the long-term value of these assets. For example, if we were deemed an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), we may be required to sell some or all of such assets so that we would not be subject to the requirements of the Investment Company Act. Additionally, we may have to pay significant taxes upon the sale or transfer of these assets. Accordingly, we may never realize the value of these assets relative to the contributions we made to these businesses. We may experience significant fluctuations in our operating results. If we are unable to achieve or sustain profitability, our prospects would be adversely affected and investors may lose some or all of the value of their investment. Our operating results may vary significantly and are not necessarily an indication of future performance. These fluctuations may be a result of a variety of factors, some of which are beyond our control. In particular, we experience seasonal fluctuations in our financial results. For Ridesharing, we typically generate higher revenue in our fourth quarter compared to other quarters due in part to fourth quarter holiday and business demand, and typically generate lower revenue in our third quarter compared to other quarters due in part to less usage of our platform during peak vacation season in certain cities, such as Paris. We have typically experienced lower quarter-over-quarter growth in Ridesharing in the first quarter. For Uber Eats, we expect to experience seasonal increases in our revenue in the first and fourth quarters compared to the second and third quarters, although the historical growth of Uber Eats has masked these seasonal fluctuations. Our growth has made, and may in the future make, seasonal fluctuations difficult to detect. We expect these seasonal trends to become more pronounced over time as our growth slows. Other seasonal trends may develop or these existing seasonal trends may become more extreme, which would contribute to fluctuations in our operating results. In addition to seasonality, our operating results may fluctuate as a result of factors including our ability to attract and retain new platform users, increased competition in the markets in which we operate, our ability to expand our operations in new and existing markets, our ability to maintain an adequate growth rate and effectively manage that growth, our ability to keep pace with technological changes in the industries in which we operate, changes in governmental or other regulations affecting our business, harm to our brand or reputation, and other risks described elsewhere in this prospectus. As such, we may not accurately forecast our operating results. We base our expense levels and investment plans on estimates. A significant portion of our expenses and investments are fixed, and we may not be able to adjust our spending quickly enough if our revenue is less than expected, resulting in losses that exceed our expectations. If we are unable to achieve sustained profits, our prospects would be adversely affected and investors may lose some or all of the value of their investment. If our growth slows more significantly than we currently expect, we may not be able to achieve profitability, which would adversely affect our financial results and future prospects. Our Gross Bookings, revenue, and Core Platform Adjusted Net Revenue growth rates (in particular with respect to our Ridesharing products) have slowed in recent periods, and we expect that they will continue to slow in the future. We believe that our growth depends on a number of factors, including our ability to: grow supply and demand on our platform; increase existing platform users’ activity on our platform; continue to introduce our platform to new markets; provide high-quality support to Drivers, consumers, restaurants, shippers, and carriers; expand our business and increase our market share and category position; compete with the products and offerings of, and pricing and incentives offered by, our competitors; develop new products, offerings, and technologies; identify and acquire or invest in businesses, products, offerings, or technologies that we believe could complement or expand our platform (including, for example, our pending acquisition of Careem); penetrate suburban and rural areas and increase the number of rides taken on our platform outside metropolitan areas; reduce the costs of our Personal Mobility offering to better compete with personal vehicle ownership and usage and public transportation; maintain existing local regulations in key markets where we operate; enter or expand operations in some of the key countries in which we are currently limited by local regulations, such as Argentina, Germany, Italy, Japan, South Korea, and Spain; and increase positive perception of our brand. We may not successfully accomplish any of these objectives. A softening of Driver, consumer, restaurant, shipper, or carrier demand, whether caused by changes in the preferences of such parties, failure to maintain our brand, changes in the U.S. or global economies, licensing fees in various jurisdictions, competition, or other factors, may result in decreased revenue or growth and our financial results and future prospects would be adversely impacted. We expect to continue to incur significant expenses, and if we cannot increase our revenue at a faster rate than the increase in our expenses, we will not achieve profitability. We generate a significant percentage of our Gross Bookings from trips in large metropolitan areas and trips to and from airports. If our operations in large metropolitan areas or ability to provide trips to and from airports are negatively affected, our financial results and future prospects would be adversely impacted. In 2018, we derived 24% of our Ridesharing Gross Bookings from five metropolitan areas – Los Angeles, New York City, and the San Francisco Bay Area in the United States; London in the United Kingdom; and São Paulo in Brazil. We experience greater competition in large metropolitan areas than we do in other markets in which we operate, which has led us to offer significant Driver incentives and consumer discounts and promotions in these large metropolitan areas. As a result of our geographic concentration, our business and financial results are susceptible to economic, social, weather, and regulatory conditions or other circumstances in each of these large metropolitan areas. An economic downturn, increased competition, or regulatory obstacles in any of these key metropolitan areas would adversely affect our business, financial condition, and operating results to a much greater degree than would the occurrence of such events in other areas. In addition, any changes to local laws or regulations within these key metropolitan areas that affect our ability to operate or increase our operating expenses in these markets would have an adverse effect on our business. For example, in August 2018, New York City approved regulations for the local for-hire market (which includes our Ridesharing products), including a cap on the number of new for-hire vehicle licenses for ridesharing services. In addition, in December 2018, New York City approved per-mile and per-minute rates for drivers, designed to target minimum hourly earnings for drivers providing for-hire services in New York City and surrounding areas. These minimum rates took effect in February 2019. Additionally, members of the Board of Supervisors of San Francisco recently proposed imposing a surcharge on ridesharing trips in San Francisco, and a ballot measure to enact this surcharge may be introduced in 2019. In addition, other jurisdictions such as Seattle have in the past considered or may consider regulations that would implement minimum wage requirements or permit drivers to negotiate for minimum wages while providing services on our platform. Further, we expect that we will continue to face challenges in penetrating lower-density suburban and rural areas, where our network is smaller and less liquid, the cost of personal vehicle ownership is lower, and personal vehicle ownership is more convenient. If we are not successful in penetrating suburban and rural areas, or if we are unable to operate in certain key metropolitan areas in the future, our ability to serve what we consider to be our total addressable market would be limited, and our business, financial condition, and operating results would suffer. Over the same period, we generated 15% of our Ridesharing Gross Bookings from trips that either started or were completed at an airport, and we expect this percentage to increase in the future. As a result of this concentration, our operating results are susceptible to existing regulations and regulatory changes that impact the ability of drivers using our platform to provide trips to and from airports. Certain airports currently regulate ridesharing within airport boundaries, including by mandating that ridesharing service providers obtain airport-specific licenses, and some airports, particularly those outside the United States, have banned ridesharing operations altogether. Despite such bans, some Drivers continue to provide Ridesharing services, including trips to and from airports, despite lacking the requisite permits. Such actions may result in the imposition of fines or sanctions, including further bans on our ability to operate within airport boundaries, against us or Drivers. Additional bans on our airport operations, or any permitting requirements or instances of non-compliance by Drivers, would significantly disrupt our operations. In addition, if drop-offs or pick-ups of riders become inconvenient because of airport rules or regulations, or more expensive because of airport-imposed fees, the number of Drivers or consumers could decrease, which would adversely affect our business, financial condition, and operating results. While we have entered into agreements with most major U.S. airports as well as certain airports outside the United States to allow the use of our platform within airport boundaries, we cannot guarantee that we will be able to renew such agreements, and we may not be successful in negotiating similar agreements with airports in all jurisdictions. If we fail to develop and successfully commercialize autonomous vehicle technologies or fail to develop such technologies before our competitors, or if such technologies fail to perform as expected, are inferior to those of our competitors, or are perceived as less safe than those of our competitors or non-autonomous vehicles, our financial performance and prospects would be adversely impacted. We have invested, and we expect to continue to invest, substantial amounts in autonomous vehicle technologies. As discussed elsewhere in this prospectus, we believe that autonomous vehicle technologies may have the ability to meaningfully impact the industries in which we compete. While we believe that autonomous vehicles present substantial opportunities, the development of such technology is expensive and time-consuming and may not be successful. Several other companies, including Waymo, Cruise Automation, Tesla, Apple, Zoox, Aptiv, May Mobility, Pronto.ai, Aurora, and Nuro, are also developing autonomous vehicle technologies, either alone or through collaborations with car manufacturers, and we expect that they will use such technology to further compete with us in the personal mobility, meal delivery, or logistics industries. We expect certain competitors to commercialize autonomous vehicle technologies at scale before we do. Waymo has already introduced a commercialized ridehailing fleet of autonomous vehicles, and it is possible that other of our competitors could introduce autonomous vehicle offerings earlier than we will. In the event that our competitors bring autonomous vehicles to market before we do, or their technology is or is perceived to be superior to ours, they may be able to leverage such technology to compete more effectively with us, which would adversely impact our financial performance and our prospects. For example, use of autonomous vehicles could substantially reduce the cost of providing ridesharing, meal delivery, or logistics services, which could allow competitors to offer such services at a substantially lower price as compared to the price available to consumers on our platform. If a significant number of consumers choose to use our competitors’ offerings over ours, our financial performance and prospects would be adversely impacted. Autonomous vehicle technologies involve significant risks and liabilities. We have conducted real-world testing of our autonomous vehicles, involving a trained driver in the driver’s seat monitoring operations while the vehicle is in autonomous mode. In March 2018, one of these test vehicles struck and killed a pedestrian in Tempe, Arizona. Following that incident, we voluntarily suspended real-world testing of our autonomous vehicles for several months in all markets where we were conducting real-world testing, which was a setback for our autonomous vehicle technology efforts. Failures of our autonomous vehicle technologies or additional crashes involving autonomous vehicles using our technology would generate substantial liability for us, create additional negative publicity about us, or result in regulatory scrutiny, all of which would have an adverse effect on our reputation, brand, business, prospects, and operating results. The development of our autonomous vehicle technologies is highly dependent on internally developed software, as well as on partnerships with third parties such as OEMs and other suppliers. We develop and integrate self-driving software into our autonomous vehicle technologies and work with OEMs and other suppliers to develop autonomous vehicle technology hardware. We partner with OEMs that will seek to manufacture vehicles capable of incorporating our autonomous vehicle technologies. Our dependence on these relationships exposes us to the risk that components manufactured by OEMs or other suppliers could contain defects that would cause our autonomous vehicle technologies to not operate as intended. Further, reliance on these relationships exposes us to risks beyond our control, such as third-party software or manufacturing defects, which would substantially impair our ability to deploy autonomous vehicles. If our autonomous vehicle technologies were to contain design or manufacturing defects that caused such technology to not perform as expected, or if we were unable to deploy autonomous vehicles as a result of manufacturing delays by OEMs, our financial performance and our prospects could be harmed. We expect that governments will develop regulations that are specifically designed to apply to autonomous vehicles. These regulations could include requirements that significantly delay or narrowly limit the commercialization of autonomous vehicles, limit the number of autonomous vehicles that we can manufacture or use on our platform, or impose significant liabilities on manufacturers or operators of autonomous vehicles or developers of autonomous vehicle technologies. If regulations of this nature are implemented, we may not be able to commercialize our autonomous vehicle technologies in the manner we expect, or at all. Further, if we are unable to comply with existing or new regulations or laws applicable to autonomous vehicles, we could become subject to substantial fines or penalties. Our business depends on retaining and attracting high-quality personnel, and continued attrition, future attrition, or unsuccessful succession planning could adversely affect our business. Our success depends in large part on our ability to attract and retain high-quality management, operations, engineering, and other personnel who are in high demand, are often subject to competing employment offers, and are attractive recruiting targets for our competitors. Challenges related to our culture and workplace practices and negative publicity we experience have in the past led to significant attrition and made it more difficult to attract high-quality employees. Future challenges related to our culture and workplace practices or additional negative publicity could lead to further attrition and difficulty attracting high-quality employees. In 2017, we experienced significant leadership changes, which disrupted our business and increased attrition among senior management and employees, and during the third quarter of 2018, annualized attrition among employees was near peak levels. Future leadership transitions and management changes may cause uncertainty in, or a disruption to, our business, and may increase the likelihood of senior management or other employee turnover. The loss of qualified executives and employees, or an inability to attract, retain, and motivate high-quality executives and employees required for the planned expansion of our business, may harm our operating results and impair our ability to grow. In addition, we depend on the continued services and performance of our key personnel, including our Chief Executive Officer Dara Khosrowshahi. We have entered into an employment agreement with Mr. Khosrowshahi, which is at-will and has no specific duration. Other key members of our management team joined our company after August 2017, and none had previously worked within our industry. Recently hired executives may view our business differently than members of our prior management team and, over time, may make changes to our personnel and their responsibilities as well as our strategic focus, operations, or business plans. We may not be able to properly manage any such shift in focus, and any changes to our business may ultimately prove unsuccessful. In addition, our failure to put in place adequate succession plans for senior and key management roles or the failure of key employees to successfully transition into new roles could have an adverse effect on our business and operating results. The unexpected or abrupt departure of one or more of our key personnel and the failure to effectively transfer knowledge and effect smooth key personnel transitions has had and may in the future have an adverse effect on our business resulting from the loss of such person’s skills, knowledge of our business, and years of industry experience. If we cannot effectively manage leadership transitions and management changes in the future, our reputation and future business prospects could be adversely affected. To attract and retain key personnel, we use equity incentives, among other measures. These measures may not be sufficient to attract and retain the personnel we require to operate our business effectively. Additionally, key members of our management team and many of our employees hold RSUs that will vest in connection with this offering, or hold stock options that will become exercisable for common stock that will be tradeable following this offering, which we expect will adversely impact our ability to retain employees. Further the equity incentives we currently use to attract, retain, and motivate employees may not be as effective as in the past, particularly if the value of the underlying stock does not increase commensurate with expectations or consistent with our historical stock price growth. If we are unable to attract and retain high-quality management and operating personnel, our business, financial condition, and operating results could be adversely affected. The impact of economic conditions, including the resulting effect on discretionary consumer spending, may harm our business and operating results. Our performance is subject to economic conditions and their impact on levels of discretionary consumer spending. Some of the factors that have an impact on discretionary consumer spending include general economic conditions, unemployment, consumer debt, reductions in net worth, residential real estate and mortgage markets, taxation, energy prices, interest rates, consumer confidence, and other macroeconomic factors. Consumer preferences tend to shift to lower-cost alternatives during recessionary periods and other periods in which disposable income is adversely affected. In such circumstances, consumers may choose to use one of our lower price-point products, such as UberPOOL, over a higher Gross Bookings per Trip offering, may choose to forego our offerings for lower-cost personal vehicle or public transportation alternatives, or may reduce total miles traveled as economic activity decreases. Such a shift in consumer behavior may reduce our network liquidity and may harm our business, financial condition, and operating results. Likewise, small businesses that do not have substantial resources, including many of the restaurants in our network, tend to be more adversely affected by poor economic conditions than large businesses. Further, because spending for food purchases from restaurants is generally considered discretionary, any decline in consumer spending may have a disproportionate effect on our Uber Eats offering. If spending at many of the restaurants in our network declines, or if a significant number of these restaurants go out of business, consumers may be less likely to use our products and offerings, which could harm our business and operating results. Alternatively, if economic conditions improve, it could lead to Drivers obtaining additional or alternative opportunities for work, which could negatively impact the number of Drivers on our platform, and thereby reduce our network liquidity. Increases in fuel, food, labor, energy, and other costs could adversely affect our operating results. Factors such as inflation, increased fuel prices, and increased vehicle purchase, rental, or maintenance costs may increase the costs incurred by Drivers and carriers when providing services on our platform. Similarly, factors such as inflation, increased food costs, increased labor and employee benefit costs, increased rental costs, and increased energy costs may increase restaurant operating costs, particularly in certain international markets, such as Egypt. Many of the factors affecting Driver, restaurant, and carrier costs are beyond the control of these parties. In many cases, these increased costs may cause Drivers and carriers to spend less time providing services on our platform or to seek alternative sources of income. Likewise, these increased costs may cause restaurants to pass costs on to consumers by increasing prices, which would likely cause order volume to decline, may cause restaurants to cease operations altogether, or may cause carriers to pass costs on to shippers, which may cause shipments on our platform to decline. A decreased supply of Drivers, consumers, restaurants, shippers, or carriers on our platform would decrease our network liquidity, which could harm our business and operating results. We will require additional capital to support the growth of our business, and this capital might not be available on reasonable terms or at all. To continue to effectively compete, we will require additional funds to support the growth of our business and allow us to invest in new products, offerings, and markets. In particular, our dockless e-bike and e-scooter products and autonomous vehicle development efforts are capital and operations intensive and we may require additional capital to expand these products or continue these development efforts. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders may suffer significant dilution, and any new equity securities we issue may have rights, preferences, and privileges superior to those of existing stockholders. Certain of our existing debt instruments contain, and any debt financing we secure in the future could contain, restrictive covenants relating to our ability to incur additional indebtedness and other financial and operational matters that make it more difficult for us to obtain additional capital with which to pursue business opportunities. For example, our existing debt instruments contain significant restrictions on our ability to incur additional secured indebtedness. We may not be able to obtain additional financing on favorable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth and to respond to business challenges and competition may be significantly limited. If we experience security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data, or platform user data, we may face loss of revenue, harm to our brand, business disruption, and significant liabilities. We collect, use, and process a variety of personal data, such as email addresses, mobile phone numbers, profile photos, location information, drivers’ license numbers and Social Security numbers of Drivers, consumer payment card information, and Driver and restaurant bank account information. As such, we are an attractive target of data security attacks by third parties. Any failure to prevent or mitigate security breaches or improper access to, use of, or disclosure of any such data could result in significant liability and a material loss of revenue resulting from the adverse impact on our reputation and brand, a diminished ability to retain or attract new platform users, and disruption to our business. We rely on third-party service providers to host or otherwise process some of our data and that of platform users, and any failure by such third party to prevent or mitigate security breaches or improper access to, or disclosure of, such information could have similar adverse consequences for us. Because the techniques used to obtain unauthorized access, disable or degrade services, or sabotage systems change frequently and are often unrecognizable until launched against a target, we may be unable to anticipate these techniques and implement adequate preventative measures. Our servers and platform may be vulnerable to computer viruses or physical or electronic break-ins that our security measures may not detect. Individuals able to circumvent our security measures may misappropriate confidential, proprietary, or personal information held by or on behalf of us, disrupt our operations, damage our computers, or otherwise damage our business. In addition, we may need to expend significant resources to protect against security breaches or mitigate the impact of any such breaches, including potential liability that may not be limited to the amounts covered by our insurance. Security breaches could also expose us to liability under various laws and regulations across jurisdictions and increase the risk of litigation and governmental investigation. We have been subject to security and data privacy incidents in the past and may be again in the future. For example, in May 2014, we experienced a data security incident in which an outside actor gained access to certain personal information belonging to Drivers through an access key written into code that an employee had unintentionally posted publicly on a code-sharing website used by software developers (the “2014 Breach”). In October and November of 2016, outside actors downloaded the personal data of approximately 57 million Drivers and consumers worldwide (the “2016 Breach”). The accessed data included the names, email addresses, mobile phone numbers, and drivers’ license numbers of approximately 600,000 Drivers, among other information. For further information on this incident, see the risk factors titled “—We currently are subject to a number of inquiries, investigations, and requests for information from the U.S. Department of Justice and other U.S. and foreign government agencies, the adverse outcomes of which could harm our business” and “—We face risks related to our collection, use, transfer, disclosure, and other processing of data, which could result in investigations, inquiries, litigation, fines, legislative, and regulatory action, and negative press about our privacy and data protection practices,” below. As we expand our operations, we may also assume liabilities for breaches experienced by the companies we acquire. For example, in April 2018, Careem publicly disclosed and notified relevant regulatory authorities that it had been subject to a data security breach that allowed access to certain personal information of riders and drivers on its platform, as of January 14, 2018. If Careem becomes subject to liability as a result of this, or other data security breaches, or if we (following the completion of our acquisition of Careem) fail to remediate this or any other data security breach that Careem or we experience, we may face harm to our brand, business disruption, and significant liabilities. If we are unable to introduce new or upgraded products, offerings, or features that Drivers, consumers, restaurants, shippers, and carriers recognize as valuable, we may fail to retain and attract such users to our platform and our operating results would be adversely affected. To continue to retain and attract Drivers, consumers, restaurants, shippers, and carriers to our platform, we will need to continue to invest in the development of new products, offerings, and features that add value for Drivers, consumers, restaurants, shippers, and carriers and that differentiate us from our competitors. For example, in 2018, we redesigned our Driver application with features that better anticipate Driver needs, such as improved real-time communication and updates on the availability of riders and consumers and the pricing of fares and deliveries, and we acquired orderTalk to better integrate Uber Eats with restaurant point-of-sale systems. Developing and delivering these new or upgraded products, offerings, and features is costly, and the success of such new products, offerings, and features depends on several factors, including the timely completion, introduction, and market acceptance of such products, offerings, and features. Moreover, any such new or upgraded products, offerings, or features may not work as intended or may not provide intended value to platform users. If we are unable to continue to develop new or upgraded products, offerings, and features, or if platform users do not perceive value in such new or upgraded products, offerings, and features, platform users may choose not to use our platform, which would adversely affect our operating results. If we are unable to manage supply chain risks related to New Mobility products within our Personal Mobility offering such as dockless e-bikes and e-scooters and advanced technologies such as autonomous vehicles, our operations may be disrupted. We have expanded our Personal Mobility products to include dockless e-bikes and e-scooters and are developing advanced technologies for autonomous vehicles. These products require and rely on hardware and other components that we source from third-party suppliers. The continued development of dockless e-bikes and e-scooters, autonomous vehicle technologies, and other products depends on our ability to implement and manage supply chain logistics to secure the necessary components and hardware. We do not have significant experience in managing supply chain risks. We depend on a limited number of suppliers for our dockless e-bikes, and on a single supplier for our e-scooters that also supplies our primary competitors. It is possible that we may not be able to obtain a sufficient supply of dockless e-bikes and e-scooters in a timely manner, or at all. Further, we source certain specialized or custom-made components for our autonomous vehicle and other advanced technologies from a small number of specialized suppliers, and we may not be able to secure substitutes in a timely manner, on reasonable terms, or at all. Events that could disrupt our supply chain include, but are not limited to: the imposition of trade laws or regulations; the imposition of duties, tariffs, and other charges on imports and exports, including with respect to imports and exports of dockless e-bikes and e-scooters from China; disruption in the supply of certain hardware and components from our international suppliers, particularly those in China; foreign currency fluctuations; theft; and restrictions on the transfer of funds. The occurrence of any of the foregoing could materially increase the cost and reduce or delay the supply of dockless e-bikes and e-scooters available on our platform and could materially delay our progress towards introducing autonomous vehicles onto our platform, all of which could adversely affect our business, financial condition, operating results, and prospects. We track certain operational metrics and our category position with internal systems and tools, and our equity stakes in minority-owned affiliates with information provided by such minority-owned affiliates, and do not independently verify such metrics. Certain of our operational metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business. We track certain operational metrics, including key metrics such as MAPCs, Trips, Gross Bookings, and our category position, with internal systems and tools, and our equity stakes in minority-owned affiliates with information provided by such minority-owned affiliates, that are not independently verified by any third party and which may differ from estimates or similar metrics published by third parties due to differences in sources, methodologies, or the assumptions on which we rely. Our internal systems and tools have a number of limitations, and our methodologies for tracking these metrics may change over time, which could result in unexpected changes to our metrics, including the metrics we publicly disclose, or our estimates of our category position. If the internal systems and tools we use to track these metrics undercount or overcount performance or contain algorithmic or other technical errors, the data we report may not be accurate. While these numbers are based on what we believe to be reasonable estimates of our metrics for the applicable period of measurement, there are inherent challenges in measuring how our products are used across large populations globally. For example, we believe that there are consumers who have multiple accounts, even though we prohibit that in our Terms of Service and implement measures to detect and prevent that behavior. In addition, limitations or errors with respect to how we measure data or with respect to the data that we measure may affect our understanding of certain details of our business, which could affect our long-term strategies. If our operating metrics or our estimates of our category position or our equity stakes in our minority-owned affiliates are not accurate representations of our business, or if investors do not perceive our operating metrics or estimates of our category position or equity stakes in our minority-owned affiliates to be accurate, or if we discover material inaccuracies with respect to these figures, our reputation may be significantly harmed, and our operating and financial results could be adversely affected. In certain jurisdictions, we allow consumers to pay for rides and meal deliveries using cash, which raises numerous regulatory, operational, and safety concerns. If we do not successfully manage those concerns, we could become subject to adverse regulatory actions and suffer reputational harm or other adverse financial and accounting consequences. In certain jurisdictions, including India, Brazil, and Mexico, as well as certain other countries in Latin America, Europe, the Middle East, and Africa, we allow consumers to use cash to pay Drivers the entire fare of rides and cost of meal deliveries (including our service fee from such rides and meal deliveries). In 2018, cash-paid trips accounted for nearly 13% of our global Gross Bookings. This percentage may increase in the future, particularly in the markets in which Careem operates. The use of cash in connection with our technology raises numerous regulatory, operational, and safety concerns. For example, many jurisdictions have specific regulations regarding the use of cash for ridesharing. Failure to comply with these regulations could result in the imposition of significant fines and penalties and could result in a regulator requiring that we suspend operations in those jurisdictions. In addition to these regulatory concerns, the use of cash with our Ridesharing products and Uber Eats offering can increase safety and security risks for Drivers and riders, including potential robbery, assault, violent or fatal attacks, and other criminal acts. In certain jurisdictions such as Brazil, serious safety incidents resulting in robberies and violent, fatal attacks on Drivers while using our platform have been reported. If we are not able to adequately address any of these concerns, we could suffer significant reputational harm, which could adversely impact our business. In addition, establishing the proper infrastructure to ensure that we receive the correct service fee on cash trips is complex, and has in the past meant and may continue to mean that we cannot collect the entire service fee for certain of our cash-based trips. We have created systems for Drivers to collect and deposit the cash received for cash-based trips and deliveries, as well as systems for us to collect, deposit, and properly account for the cash received, some of which are not always effective, convenient, or widely-adopted by Drivers. Creating, maintaining, and improving these systems requires significant effort and resources, and we cannot guarantee these systems will be effective in collecting amounts due to us. Further, operating a business that uses cash raises compliance risks with respect to a variety of rules and regulations, including anti-money laundering laws. If Drivers fail to pay us under the terms of our agreements or if our collection systems fail, we may be adversely affected by both the inability to collect amounts due and the cost of enforcing the terms of our contracts, including litigation. Such collection failure and enforcement costs, along with any costs associated with a failure to comply with applicable rules and regulations, could, in the aggregate, impact our financial performance. Loss or material modification of our credit card acceptance privileges could have an adverse effect on our business and operating results. In 2018, 87% of our Gross Bookings were paid by either credit card or debit card. As such, the loss of our credit card acceptance privileges would significantly limit our business model. We are required by our payment processors to comply with payment card network operating rules, including the Payment Card Industry (“PCI”) and Data Security Standard (the “Standard”). The Standard is a comprehensive set of requirements for enhancing payment account data security developed by the PCI Security Standards Council to help facilitate the broad adoption of consistent data security measures. Our failure to comply with the Standard and other network operating rules could result in fines or restrictions on our ability to accept payment cards. Under certain circumstances specified in the payment card network rules, we may be required to submit to periodic audits, self-assessments, or other assessments of our compliance with the Standard. Such activities may reveal that we have failed to comply with the Standard. If an audit, self-assessment, or other test determines that we need to take steps to remediate any deficiencies, such remediation efforts may distract our management team and require us to undertake costly and time consuming remediation efforts. In addition, even if we comply with the Standard, there is no assurance that we will be protected from a security breach. Moreover, the payment card networks could adopt new operating rules or interpret existing rules that we or our processors might find difficult or even impossible to follow, or costly to implement. In addition to violations of network rules, including the Standard, any failure to maintain good relationships with the payment card networks could impact our ability to receive incentives from them, could increase our costs, or could otherwise harm our business. The loss of our credit card acceptance privileges for any one of these reasons, or the significant modification of the terms under which we obtain credit card acceptance privileges, may have an adverse effect on our business, revenue, and operating results. The successful operation of our business depends upon the performance and reliability of Internet, mobile, and other infrastructures that are not under our control. Our business depends on the performance and reliability of Internet, mobile, and other infrastructures that are not under our control. Disruptions in Internet infrastructure or GPS signals or the failure of telecommunications network operators to provide us with the bandwidth we need to provide our products and offerings could interfere with the speed and availability of our platform. For example, in January 2018, some T-Mobile customers traveling internationally experienced a mobile service outage and as a result were unable to use our platform. If our platform is unavailable when platform users attempt to access it, or if our platform does not load as quickly as platform users expect, platform users may not return to our platform as often in the future, or at all, and may use our competitors’ products or offerings more often. In addition, we have no control over the costs of the services provided by national telecommunications operators. If mobile Internet access fees or other charges to Internet users increase, consumer traffic may decrease, which may in turn cause our revenue to significantly decrease. Our business depends on the efficient and uninterrupted operation of mobile communications systems. The occurrence of an unanticipated problem, such as a power outage, telecommunications delay or failure, security breach, or computer virus could result in delays or interruptions to our products, offerings, and platform, as well as business interruptions for us and platform users. Furthermore, foreign governments may leverage their ability to shut down directed services, and local governments may shut down our platform at the routing level. Any of these events could damage our reputation, significantly disrupt our operations, and subject us to liability, which could adversely affect our business, financial condition, and operating results. We have invested significant resources to develop new products to mitigate the impact of potential interruptions to mobile communications systems, which can be used by consumers in territories where mobile communications systems are less efficient. However, these products may ultimately be unsuccessful. We rely on third parties maintaining open marketplaces to distribute our platform and to provide the software we use in certain of our products and offerings. If such third parties interfere with the distribution of our products or offerings or with our use of such software, our business would be adversely affected. Our platform relies on third parties maintaining open marketplaces, including the Apple App Store and Google Play, which make applications available for download. We cannot assure you that the marketplaces through which we distribute our platform will maintain their current structures or that such marketplaces will not charge us fees to list our applications for download. We rely upon certain third parties to provide software for our products and offerings, including Google Maps for the mapping function that is critical to the functionality of our platform. We do not believe that an alternative mapping solution exists that can provide the global functionality that we require to offer our platform in all of the markets in which we operate. We do not control all mapping functions employed by our platform or Drivers using our platform, and it is possible that such mapping functions may not be reliable. If such third parties cease to provide access to the third-party software that we and Drivers use, do not provide access to such software on terms that we believe to be attractive or reasonable, or do not provide us with the most current version of such software, we may be required to seek comparable software from other sources, which may be more expensive or inferior, or may not be available at all, any of which would adversely affect our business. Our business depends upon the interoperability of our platform across devices, operating systems, and third-party applications that we do not control. One of the most important features of our platform is its broad interoperability with a range of devices, operating systems, and third-party applications. Our platform is accessible from the web and from devices running various operating systems such as iOS and Android. We depend on the accessibility of our platform across these third-party operating systems and applications that we do not control. Moreover, third-party services and products are constantly evolving, and we may not be able to modify our platform to assure its compatibility with that of other third parties following development changes. The loss of interoperability, whether due to actions of third parties or otherwise, could adversely affect our business. We rely on third parties for elements of the payment processing infrastructure underlying our platform. If these third-party elements become unavailable or unavailable on favorable terms, our business could be adversely affected. The convenient payment mechanisms provided by our platform are key factors contributing to the development of our business. We rely on third parties for elements of our payment-processing infrastructure to remit payments to Drivers, restaurants, and carriers using our platform, and these third parties may refuse to renew our agreements with them on commercially reasonable terms or at all. If these companies become unwilling or unable to provide these services to us on acceptable terms or at all, our business may be disrupted. For certain payment methods, including credit and debit cards, we generally pay interchange fees and other processing and gateway fees, and such fees result in significant costs. In addition, online payment providers are under continued pressure to pay increased fees to banks to process funds, and there is no assurance that such online payment providers will not pass any increased costs on to merchant partners, including us. If these fees increase over time, our operating costs will increase, which could adversely affect our business, financial condition, and operating results. In addition, system failures have at times prevented us from making payments to Drivers in accordance with our typical timelines and processes, and have caused substantial Driver dissatisfaction and generated a significant number of Driver complaints. Future failures of the payment processing infrastructure underlying our platform could cause Drivers to lose trust in our payment operations and could cause them to instead use our competitors’ platforms. If the quality or convenience of our payment processing infrastructure declines as a result of these limitations or for any other reason, the attractiveness of our business to Drivers, restaurants, and carriers could be adversely affected. If we are forced to migrate to other third-party payment service providers for any reason, the transition would require significant time and management resources, and may not be as effective, efficient, or well-received by platform users. Computer malware, viruses, spamming, and phishing attacks could harm our reputation, business, and operating results. We rely heavily on information technology systems across our operations. Our information technology systems, including mobile and online platforms and mobile payment systems, administrative functions such as human resources, payroll, accounting, and internal and external communications, and the information technology systems of our third-party business partners and service providers contain proprietary or confidential information related to business and sensitive personal data, including personally identifiable information, entrusted to us by platform users, employees, and job candidates. Computer malware, viruses, spamming, and phishing attacks have become more prevalent in our industry, have occurred on our systems in the past, and may occur on our systems in the future. Various other factors may also cause system failures, including power outages, catastrophic events, inadequate or ineffective redundancy, issues with upgrading or creating new systems or platforms, flaws in third-party software or services, errors by our employees or third-party service providers, or breaches in the security of these systems or platforms. For example, third parties may attempt to fraudulently induce employees or platform users to disclose information to gain access to our data or the data of platform users. If our incident response, disaster recovery, and business continuity plans do not resolve these issues in an effective manner, they could result in adverse impacts to our business operations and our financial results. Because of our prominence, the number of platform users, and the types and volume of personal data on our systems, we may be a particularly attractive target for such attacks. Although we have developed systems and processes that are designed to protect our data and that of platform users, and to prevent data loss, undesirable activities on our platform, and security breaches, we cannot assure you that such measures will provide absolute security. Our efforts on this front may be unsuccessful as a result of, for example, software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance; government surveillance; or other threats that evolve, and we may incur significant costs in protecting against or remediating cyber-attacks. Any actual or perceived failure to maintain the performance, reliability, security, and availability of our products, offerings, and technical infrastructure to the satisfaction of platform users and certain regulators would likely harm our reputation and result in loss of revenue from the adverse impact to our reputation and brand, disruption to our business, and our decreased ability to attract and retain Drivers, consumers, restaurants, shippers, and carriers. Our platform is highly technical, and any undetected errors could adversely affect our business. Our platform is a complex system composed of many interoperating components and incorporates software that is highly complex. Our business is dependent upon our ability to prevent system interruption on our platform. Our software, including open source software that is incorporated into our code, may now or in the future contain undetected errors, bugs, or vulnerabilities. Some errors in our software code may only be discovered after the code has been released. Bugs in our software, third-party software including open source software that is incorporated into our code, misconfigurations of our systems, and unintended interactions between systems could result in our failure to comply with certain federal, state, or foreign reporting obligations, or could cause downtime that would impact the availability of our service to platform users. We have from time to time found defects or errors in our system and may discover additional defects in the future that could result in platform unavailability or system disruption. In addition, we have experienced outages on our platform due to circumstances within our control, such as outages due to software limitations. We rely on co-located data centers for the operation of our platform. If our co-located data centers fail, our platform users may experience down time. If sustained or repeated, any of these outages could reduce the attractiveness of our platform to platform users. For example, as a result of an error with one of our routine maintenance releases in February 2018, we experienced an outage on our platform for 28 minutes, resulting in Drivers, consumers, restaurants, shippers, and carriers being unable to log on to our platform in major cities, including Las Vegas, Atlanta, New York, and Washington D.C. In addition, our release of new software in the past has inadvertently caused, and may in the future cause, interruptions in the availability or functionality of our platform. Any errors, bugs, or vulnerabilities discovered in our code or systems after release could result in an interruption in the availability of our platform or a negative experience for Drivers, consumers, restaurants, shippers, and carriers, and could also result in negative publicity and unfavorable media coverage, damage to our reputation, loss of platform users, loss of revenue or liability for damages, regulatory inquiries, or other proceedings, any of which could adversely affect our business and financial results. We currently rely on a small number of third-party service providers to host a significant portion of our platform, and any interruptions or delays in services from these third parties could impair the delivery of our products and offerings and harm our business. We use a combination of third-party cloud computing services and co-located data centers in the United States and abroad. We do not control the physical operation of any of the co-located data centers we use or the operations of our third-party service providers. These third-party operations and co-located data centers may experience break-ins, computer viruses, denial-of-service attacks, sabotage, acts of vandalism, and other misconduct. These facilities may also be vulnerable to damage or interruption from power loss, telecommunications failures, fires, floods, earthquakes, hurricanes, tornadoes, and similar events. Our systems do not provide complete redundancy of data storage or processing, and as a result, the occurrence of any such event, a decision by our third-party service providers to close our co-located data centers without adequate notice, or other unanticipated problems may result in our inability to serve data reliably or require us to migrate our data to either a new on-premise data center or cloud computing service. This could be time consuming and costly and may result in the loss of data, any of which could significantly interrupt the provision of our products and offerings and harm our reputation and brand. We may not be able to easily switch to another cloud or data center provider in the event of any disruptions or interference to the services we use, and even if we do, other cloud and data center providers are subject to the same risks. Additionally, our co-located data center facility agreements are of limited durations, and our co-located data center facilities have no obligation to renew their agreements with us on commercially reasonable terms or at all. If we are unable to renew our agreements with these facilities on commercially reasonable terms, we may experience delays in the provision of our products and offerings until an agreement with another co-located data center is arranged. Interruptions in the delivery of our products and offerings may reduce our revenue, cause Drivers, restaurants, and carriers to stop offering their services through our platform, and reduce use of our platform by consumers and shippers. Our business and operating results may be harmed if current and potential Drivers, consumers, restaurants, shippers, and carriers believe our platform is unreliable. In addition, if we are unable to scale our data storage and computational capacity sufficiently or on commercially reasonable terms, our ability to innovate and introduce new products on our platform may be delayed or compromised, which would have an adverse effect on our growth and business. Our use of third-party open source software could adversely affect our ability to offer our products and offerings and subjects us to possible litigation. We use third-party open source software in connection with the development of our platform. From time to time, companies that use third-party open source software have faced claims challenging the use of such open source software and their compliance with the terms of the applicable open source license. We may be subject to suits by parties claiming ownership of what we believe to be open source software, or claiming non-compliance with the applicable open source licensing terms. Some open source licenses require end-users who distribute or make available across a network software and services that include open source software to make available all or part of such software, which in some circumstances could include valuable proprietary code. While we employ practices designed to monitor our compliance with the licenses of third-party open source software and protect our valuable proprietary source code, we have not run a complete open source license review and may inadvertently use third-party open source software in a manner that exposes us to claims of non-compliance with the applicable terms of such license, including claims for infringement of intellectual property rights or for breach of contract. Furthermore, there is an increasing number of open-source software license types, almost none of which have been tested in a court of law, resulting in a dearth of guidance regarding the proper legal interpretation of such licenses. If we were to receive a claim of non-compliance with the terms of any of our open source licenses, we may be required to publicly release certain portions of our proprietary source code or expend substantial time and resources to re-engineer some or all of our software. In addition, the use of third-party open source software typically exposes us to greater risks than the use of third-party commercial software because open-source licensors generally do not provide warranties or controls on the functionality or origin of the software. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third parties to determine how to compromise our platform. Additionally, because any software source code that we contribute to open source projects becomes publicly available, our ability to protect our intellectual property rights in such software source code may be limited or lost entirely, and we would be unable to prevent our competitors or others from using such contributed software source code. Any of the foregoing could be harmful to our business, financial condition, or operating results and could help our competitors develop products and offerings that are similar to or better than ours. We have incurred a significant amount of debt and may in the future incur additional indebtedness. Our payment obligations under such indebtedness may limit the funds available to us, and the terms of our debt agreements may restrict our flexibility in operating our business. As of December 31, 2018, we had total outstanding indebtedness of $7.5 billion aggregate principal amount, including $1.8 billion aggregate principal amount of our outstanding 2021 Convertible Notes and $1.0 billion aggregate principal amount of our outstanding 2022 Convertible Notes. We expect the Convertible Notes will be converted into our common stock in connection with this offering. In addition, we have agreed to issue up to approximately $1.7 billion of the Careem Convertible Notes to Careem stockholders, a majority of which will be issued upon the closing of our acquisition of Careem. The Careem Convertible Notes do not bear interest and will mature 90 days after their respective dates of issuance. Subject to the limitations in the terms of our existing and future indebtedness, we and our subsidiaries may incur additional debt, secure existing or future debt, or refinance our debt. In particular, we may need to incur additional debt to finance the purchase of dockless e-bikes and e-scooters or autonomous vehicles and such financing may not be available to us on attractive terms, or at all. We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness. Such payments will reduce the funds available to us for working capital, capital expenditures, and other corporate purposes and limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans, and other investments, which may in turn limit our ability to implement our business strategy, heighten our vulnerability to downturns in our business, the industry, or in the general economy, limit our flexibility in planning for, or reacting to, changes in our business and the industry, and prevent us from taking advantage of business opportunities as they arise. For example, the Careem Convertible Notes are convertible into shares of our common stock at the election of each note holder at a price of $55.00 per share. Some or all of the holders of the Careem Convertible Notes may not elect to convert their notes prior to their maturity, in which case we will be required to repay such notes in cash. We cannot assure you that our business will generate sufficient cash flow from operations or that future financing will be available to us in amounts sufficient to enable us to make required and timely payments on our indebtedness, or to fund our operations. To date, we have used a substantial amount of cash for operating activities, and we cannot assure you when we will begin to generate cash from operating activities in amounts sufficient to cover our debt service obligations. In addition, under certain of our existing debt instruments, we and certain of our subsidiaries are subject to limitations regarding our business and operations, including limitations on incurring additional indebtedness and liens, limitations on certain consolidations, mergers, and sales of assets, and restrictions on the payment of dividends or distributions. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital to pursue business opportunities, including potential acquisitions or divestitures. Any default under our debt arrangements could require that we repay our loans immediately, and may limit our ability to obtain additional financing, which in turn may have an adverse effect on our cash flows and liquidity. In addition, we are exposed to interest rate risk related to some of our indebtedness, which is discussed in greater detail under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Factors about Market Risk—Interest Rate Risk.” We may have exposure to materially greater than anticipated tax liabilities. The tax laws applicable to our global business activities are subject to uncertainty and can be interpreted differently by different companies. For example, we may become subject to sales tax rates in certain jurisdictions that are significantly greater than the rates we currently pay in those jurisdictions. Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign jurisdictions and have structured our operations to reduce our effective tax rate. Currently, certain jurisdictions are investigating our compliance with tax rules. If it is determined that we are not compliant with such rules, we could owe additional taxes. Additionally, the taxing authorities of the jurisdictions in which we operate have in the past, and may in the future, examine or challenge our methodologies for valuing developed technology, which could increase our worldwide effective tax rate and harm our financial position and operating results. Furthermore, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, changes in the valuation of our deferred tax assets and liabilities, or changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by both U.S. federal and state tax authorities, as well as foreign tax authorities, and currently face numerous audits in the United States and abroad. Any adverse outcome of such reviews and audits could have an adverse effect on our financial position and operating results. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by our management, and we have engaged in many transactions for which the ultimate tax determination remains uncertain. The ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. Our tax positions or tax returns are subject to change, and therefore we cannot accurately predict whether we may incur material additional tax liabilities in the future, which could impact our financial position. In addition, in connection with any planned or future acquisitions, we may acquire businesses that have differing licenses and other arrangements that may be challenged by tax authorities for not being at arm’s-length or that are otherwise potentially less tax efficient than our licenses and arrangements. Any subsequent integration or continued operation of such acquired businesses may result in an increased effective tax rate in certain jurisdictions or potential indirect tax costs, which could result in us incurring additional tax liabilities or having to establish a reserve in our consolidated financial statements, and could adversely affect our financial results. Changes in global and U.S. tax legislation may adversely affect our financial condition, operating results, and cash flows. We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. U.S. tax legislation enacted in 2017 has significantly changed the U.S. federal income taxation of U.S. corporations, including reducing the U.S. corporate income tax rate, revising the rules governing net operating losses effective for tax years beginning after December 31, 2017, providing a transition of U.S. international taxation from a worldwide tax system to a modified territorial system, imposing a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, and imposing new limitations on the deductibility of interest. Many of these changes were effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the U.S. Treasury and U.S. Internal Revenue Service (the “IRS”), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. We are unable to predict what global or U.S. tax reforms may be proposed or enacted in the future or what effects such future changes would have on our business. Any such changes in tax legislation, regulations, policies or practices in the jurisdictions in which we operate could increase the estimated tax liability that we have expensed to date and paid or accrued on our balance sheet; affect our financial position, future operating results, cash flows, and effective tax rates where we have operations; reduce post-tax returns to our stockholders; and increase the complexity, burden, and cost of tax compliance. We are subject to potential changes in relevant tax, accounting, and other laws, regulations, and interpretations, including changes to tax laws applicable to corporate multinationals. The governments of countries in which we operate and other governmental bodies could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in our income tax returns filed in such jurisdictions. New laws could significantly increase our tax obligations in the countries in which we do business or require us to change the manner in which we operate our business. As a result of the large and expanding scale of our international business activities, many of these changes to the taxation of our activities could increase our worldwide effective tax rate and harm our financial position, operating results, and cash flows. Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. As of December 31, 2018, we had net operating loss carryforwards for U.S. federal income tax purposes and state income tax purposes of $5.1 billion and $4.4 billion, respectively, available to offset future taxable income. If not utilized, the federal net operating loss carryforward amounts generated prior to January 1, 2018 will begin to expire in 2030, and the state net operating loss carryforward amounts will begin to expire in 2019. Realization of these net operating loss carryforwards depends on our future taxable income, and there is a risk that our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could materially and adversely affect our operating results. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income may be limited. We may experience ownership changes in the future because of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards and other tax attributes to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. We are exposed to fluctuations in currency exchange rates. Because we conduct a significant and growing portion of our business in currencies other than the U.S. dollar but report our consolidated financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates. As exchange rates vary, revenue, cost of revenue, exclusive of depreciation and amortization, operating expenses, other income and expense, and assets and liabilities, when translated, may also vary materially and thus affect our overall financial results. We have not to date, but may in the future, enter into hedging arrangements to manage foreign currency translation, but such activity may not completely eliminate fluctuations in our operating results due to currency exchange rate changes. Hedging arrangements are inherently risky, and we do not have experience establishing hedging programs, which could expose us to additional risks that could adversely affect our financial condition and operating results. In March 2019, we entered into an asset purchase agreement to acquire Careem for approximately $3.1 billion, consisting of up to approximately $1.7 billion in Careem Convertible Notes and approximately $1.4 billion in cash, subject to certain adjustments. We expect the acquisition to close in January 2020. We will acquire substantially all of the assets and assume substantially all of the liabilities of Careem, including liabilities associated with any data security breaches it has experienced in the past. Our acquisition of Careem is subject to a number of risks and uncertainties, including, in particular, that we must obtain the approval of competition authorities in certain markets in which Careem operates, and we cannot guarantee that we will be able to obtain approval in any or all of these markets. The acquisition could be blocked, delayed, or subject to significant limitations or restrictions on our ability to operate in one or more markets, and we could be required to divest our or Careem’s business in one or more markets. Subsequent to the announcement of our acquisition of Careem, the Egyptian Competition Authority (“ECA”) issued a press release expressing concerns regarding the proposed acquisition. Although Careem has agreed to a reduction of the purchase price in the event we do not receive regulatory approval in some or all of the markets in which Careem operates, any such reduction would be limited to only a portion of the value ascribed to Careem’s operations in such markets, and any such reductions in the aggregate would be capped at 15% of the total purchase price. Additionally, 10% of the total purchase price will be subject to a holdback for a limited period of time after the closing of the acquisition to satisfy any potential indemnification claims. Accordingly, we will be required to pay at least 75% of the total purchase price (including the full cash portion of the purchase price) upon the closing of the acquisition, regardless of which, if any, competition approvals we are able to obtain prior to the closing date. As a result, our acquisition of Careem will result in a significant cash expenditure and increased indebtedness, which may not be commensurate with the value of Careem’s operations that we are able to acquire upon the closing of the acquisition. In addition, some or all of the holders of the Careem Convertible Notes may not elect to convert their notes into shares of our common stock at any time prior to their maturity 90 days after issuance, in which case we will be required to repay their notes in cash. Pursuant to our agreement with Careem, the Careem brand and ridesharing, meal delivery, and payments apps will continue to operate in parallel with Uber’s apps following the closing of the acquisition. Careem’s Chief Executive Officer will continue to be the Chief Executive Officer of Careem and will report to an Uber-controlled board of directors. Although we will integrate certain general and administrative functions at the Uber parent level, Careem’s engineering, human resources, and operations teams will continue to operate independently and report to Careem’s Chief Executive Officer. This structure may reduce the synergies that we expect to gain from the acquisition and our brand and reputation could be impacted by any damage or reputational harm to the Careem brand. Careem has historically shared certain user data with certain government authorities, which conflicts with our global policies regarding data use, sharing, and ownership. We expect to maintain our data use, sharing, and ownership practices for both our business and Careem’s business following the closing of the acquisition, and doing so may cause our relationships with government authorities in certain jurisdictions to suffer, and may result in such government authorities assessing significant fines or penalties against us or shutting down our or Careem’s app on either a temporary or indefinite basis. Our acquisition of Careem will also increase our risks under the U.S. Foreign Corrupt Practices Act (“FCPA”) and other similar laws outside the United States. After the acquisition, we plan to provide significant training to Careem’s employees, consultants, and business partners. Our existing and planned safeguards, including training and compliance programs to discourage corrupt practices by such parties, may not prove effective, and such parties may engage in conduct for which we could be held responsible. Any of these risks and uncertainties could have an adverse effect on our business, financial condition, operating results, and prospects. If we are unable to identify and successfully acquire suitable businesses, our operating results and prospects could be harmed, and any businesses we acquire may not perform as expected or be effectively integrated. As part of our business strategy, we have entered into, and expect to continue to enter into, agreements to acquire companies, form joint ventures, divest portions or aspects of our business, sell minority stakes in portions or aspects of our business, and acquire complementary companies or technologies, including divestitures in China and Southeast Asia, our Yandex.Taxi joint venture in Russia/CIS, and our agreement to acquire Careem. Competition within our industry for acquisitions of businesses, technologies, and assets is intense. As such, even if we are able to identify a target for acquisition, we may not be able to complete the acquisition on commercially reasonable terms, we may not be able to receive approval from the applicable competition authorities, or such target may be acquired by another company, including one of our competitors. For example, our acquisition of Careem is subject to a number of risks and uncertainties, including, in particular, approval from the regional competition authorities in certain markets in which Careem operates. Pursuant to the terms of our agreement with Careem, failure to obtain approval in one or more of these countries could require us to divest our or Careem’s business in that country. Further, negotiations for such potential acquisitions may result in the diversion of our management’s time and significant out-of-pocket costs. We may expend significant cash or incur substantial debt to finance such acquisitions, and such indebtedness may restrict our business or require the use of available cash to make interest and principal payments. In addition, we may finance or otherwise complete acquisitions by issuing equity or convertible debt securities, which may result in dilution to our stockholders, or if such convertible debt securities are not converted, significant cash outlays. If we fail to evaluate and execute acquisitions successfully or fail to successfully address any of these risks, our business, financial condition, and operating results may be harmed. In addition, any businesses we may acquire (including Careem) may not perform as well as we expect. Failure to manage and successfully integrate recently acquired businesses and technologies, including managing any privacy or data security risks associated with such acquisitions, may harm our operating results and expansion prospects. The process of integrating an acquired company, business, or technology or acquired personnel into our company is subject to various risks and challenges, including: diverting management time and focus from operating our business to acquisition integration; disrupting our ongoing business operations; platform user acceptance of the acquired company’s offerings; implementing or remediating the controls, procedures, and policies of the acquired company; integrating the acquired business onto our systems and ensuring the acquired business meets our financial reporting requirements and timelines; retaining and integrating acquired employees, including aligning incentives between acquired employees and existing employees, as well as managing costs associated with eliminating redundancies or transferring employees on acceptable terms with minimal business disruption; maintaining important business relationships and contracts of the acquired business; liability for pre-acquisition activities of the acquired company; litigation or other claims or liabilities arising in connection with the acquired company; impairment charges associated with goodwill, long-lived assets, investments, and other acquired intangible assets; and other unforeseen operating difficulties and expenditures. We may not receive a favorable return on investment for prior or future business combinations, including Careem or our minority-owned affiliates, and we cannot predict whether these acquisitions or divestitures will be accretive to the value of our common stock. If we do not obtain approval from local competition authorities in connection with our acquisition of Careem, and as a result are required to divest portions or aspects of our or Careem’s business or discontinue or limit our or Careem’s operations in certain countries, we may limit our growth and negatively affect our operating results. It is also possible that acquisitions, combinations, divestitures, joint ventures, or other strategic transactions we announce could be viewed negatively by the press, investors, platform users, or regulators, any or all of which may adversely affect our reputation and our business. Any of these factors may adversely affect our ability to consummate a transaction, our financial condition, and our operating results. Legal and Regulatory Risks Related to Our Business In certain jurisdictions, including key markets such as Argentina, Germany, Italy, Japan, South Korea, and Spain, our ridesharing business model has been blocked, capped, or suspended, or we have been required to change our business model, due primarily to laws and significant regulatory restrictions in such jurisdictions. In some cases, we have applied for and obtained licenses or permits to operate and must continue to comply with the license or permit requirements or risk revocation. In addition, we may not be able to maintain or renew any such license or permit. For example, Transport for London (“TfL”) announced in September 2017 that it would not renew our license to operate in London because it determined that we were not fit and proper to hold an operator’s license. We appealed this decision and in June 2018, we were granted a license to operate in London on a 15-month term (instead of the usual five-year term). If we are not successful in complying with the terms of the 15-month license and, as a result, it is terminated or not renewed, we would likely appeal any such decision as we did in 2017. Any inability to operate in London, as well as the publicity concerning any such termination or non-renewal, would adversely affect our business, revenue, and operating results. We cannot predict whether the TfL decision, or future regulatory decisions or legislation in other jurisdictions, may embolden or encourage other authorities to take similar actions even where we are operating according to the terms of an existing license or permit. Traditional taxicab and car service operators in various jurisdictions continue to lobby legislators and regulators to block our Ridesharing products or to require us to comply with regulatory, insurance, record-keeping, licensing, and other requirements to which taxicab and car services are subject. For example, in January 2019, we suspended our Ridesharing products in Barcelona after the regional government enacted regulations mandating minimum wait times before riders could be picked up by ridesharing drivers. In December 2018, New York City approved per-mile and per-minute rates, designed to target minimum hourly earnings, for drivers providing for-hire services in New York City and surrounding areas, such as those provided by ridesharing Drivers on our platform. These minimum rates took effect in February 2019. In August 2018, the New York City Council voted to approve various measures to further regulate our business, including driver earning rules, licensing requirements, and a one-year freeze on new for-hire vehicle licenses for ridesharing services like those enabled via our platform, while the city studies whether a permanent freeze would help reduce congestion. Additionally, members of the Board of Supervisors of San Francisco recently proposed imposing a surcharge on ridesharing trips in San Francisco, and a ballot measure to enact this surcharge may be introduced in 2019. In addition, other jurisdictions such as Seattle have in the past considered or may consider regulations which would implement minimum wage requirements or permit drivers to negotiate for minimum wages while providing services on our platform. Similar legislative or regulatory initiatives are being considered or have been enacted in countries outside the United States. If other jurisdictions impose similar regulations, our business growth could be adversely affected. In certain jurisdictions, we are subject to national, state, local, or municipal laws and regulations that are ambiguous in their application or enforcement or that we believe are invalid or inapplicable. In such jurisdictions, we may be subject to regulatory fines and proceedings and, in certain cases, may be required to cease operations altogether if we continue to operate our business as currently conducted, unless and until such laws and regulations are reformed to clarify that our business operations are fully compliant. In certain of these jurisdictions, we continue to provide our products and offerings while we assess the applicability of these laws and regulations to our products and offerings or while we seek regulatory or policy changes to address concerns with respect to our ability to comply with these laws and regulations. Our decision to continue operating in these instances has come under investigation or has otherwise been subject to scrutiny by government authorities. Our continuation of this practice and other past practices may result in fines or other penalties against us and Drivers imposed by local regulators, potentially increasing the risk that our licenses or permits that are necessary to operate in such jurisdictions will not be renewed. Such fines and penalties have in the past been, and may in the future continue to be, imposed solely on Drivers, which may cause Drivers to stop providing services on our platform. In many instances, we make the business decision as a gesture of goodwill to pay the fines on behalf of Drivers or to pay Drivers’ defense costs, which, in the aggregate, can be in the millions of dollars. Furthermore, such business practices may also result in negative press coverage, which may discourage Drivers and consumers from using our platform and could adversely affect our revenue. In addition, we face regulatory obstacles, including those lobbied for by our competitors or from local governments globally, that have favored and may continue to favor local or incumbent competitors, including obstacles for potential Drivers seeking to obtain required licenses or vehicle certifications. We have incurred, and expect that we will continue to incur, significant costs in defending our right to operate in accordance with our business model in many jurisdictions. To the extent that efforts to block or limit our operations are successful, or we or Drivers are required to comply with regulatory and other requirements applicable to taxicab and car services, our revenue and growth would be adversely affected. Our platform is available in over 700 cities across 63 countries. We are subject to differing, and sometimes conflicting, laws and regulations in the various jurisdictions in which we provide our offerings. A large number of proposals are before various national, regional, and local legislative bodies and regulatory entities, both within the United States and in foreign jurisdictions, regarding issues related to our business model. Certain proposals, if adopted, could significantly and materially harm our business, financial condition, and operating results by restricting or limiting how we operate our business, increasing our operating costs, and decreasing our number of platform users. We cannot predict whether or when such proposals may be adopted. Further, existing or new laws and regulations could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, and could dampen the growth and usage of our platform. For example, as we expand our offerings in new areas, such as non-emergency medical transportation, we may be subject to additional healthcare-related federal and state laws and regulations. Additionally, because our offerings are frequently first-to-market in the jurisdictions in which we operate, several local jurisdictions have passed, and we expect additional jurisdictions to pass, laws and regulations that limit or block our ability to offer our products to Drivers and consumers in those jurisdictions, thereby impeding overall use of our platform. We are actively challenging some of these laws and regulations and are lobbying other jurisdictions to oppose similar restrictions on our business, especially our ridesharing services. Further, because a substantial portion of our business involves vehicles that run on fossil fuels, laws, regulations, or governmental actions seeking to curb air pollution or emissions may impact our business. For example, in response to London’s efforts to cut emissions and improve air quality in the city (including the institution of a toxicity charge for polluting vehicles in the city center congestion zone and the introduction of an “Ultra Low Emissions Zone” that went into effect in April 2019), we have added a clean-air fee of 15 pence per mile to each trip on our platform in London, and plan to help Drivers on our platform fully transition to electric vehicles by 2025. Additionally, proposed ridesharing regulations in Egypt may require us to share certain personal data with government authorities to operate our app, which we may not be willing to provide. Our failure to share such data in accordance with these regulations may result in government authorities assessing significant fines or penalties against us or shutting down our or (after the acquisition) Careem’s app in Egypt on either a temporary or indefinite basis. Additionally, the United Kingdom held a referendum on June 23, 2016, to determine whether the United Kingdom should leave the European Union (“EU”) or remain as a member state, the outcome of which was in favor of leaving the EU, which is commonly referred to as Brexit. Lack of clarity about future U.K. laws and regulations as the United Kingdom determines which EU rules and regulations to replace or replicate in the event of a withdrawal, including financial laws and regulations (including relating to payment processing), tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws, and employment laws, could decrease foreign direct investment in the United Kingdom, increase costs, depress economic activity, and restrict access to capital. In addition, we are currently involved in litigation in a number of the jurisdictions in which we operate. We initiated some of these legal challenges to contest the application of certain laws and regulations to our business. Others have been brought by taxicab owners, local regulators, local law enforcement, and platform users, including Drivers and consumers. These include individual, multiple plaintiff, and putative class and class action claims for alleged violation of laws related to, among other things, transportation, competition, advertising, consumer protection, fee calculations, personal injuries, privacy, intellectual property, product liability, discrimination, safety, and employment. These legislative and regulatory proceedings, allegations, and lawsuits are expensive and time consuming to defend, and, if resolved adversely to us, could result in financial damages and/or penalties, including criminal penalties/incarceration and sanctions for individuals employed by us or parties with whom we contract, which could harm our ability to operate our business as planned in one or more of jurisdictions, which could adversely affect our business, revenue, and operating results. We may face legal risks relating to our new dockless e-bike and e-scooter products, which may result in unforeseen costs and increased liability. As we expand our Personal Mobility offering to include dockless e-bikes and e-scooters, we expect to become subject to additional risks distinct from those relating to our Ridesharing products and our meal delivery and logistics offerings. Consumers may not be technically proficient in using dockless e-bikes and e-scooters, and they may not know to wear, or intentionally choose not to wear, protective equipment designed to enhance the safety of these products, including helmets. User error, together with the failure to use protective equipment, increases the risk of injuries or death while using these products. Non-compliance with standard traffic laws, as well as urban hazards such as unpaved or uneven roadways, increases the risk and severity of potential injuries. In addition, we offer our dockless e-bike and e-scooter products predominantly in metropolitan areas, where consumers using dockless e-bikes and e-scooters need to share, navigate, and at times contend with narrow and heavily congested roads occupied by cars, buses and light rail, especially during “rush” hours, all of which heighten the potential of injuries or death. Although we advise platform users of local requirements, including applicable helmet laws, and offer promotional codes for and occasionally give away helmets during promotions or in accordance with local regulations, we do not otherwise provide protective equipment to consumers using our dockless e-bikes and e-scooters. Further, dockless e-bike and e-scooter maintenance, whether performed or facilitated by us, is difficult to ensure, and improper maintenance could lead to serious rider injury or death. Consumers using dockless e-bikes or e-scooters face a more severe level of injury in the event of a collision than that faced while riding in a vehicle, given the less sophisticated, and in some cases absent, passive protection systems on dockless e-bikes and e-scooters. As such, our dockless e-bike and e-scooter products expose us to increased liability. Additionally, we rely on third parties to manufacture our dockless e-bikes and e-scooters and their component parts. Certain dockless e-bikes and e-scooters, or component parts provided by such manufacturers may have product, design, or manufacturing defects, which could lead to injury or death resulting from consumers using our dockless e-bikes and e-scooters, or could result in us having to recall certain or all of our dockless e-bikes and e-scooters. For example, a model of e-scooter we offer on our platform was recently recalled because of concerns regarding combustibility. As such, incorporating dockless e-bikes and e-scooters into our platform will result in increased costs and liability. Our dockless e-bikes and e-scooters are currently subject to operating restrictions or caps in certain cities and municipalities. Most jurisdictions in which we provide our dockless e-bikes and e-scooters, including Santa Monica and Austin, limit the aggregate number of dockless e-bikes or e-scooters that we may provide in a given jurisdiction. In other jurisdictions, such as Fort Lauderdale, we have failed to secure permits to offer dockless e-bikes or e-scooters, which allows our competitors to operate in those markets while we cannot. In addition, many jurisdictions have not yet authorized dockless e-bike or e-scooter operations, which in some cases has limited our ability to expand our operations. In many major metropolitan areas, such as New York City, governmental bodies have entered into exclusive contracts for docked e-bike services in certain portions of the city, including Manhattan, and those jurisdictions may interpret such exclusive deals to prohibit dockless e-bikes provided by other operators. We face a combination of these limitations in certain cities, including San Francisco, where the number of dockless e-bikes we can offer is subject to a cap, and where we failed to obtain one of two permits for a limited scooter pilot program, and in Madrid, where the city provided permits to more than fifteen companies, with each company subject to a cap. Our inability to expand our dockless e-bikes and e-scooters could harm our business, financial condition, and operating results. Changes in, or failure to comply with, competition laws could adversely affect our business, financial condition, or operating results. Competition authorities closely scrutinize us under U.S. and foreign antitrust and competition laws. An increasing number of governments are enforcing competition laws and are doing so with increased scrutiny, including governments in large markets such as the EU, the United States, Brazil, and India, particularly surrounding issues of predatory pricing, price-fixing, and abuse of market power. Many of these jurisdictions also allow competitors or consumers to assert claims of anti-competitive conduct. For example, complaints have been filed in several jurisdictions, including in the United States and India, alleging that our prices are too high (surge pricing) or too low (discounts or predatory pricing), or both. In December 2018, a purported assignee of Sidecar, an early competitor in the ridesharing business, filed a lawsuit against us asserting claims under both federal and California law based on allegations that we engaged in anti-competitive conduct. If one jurisdiction imposes or proposes to impose new requirements or restrictions on our business, other jurisdictions may follow. Further, any new requirements or restrictions, or proposed requirements or restrictions, could result in adverse publicity or fines, whether or not valid or subject to appeal. In addition, governmental agencies and regulators may, among other things, prohibit future acquisitions, divestitures, or combinations we plan to make, impose significant fines or penalties, require divestiture of certain of our assets, or impose other restrictions that limit or require us to modify our operations, including limitations on our contractual relationships with platform users or restrictions on our pricing models. For example, our acquisition of Careem is subject to approval by the relevant competition authorities in certain markets in which Careem operates, and failure to obtain approval in one or more of these markets could require us to divest our or Careem’s business in those markets. We cannot guarantee that we will be able to obtain approval in any or all of these markets. Additionally, in connection with our transaction with Grab, the Competition and Consumer Commission of Singapore concluded that such transaction was a violation of local competition laws and imposed fines and restrictions on both us and Grab; similarly, the Philippine Competition Commission approved our transaction with Grab subject to remedial measures and imposed fines relating to our and Grab’s compliance with the commission’s interim order. Furthermore, the review of our sale of our China operations to Didi in August 2016 by the Chinese authorities (the Anti-Monopoly Bureau of the Ministry of Commerce, now a part of the State Administration for Market Regulations) is still ongoing, and it is not clear how or when that proceeding will be resolved. Such rulings may alter the way in which we do business and, therefore, may continue to increase our costs or liabilities or reduce demand for our platform, which could adversely affect our business, financial condition, or operating results. Our business is subject to extensive government regulation and oversight relating to the provision of payment and financial services. Most jurisdictions in which we operate have laws that govern payment and financial services activities. Regulators in certain jurisdictions may determine that certain aspects of our business are subject to these laws and could require us to obtain licenses to continue to operate in such jurisdictions. Our subsidiary in the Netherlands, Uber Payments B.V., is registered and authorized by its competent authority, De Nederlandsche Bank, as an electronic money institution. This authorization permits Uber Payments B.V. to provide payment services (including acquiring and executing payment transactions and money remittances, as referred to in the Revised Payment Services Directive (2015/2366/EU)) and issue electronic money in the Netherlands. In addition, Uber Payments B.V. has notified De Nederlandsche Bank that it will provide such services on a cross-border passport basis into other countries within the European Economic Area (the “EEA”). We continue to critically evaluate our options for seeking additional licenses and approvals in several other jurisdictions to optimize our payment solutions and support the future growth of our business. We could be denied such licenses, have existing licenses revoked, or be required to make significant changes to our business operations before being granted such licenses. For example, it is prohibited for persons to hold, acquire, or increase a “qualifying holding” in an electronic money institution with a corporate seat in the Netherlands, such as Uber Payments B.V., prior to receiving a declaration of no objection (“DNO”) from De Nederlandsche Bank. A “qualifying holding” is a direct or indirect holding of 10% or more of the issued share capital of an electronic money institution, the ability to exercise directly or indirectly 10% or more of the voting rights in an electronic money institution, or the ability to exercise directly or indirectly a similar influence over an electronic money institution. We cannot guarantee that a person intending to hold, acquire, or increase a qualifying holding in us will receive a DNO in the future, and a failure of such person to receive a DNO could expose that person to financial regulatory enforcement action in the Netherlands and could cause our electronic money institution license to be negatively impacted or revoked. If we are denied payment or other financial licenses or such licenses are revoked, we could be forced to cease or limit business operations in certain jurisdictions, and even if we are able to obtain such licenses, we could be subject to fines or other enforcement action, or stripped of such licenses, if we are found to violate the requirements of such licenses. In some countries, it is not clear whether we are required to be licensed as a payment services provider where we rely on local payment providers to disburse payments. Were local regulators to determine that such arrangements require us to be so licensed, such regulators may block payments to Drivers, restaurants, shippers or carriers. Such regulatory actions, or the need to obtain regulatory approvals, could impose significant costs and involve substantial delay in payments we make in certain local markets, any of which could adversely affect our business, financial condition, or operating results. Beginning in September 2019, payments made by platform users with payment accounts in the EEA for services provided through our platform will be subject to Strong Customer Authentication (“SCA”) regulatory requirements. In many cases, SCA will require a platform user to engage in additional steps to authenticate each payment transaction. These additional authentication requirements may make our platform user experience in the EEA substantially less convenient, and such loss of convenience could meaningfully reduce the frequency with which platform users use our platform or could cause some platform users to stop using our platform entirely, which could adversely affect our business, financial condition, operating results, and prospects. Further, once SCA is implemented, many payment transactions on our platform may fail to be authenticated due to platform users not completing all necessary authentication steps. Thus, in some cases, we may not receive payment from consumers in advance of paying Drivers for services received by those users. A substantial increase in the frequency with which we make Driver payments without having received corresponding payments from consumers could adversely affect our business, financial condition, operating results, and prospects. In addition, laws related to money transmission and online payments are evolving, and changes in such laws could affect our ability to provide payment processing on our platform in the same form and on the same terms as we have historically, or at all. For example, changes to our business in Europe, combined with changes to the EU Payment Services Directive, caused aspects of our payment operations in the EEA to fall within the scope of European payments regulation. As a result, one of our subsidiaries, Uber Payments B.V., is directly subject to financial services regulations (including those relating to anti-money laundering, terrorist financing, and sanctioned or prohibited persons) in the Netherlands and in other countries in the EEA where it conducts business. In addition, as we evolve our business or make changes to our business structure, we may be subject to additional laws or requirements related to money transmission, online payments, and financial regulation. These laws govern, among other things, money transmission, prepaid access instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, banking, systemic integrity risk assessments, cyber-security of payment processes, and import and export restrictions. Our business operations, including our payments to Drivers and restaurants, may not always comply with these financial laws and regulations. Historical or future non-compliance with these laws or regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions. Costs associated with fines and enforcement actions, as well as reputational harm, changes in compliance requirements, or limits on our ability to expand our product offerings, could harm our business. Further, our payment system is susceptible to illegal and improper uses, including money laundering, terrorist financing, fraudulent sales of goods or services, and payments to sanctioned parties. We have invested and will need to continue to invest substantial resources to comply with applicable anti-money laundering and sanctions laws, and in the EEA to conduct appropriate risk assessments and implement appropriate controls as a regulated financial service provider. Government authorities may seek to bring legal action against us if our payment system is used for improper or illegal purposes or if our enterprise risk management or controls in the EEA are not adequately assessed, updated, or implemented appropriately, and any such action could result in financial or reputational harm to our business. We currently are subject to a number of inquiries, investigations, and requests for information from the U.S. Department of Justice and other U.S. and foreign government agencies, the adverse outcomes of which could harm our business. We are the subject of DOJ criminal inquiries and investigations, as well as related civil enforcement inquiries and investigations by other government agencies in the United States and abroad. Those inquiries and investigations cover a broad range of matters, including our data designation and document retention policies related to the 2016 Breach, which involved the breach of certain archived consumer data hosted on a cloud-based service that outside actors accessed and downloaded. We have in the past and may in the future settle claims related to such matters. For example, in September 2018, after investigations and various lawsuits relating to the 2016 Breach, we settled with the Attorneys General of all 50 U.S. states and the District of Columbia through stipulated judgments and payment in an aggregate amount of $148 million related to our failure to report the incident for approximately one year. In April 2018, we entered into a consent decree that lasts through 2038 covering the 2014 Breach and the 2016 Breach with the U.S. Federal Trade Commission (the “FTC”), which the FTC Commissioners approved in October 2018. In November 2018, U.K. and Dutch regulators imposed fines totaling approximately $1.2 million related to the 2016 Breach. The 2016 Breach may lead to additional costly and time-consuming regulatory investigations and litigation from other government entities, as well as potentially material fines and penalties imposed by other U.S. and international regulators. We are also subject to inquiries and or investigations by various government authorities related to, among other matters, the use of a tool to limit the vehicle views available to regulatory enforcement authorities (known as Greyball), alleged deceptive business practices and fraud, the use of alleged inappropriate means to obtain a rape victim’s medical records, and our disclosures to certain investors. Investigations and enforcement actions from such entities, as well as continued negative publicity and an erosion of current and prospective platform users’ trust, could severely disrupt our business. We are also subject to inquiries and investigations by government agencies related to certain transactions we have entered into in the United States and other countries. For example, in connection with the Grab transaction, the Competition and Consumer Commission of Singapore concluded that the transaction violated local competition laws and imposed fines and restrictions on both us and Grab, including a requirement that Grab cannot require drivers to drive exclusively on its platform, a prohibition on “excessive price surges,” and protections for driver commission rates. In addition, the Philippine Competition Commission approved the transaction subject to similar restrictions, including a cap on maximum allowable fares and a requirement that Grab cannot require drivers to drive exclusively on its platform, and imposed fines relating to our and Grab’s non-compliance with its interim measures order during the pendency of the commission’s antitrust review. These government inquiries and investigations are time-consuming and require a great deal of financial resources and attention from us and our senior management. If any of these matters are resolved adversely to us, we may be subject to additional fines, penalties, and other sanctions, and could be forced to change our business practices substantially in the relevant jurisdictions. Any such determinations could also result in significant adverse publicity or additional reputational harm, and could result in or complicate other inquiries, investigations, or lawsuits from other regulators in future merger control or conduct investigations. Any of these developments could result in material financial damages, operational restrictions, and harm our business. We face risks related to our collection, use, transfer, disclosure, and other processing of data, which could result in investigations, inquiries, litigation, fines, legislative, and regulatory action, and negative press about our privacy and data protection practices. The nature of our business exposes us to claims, including civil lawsuits in the United States such as those related to the 2014 Breach and the 2016 Breach. These and any future data breaches could result in violation of applicable U.S. and international privacy, data protection, and other laws. Such violations subject us to individual or consumer class action litigation as well as governmental investigations and proceedings by federal, state, and local regulatory entities in the United States and internationally, resulting in exposure to material civil or criminal liability. Our data security and privacy practices have been the subject of inquiries from government agencies and regulators. In April 2018, we entered into an FTC consent decree pursuant to which we agreed, among other things, to implement a comprehensive privacy program, undergo biannual third-party audits, and not misrepresent how we protect consumer information through 2038. In October 2018, the FTC approved the final settlement, which exposes us to penalties for future failure to report security incidents. In November 2018, U.K. and Dutch regulators imposed fines totaling approximately $1.2 million. We have also entered into settlement agreements with numerous state enforcement agencies. In January 2016, we entered into a settlement with the Office of the New York State Attorney General under which we agreed to enhance our data security practices. In September 2018, we entered into stipulated judgments with the state attorneys general of all 50 U.S. states and the District of Columbia relating to the 2016 Breach, which involved payment of $148 million and assurances that we would enhance our data security and privacy practices. Failure to comply with these and other orders could result in substantial fines, enforcement actions, injunctive relief, and other penalties that may be costly or that may impact our business. We may also assume liabilities for breaches experienced by the companies we acquire as we expand our operations. For example, in April 2018, Careem publicly disclosed and notified relevant regulatory authorities that it had been subject to a data security breach that allowed access to certain personal information of riders and drivers on its platform as of January 14, 2018. If Careem becomes subject to liability as a result of this or other data security breaches or if we (following the completion of our acquisition of Careem) fail to remediate this or any other data security breach that Careem or we experience, we may face harm to our brand, business disruption, and significant liabilities. Our general liability insurance and corporate risk program may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for the full extent of our potential liabilities. This risk is enhanced in certain jurisdictions with stringent data privacy laws and, as we expand our products, offerings, and operations domestically and internationally, we may become subject to amended or additional laws that impose substantial additional obligations related to data privacy. The EU adopted the General Data Protection Regulation (“GDPR”) in 2016, and it became effective in May 2018. The GDPR applies extraterritorially and imposes stringent requirements for controllers and processors of personal data. Such requirements include higher consent standards to process personal data, robust disclosures regarding the use of personal data, strengthened individual data rights, data breach requirements, limitations on data retention, strengthened requirements for special categories of personal data and pseudonymised (i.e., key-coded) data, and additional obligations for contracting with service providers that may process personal data. The GDPR further provides that EU member states may institute additional laws and regulations impacting the processing of personal data, including (i) special categories of personal data (e.g., racial or ethnic origin, political opinions, and religious or philosophical beliefs) and (ii) profiling of individuals and automated individual decision-making. Such additional laws and regulations could limit our ability to use and share personal or other data, thereby increasing our costs and harming our business and financial condition. Non-compliance with the GDPR (including any non-compliance by any acquired business such as Careem) is subject to significant penalties, including fines of up to the greater of €20 million or 4% of total worldwide revenue, and enjoining the processing of personal data. Other jurisdictions outside the EU are similarly introducing or enhancing privacy and data security laws, rules, and regulations, which could increase our compliance costs and the risks associated with non-compliance. For example, California recently adopted the California Consumer Privacy Act of 2018 (“CCPA”), which provides new data privacy rights for consumers and new operational requirements for businesses. The CCPA includes a statutory damages framework and private rights of action against businesses that fail to comply with certain CCPA terms or implement reasonable security procedures and practices to prevent data breaches. The CCPA goes into effect in January 2020. Additionally, we are subject to laws, rules, and regulations regarding cross-border transfers of personal data, including laws relating to transfer of personal data outside the EEA. We rely on transfer mechanisms permitted under these laws, including the EU Standard Contract Clauses. Such mechanisms have recently received heightened regulatory and judicial scrutiny. If we cannot rely on existing mechanisms for transferring personal data from the EEA, the United Kingdom, or other jurisdictions, we may be unable to transfer personal data of Drivers, consumers, or employees in those regions. In addition, we may be required to disclose personal data pursuant to demands from government agencies, including from state and city regulators as a requirement for obtaining or maintaining a license or otherwise, from law enforcement agencies, and from intelligence agencies. This disclosure may result in a failure or perceived failure by us to comply with privacy and data protection policies, notices, laws, rules, and regulations, could result in proceedings or actions against us in the same or other jurisdictions, and could have an adverse impact on our reputation and brand. In addition, Careem has historically shared certain user data with certain government authorities, which conflicts with our global policies regarding data use, sharing, and ownership. We expect to maintain our data use, sharing, and ownership practices for both our business and Careem’s business following the closing of the acquisition, and doing so may cause our relationship with government authorities in certain jurisdictions to suffer, and may result in such government authorities assessing significant fines or penalties against us or shutting down our or Careem’s app on either a temporary or indefinite basis. Further, if any jurisdiction in which we operate changes its laws, rules, or regulations relating to data residency or local computation such that we are unable to comply in a timely manner or at all, we may risk losing our rights to operate in such jurisdictions. This could adversely affect the manner in which we provide our products and offerings and thus materially affect our operations and financial results. Such data protection laws, rules, and regulations are complex and their interpretation is rapidly evolving, making implementation and enforcement, and thus compliance requirements, ambiguous, uncertain, and potentially inconsistent. Compliance with such laws may require changes to our data collection, use, transfer, disclosure, and other processing and certain other related business practices and may thereby increase compliance costs. Additionally, any failure or perceived failure by us to comply with privacy and data protection policies, notices, laws, rules, and regulations could result in proceedings or actions against us by individuals, consumer rights groups, governmental entities or agencies, or others. We could incur significant costs investigating and defending such claims and, if found liable, significant damages. Further, these proceedings and any subsequent adverse outcomes may subject us to significant penalties and negative publicity. If any of these events were to occur, our business and financial results could be significantly disrupted and adversely affected. Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business. We have in the past been, are currently, and may in the future become, involved in private actions, collective actions, investigations, and various other legal proceedings by Drivers, consumers, restaurants, shippers, carriers, employees, commercial partners, competitors or, government agencies, among others. We are subject to litigation relating to various matters including Driver classification, Drivers’ tips and taxes, the Americans with Disabilities Act, antitrust, intellectual property infringement, data privacy, unfair competition, workplace culture, safety practices, and employment and human resources practices. The results of any such litigation, investigations, and legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, costly, and harmful to our reputation, and could require significant amounts of management time and corporate resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or be forced to change the way in which we operate our business, which could have an adverse effect on our business, financial condition, and operating results. In addition, we regularly include arbitration provisions in our terms of service with end-users. These provisions are intended to streamline the litigation process for all parties involved, as arbitration can in some cases be faster and less costly than litigating disputes in state or federal court. However, arbitration may become more costly for us, or the volume of arbitrations may increase and become burdensome. Further, the use of arbitration provisions may subject us to certain risks to our reputation and brand, as these provisions have been the subject of increasing public scrutiny. To minimize these risks, we may voluntarily limit our use of arbitration provisions, or we may be required to do so, in any legal or regulatory proceeding, either of which could increase our litigation costs and exposure in respect of such proceedings. For example, effective May 15, 2018, we ended mandatory arbitration of sexual misconduct claims by platform users and employees. Further, with the potential for conflicting rules regarding the scope and enforceability of arbitration on a state-by-state basis, as well as conflicting rules between state and federal law, some or all of our arbitration provisions could be subject to challenge or may need to be revised to exempt certain categories of protection. If our arbitration agreements were found to be unenforceable, in whole or in part, or specific claims were required to be exempted from arbitration, we could experience an increase in our litigation costs and the time involved in resolving such disputes, and we could face increased exposure to potentially costly lawsuits, each of which could adversely affect our business, financial condition, operating results, and prospects. We have operations in countries known to experience high levels of corruption and are currently subject to inquiries, investigations, and requests for information with respect to our compliance with a number of anti-corruption laws to which we are subject. We have operations in, and have business relationships with, entities in countries known to experience high levels of corruption. We are subject to the FCPA and other similar laws outside the United States that prohibit improper payments or offers of payments to foreign governments, their officials, and political parties for the purpose of obtaining or retaining business. U.S. and non-U.S. regulators alike continue to focus on the enforcement of these laws, and we may be subject to additional compliance requirements to identify criminal activity and payments to sanctioned parties. Our activities in certain countries with high levels of corruption enhance the risk of unauthorized payments or offers of payments by Drivers, consumers, restaurants, shippers or carriers, employees, consultants, or business partners in violation of various anti-corruption laws, including the FCPA, even though the actions of these parties are often outside our control. Our acquisition of Careem may further enhance this risk because users of Careem’s platform and Careem’s employees, consultants, and business partners may not be familiar with, or currently subject to, these anti-corruption laws. After the acquisition, we plan to provide significant training to Careem’s employees, consultants, and business partners. However, our existing and future safeguards, including training and compliance programs to discourage these practices by such parties, may not prove effective, and such parties may engage in conduct for which we could be held responsible. Additional compliance requirements may compel us to revise or expand our compliance program, including the procedures we use to verify the identity of platform users and monitor international and domestic transactions. We received requests from the DOJ in May 2017 and August 2017 with respect to an investigation into allegations of small payments to police in Indonesia and other potential improper payments in other countries in which we operate or have operated, including in Malaysia, China, and India. The investigation is ongoing, and we are cooperating with the DOJ in this investigation. If we are determined to have violated the FCPA or similar laws, we may be subject to criminal sanctions and other liabilities, which would adversely affect our business, financial condition, and operating results. Drivers may become subject to increased licensing requirements, and we may be required to obtain additional licenses or cap the number of Drivers using our platform. Many Drivers currently are not required to obtain a commercial taxi or livery license in their respective jurisdictions. However, numerous jurisdictions in which we operate have conducted investigations or taken action to enforce existing licensing rules, including markets within Latin America and the Asia-Pacific region, and many others, including many countries in Europe, the Middle East, and Africa, have adopted or proposed new laws or regulations that require Drivers to be licensed with local authorities or require us or our subsidiaries to be licensed as a transportation company. Local regulations requiring the licensing of us or Drivers may adversely affect our ability to scale our business and operations. In addition, it is possible that various jurisdictions could impose caps on the number of licensed Drivers or vehicles with whom we may partner or impose limitations on the maximum number of hours a Driver may work, similar to recent regulations that were adopted in Spain and New York City, which have temporarily frozen new vehicle licenses for Drivers using platforms like ours. If we or Drivers become subject to such caps, limitations, or licensing requirements, our business and growth prospects would be adversely impacted. We may be subject to liability for the means we use to attract and onboard Drivers. We operate in an industry in which the competition for Drivers is intense. In this highly competitive environment, the means we use to onboard and attract Drivers may be challenged by competitors, government regulators, or individual plaintiffs. For example, putative class actions have been filed by individual plaintiffs against us for alleged violation of the Telephone Consumer Protection Act of 1991, alleging, among other things, that plaintiffs received text messages from us regarding our Driver program without their consent or after indicating to us they no longer wished to receive such text messages. In addition, in early 2017, we settled an investigation by the FTC into statements we made regarding potential Driver earnings and third-party vehicle leasing and financing programs. In connection with this matter, we agreed, among other things, to pay $20 million to the FTC for Driver redress. These lawsuits are expensive and time consuming to defend, and, if resolved adversely to us, could result in material financial damages and penalties, costly adjustments to our business practices, and negative publicity. In addition, we could incur substantial expense and possible loss of revenue if competitors file additional lawsuits or other claims challenging these practices. Our business depends heavily on insurance coverage for Drivers and on other types of insurance for additional risks related to our business. If insurance carriers change the terms of such insurance in a manner not favorable to Drivers or to us, if we are required to purchase additional insurance for other aspects of our business, or if we fail to comply with regulations governing insurance coverage, our business could be harmed. We use a combination of third-party insurance and self-insurance mechanisms, including a wholly owned captive insurance subsidiary. Insurance related to our Ridesharing products may include third-party automobile liability, automobile comprehensive and collision, physical damage, and uninsured and underinsured motorist coverage. In particular, we require Drivers to carry automobile insurance in most countries, and in many cases we also maintain insurance on behalf of Drivers. We rely on a limited number of ridesharing insurance providers, particularly internationally, and should such providers discontinue or increase the cost of coverage, we cannot guarantee that we would be able to secure replacement coverage on reasonable terms or at all. In addition to insurance related to our Ridesharing products, we maintain other automobile insurance coverage for owned vehicles and employee activity, as well as insurance coverage for non-automotive corporate risks including general liability, workers’ compensation, property, cyber liability, and director and officers’ liability. If our insurance carriers change the terms of our policies in a manner not favorable to us or Drivers, our insurance costs could increase. Further, if the insurance coverage we maintain is not adequate to cover losses that occur, we could be liable for significant additional costs. In addition, we and our captive insurance subsidiary are party to certain reinsurance and indemnification arrangements that transfer a significant portion of the risk from the insurance provider to us or our captive insurance subsidiary, which could require us to pay out material amounts that may be in excess of our insurance reserves, resulting in harm to our financial condition. Our insurance reserves account for unpaid losses and loss adjustment expenses for risks retained by us through our captive insurance subsidiary and other risk retention mechanisms. Such amounts are based on actuarial estimates, historical claim information, and industry data. While management believes that these reserve amounts are adequate, the ultimate liability could be in excess of our reserves. We may be subject to claims of significant liability based on traffic accidents, injuries, or other incidents that are claimed to have been caused by Drivers who use our platform, even when those Drivers are not actively using our platform or when an individual impersonates a Driver. As we expand to include more offerings on our platform, our insurance needs will likely extend to those additional offerings, including but not limited to Uber Freight, autonomous vehicles, and dockless e-bikes and e-scooters. As a result, our automobile liability and general liability insurance policies may not cover all potential claims related to traffic accidents, injuries, or other incidents that are claimed to have been caused by Drivers who use our platform and may not be adequate to indemnify us for all liability that we could face. Even if these claims do not result in liability, we could incur significant costs in investigating and defending against them. If we are subject to claims of liability relating to the acts of Drivers or others using our platform, we may be subject to negative publicity and incur additional expenses, which could harm our business, financial condition, and operating results. In addition, we are subject to local laws, rules, and regulations relating to insurance coverage which could result in proceedings or actions against us by governmental entities or others. Legislation has been passed in many U.S. jurisdictions that codifies these insurance requirements with respect to ridesharing. Additional legislation has been proposed in other jurisdictions that seeks to codify or change insurance requirements with respect to ridesharing. Additionally, various municipalities have imposed or are considering legislation mandating certain levels of insurance for dockless e-bikes and e-scooters. In addition, service providers and business customers of Uber Freight and Uber for Business may require higher limits of coverage as a condition to entering into certain key contracts with us. Any failure, or perceived failure, by us to comply with local laws, rules, and regulations or contractual obligations relating to insurance coverage could result in proceedings or actions against us by governmental entities or others. These lawsuits, proceedings, or actions may subject us to significant penalties and negative publicity, require us to increase our insurance coverage, require us to amend our insurance policy disclosure, increase our costs, and disrupt our business. We may be subject to pricing regulations, as well as related litigation or regulatory inquiries. Our revenue is dependent on the pricing model we use to calculate consumer fares and Driver earnings. Our pricing model, including dynamic pricing, has been, and will likely continue to be, challenged, banned, limited in emergencies, and capped in certain jurisdictions. For example, in 2016, following the filing of a petition in the Delhi High Court relating to surge pricing, we agreed to not calculate consumer fares in excess of the maximum government-mandated fares in New Delhi, India. Further, in 2018, Honolulu, Hawaii became the first U.S. city to pass legislation to cap surge pricing if increased rates exceed the maximum fare set by the city. Additional regulation of our pricing model could increase our operating costs and adversely affect our business. Furthermore, our pricing model has been the subject of litigation and regulatory inquiries related to, among other things, the calculation of and statements regarding consumer fares and Driver earnings (including rates, fees, surcharges, and tolls), as well as the use of surge pricing during emergencies and natural disasters. As a result, we may be forced to change our pricing model in certain jurisdictions, which could harm our revenue or result in a sub-optimal tax structure. If we are unable to protect our intellectual property, or if third parties are successful in claiming that we are misappropriating the intellectual property of others, we may incur significant expense and our business may be adversely affected. Our intellectual property includes the content of our website, mobile applications, registered domain names, software code, firmware, hardware and hardware designs, registered and unregistered trademarks, trademark applications, copyrights, trade secrets, inventions (whether or not patentable), patents, and patent applications. We believe that our intellectual property is essential to our business and affords us a competitive advantage in the markets in which we operate. If we do not adequately protect our intellectual property, our brand and reputation may be harmed, Drivers, consumers, restaurants, shippers, and carriers could devalue our products and offerings, and our ability to compete effectively may be impaired. To protect our intellectual property, we rely on a combination of copyright, trademark, patent, and trade secret laws, contractual provisions, end-user policies, and disclosure restrictions. Upon discovery of potential infringement of our intellectual property, we promptly take action to protect our rights as appropriate. We also enter into confidentiality agreements and invention assignment agreements with our employees and consultants and seek to control access to, and distribution of, our proprietary information in a commercially prudent manner. The efforts we have taken to protect our intellectual property may not be sufficient or effective. For example, effective intellectual property protection may not be available in every country in which we currently or in the future will operate. In addition, it may be possible for other parties to copy or reverse-engineer our products and offerings or obtain and use the content of our website without authorization. Further, we may be unable to prevent competitors from acquiring domain names or trademarks that are similar to, infringe upon, or diminish the value of our domain names, trademarks, service marks, and other proprietary rights. Moreover, our trade secrets may be compromised by third parties or our employees, which would cause us to lose the competitive advantage derived from the compromised trade secret. Further, we may be unable to detect infringement of our intellectual property rights, and even if we detect such violations and decide to enforce our intellectual property rights, we may not be successful, and may incur significant expenses, in such efforts. In addition, any such enforcement efforts may be time-consuming and may divert management’s attention. Further, such enforcement efforts may result in a ruling that our intellectual property rights are unenforceable. Any failure to protect or any loss of our intellectual property may have an adverse effect on our ability to compete and may adversely affect our business, financial condition, or operating results. Companies in the Internet and technology industries, and other patent and trademark holders, including “non-practicing entities,” seeking to profit from royalties in connection with grants of licenses or seeking to obtain injunctions, own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have and may in the future continue to receive notices that claim we have misappropriated, misused, or infringed upon other parties’ intellectual property rights. Furthermore, from time to time we may introduce or acquire new products, including in areas in which we historically have not operated, which could increase our exposure to patent and other intellectual property claims. In addition, we have been sued, and we may in the future be sued, for allegations of intellectual property infringement or threats of trade secret misappropriation. For example, in February 2017, Waymo filed a lawsuit against us alleging, among other things, theft of trade secrets and patent infringement arising from our acquisition of Ottomotto LLC. In February 2018, we entered into a settlement agreement with Waymo. This agreement resolved Waymo’s claims and provided for certain measures, including the joint retention of an independent software expert, to ensure that our autonomous vehicle hardware and software do not misappropriate Waymo intellectual property. The independent software expert recently identified, on an interim basis, certain functions in our autonomous vehicle software that are problematic and other functions that are not. If these interim findings become final, they could result in a license fee or in design changes that could require substantial time and resources to implement, and could limit or delay our production of autonomous vehicle technologies. Any intellectual property claim against us, regardless of merit, could be time consuming and expensive to settle or litigate, could divert our management’s attention and other resources, and could hurt goodwill associated with our brand. These claims may also subject us to significant liability for damages and may result in us having to stop using technology, content, branding, or business methods found to be in violation of another party’s rights. Further, certain adverse outcomes of such proceedings could adversely affect our ability to compete effectively in existing or future businesses. We may be required or may opt to seek a license for the right to use intellectual property held by others, which may not be available on commercially reasonable terms, or at all. Even if a license is available, we may be required to pay significant royalties, which may increase our operating expenses. We may also be required to develop alternative non-infringing technology, content, branding, or business methods, which could require significant effort and expense and make us less competitive. If we cannot license or develop alternative technology, content, branding, or business methods for any allegedly infringing aspect of our business, we may be unable to compete effectively or we may be prevented from operating our business in certain jurisdictions. Any of these results could harm our operating results. Our reported financial results may be adversely affected by changes in accounting principles. The accounting for our business is complicated, particularly in the area of revenue recognition, and is subject to change based on the evolution of our business model, interpretations of relevant accounting principles, enforcement of existing or new regulations, and changes in SEC or other agency policies, rules, regulations, and interpretations, of accounting regulations. Changes to our business model and accounting methods could result in changes to our financial statements, including changes in revenue and expenses in any period, or in certain categories of revenue and expenses moving to different periods, may result in materially different financial results, and may require that we change how we process, analyze, and report financial information and our financial reporting controls. If we are deemed an investment company under the Investment Company Act, applicable restrictions could have an adverse effect on our business. The Investment Company Act contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. We believe that we have conducted our business in a manner that does not result in being characterized as an “investment company” under the Investment Company Act because we are primarily engaged in a non-investment company business. Although a significant portion of our assets constitute investments in non-controlled entities (including in China), referred to elsewhere in this prospectus as minority-owned affiliates, we believe that we are not an investment company as defined by the Investment Company Act. While we intend to conduct our operations such that we will not be deemed an investment company, such a determination would require us to initiate burdensome compliance requirements and comply with restrictions imposed by the Investment Company Act that would limit our activities, including limitations on our capital structure and our ability to transact with affiliates, which would have an adverse effect on our financial condition. To avoid such a determination, we may be required to conduct our business in a manner that does not subject us to the requirements of the Investment Company Act, which could have an adverse effect on our business. For example, we may be required to sell certain of our assets and pay significant taxes upon the sale or transfer of such assets. Risks Related to Our Initial Public Offering and Ownership of Our Common Stock The market price of our common stock may be volatile or may decline steeply or suddenly regardless of our operating performance, and we may not be able to meet investor or analyst expectations. You may not be able to resell your shares at or above the initial public offering price and may lose all or part of your investment. The initial public offering price for our common stock was determined through negotiations between the underwriters and us, and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the market price following our this offering will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time before this offering. The market price of our common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our control, including: actual or anticipated fluctuations in MAPCs, Trips, Core Platform Contribution Margin, Adjusted EBITDA, Core Platform Adjusted Net Revenue, Gross Bookings, revenue, or other operating and financial results; announcements by us or estimates by third parties of actual or anticipated changes in the number of Drivers and consumers on our platform; variations between our actual operating results and the expectations of securities analysts, investors, and the financial community; actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; negative media coverage or publicity; changes in operating performance and stock market valuations of technology companies generally, or those in our industry in particular, including our competitors; price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; lawsuits threatened, filed, or decided against us; developments in legislation or regulatory actions, including interim or final rulings by judicial or regulatory bodies (including any competition authorities blocking, delaying, or subjecting our acquisition of Careem to significant limitations or restrictions on our ability to operate in one or more markets, or requiring us to divest our or Careem’s business in one or more markets); changes in accounting standards, policies, guidelines, interpretations, or principles; any major change in our board of directors or management; any safety incidents or public reports of safety incidents that occur on our platform or in our industry; statements, commentary, or opinions by public officials that our product offerings are or may be unlawful, regardless of any interim or final rulings by judicial or regulatory bodies; and other events or factors, including those resulting from war, incidents of terrorism, natural disasters, or responses to these events. In addition, price and volume fluctuations in the stock markets have affected and continue to affect many technology companies’ stock prices. Often, their stock prices have fluctuated in ways unrelated or disproportionate to the companies’ operating performance. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and seriously harm our business. In addition, the occurrence of any of the factors listed above, among others, may cause our stock price to decline significantly, and there can be no assurance that our stock price would recover. As such, you may not be able to sell your shares at or above the initial public offering price, and you may lose some or all of your investment. Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect at the closing of this offering could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock. Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect at the closing of this offering contain provisions that could depress the trading price of our common stock by acting to discourage, delay, or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions will include the following: our board of directors has the right to elect directors to fill vacancies created by the expansion of our board of directors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; advance notice requirements for stockholder proposals, which may reduce the number of stockholder proposals available for stockholder consideration; limitations on convening special stockholder meetings, which could make it difficult for our stockholders to adopt desired governance changes; prohibition on cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; and our board of directors will be able to issue, without stockholder approval, shares of undesignated preferred stock, which makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. Any provision of our amended and restated certificate of incorporation, amended and restated bylaws, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. In addition, under our existing debt instruments, we, and certain of our subsidiaries, are subject to certain limitations on our business and operations, including limitations on certain consolidations, mergers, and sales of assets. For information regarding these and other provisions, see the risk factor titled “—We have incurred a significant amount of debt and may in the future incur additional indebtedness. Our payment obligations under such indebtedness may limit the funds available to us, and the terms of our debt agreements may restrict our flexibility in operating our business” and the section titled “Description of Capital Stock—Anti-Takeover Provisions.” An active trading market for our common stock may never develop or be sustained. We have applied to list our common stock on the New York Stock Exchange (the “NYSE”) under the symbol “UBER.” However, we cannot assure you that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our common stock when desired, or the price that you may obtain for your shares. Future sales of shares by existing stockholders could cause our stock price to decline. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Many of our existing equityholders have substantial unrecognized gains on the value of the equity they hold based upon the price of this offering, and therefore they may take steps to sell their shares or otherwise secure the unrecognized gains on those shares. Based on shares outstanding as of December 31, 2018, on the closing of this offering, we will have outstanding a total of shares of common stock, after giving effect to the conversion of 903.6 million shares of our redeemable convertible preferred stock outstanding as of December 31, 2018 into 903.6 million shares of common stock on the closing of this offering, the conversion of our Convertible Notes into shares of common stock assuming a conversion date of December 31, 2018 and the assumed initial public offering price of $ per share, the net issuance of shares of common stock pursuant to RSUs that were service-vested as of December 31, 2018, the issuance of 150,071 shares of common stock pursuant to the cash exercise of warrants to purchase shares of our Series E redeemable convertible preferred stock, and the related reclassification of the redeemable convertible preferred stock warrant liability to common stock and additional paid-in capital for such exercises, and the issuance of shares in this offering. Of these shares, only the shares of common stock sold in this offering will be freely tradable, without restriction, in the public market immediately after this offering. Each of our directors, executive officers, the selling stockholders, and other record holders of substantially all of our outstanding shares of common stock and securities convertible into our exercisable or exchangeable for shares of our common stock are subject to market standoff agreements with us or have entered into lockup agreements with the underwriters that restrict their ability to sell or transfer their shares for 180 days after the date of this prospectus, subject to the limitations described in the section titled “Underwriters.” However, Morgan Stanley & Co. LLC may, in its sole discretion, waive the lockup agreements with the underwriters before they expire. After the lockup and market standoff agreements expire, all shares outstanding as of December 31, 2018 (assuming the closing of the offering) will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 of the Securities Act of 1933, as amended (the “Securities Act”). In addition, shares of common stock were subject to outstanding stock options, RSUs, stock appreciation rights (“SARs”), and warrants as of December 31, 2018, and outstanding RSUs covering, and stock options to purchase, an aggregate of shares of common stock were granted subsequent to December 31, 2018. We intend to file a registration statement on Form S-8 under the Securities Act covering all the shares of common stock subject to outstanding equity awards and shares reserved for issuance under our stock plans. This registration statement will become effective immediately on its filing, and shares covered by this registration statement will be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates and any lockup and market standoff agreements described above. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could decline. We anticipate incurring a substantial obligation in connection with tax liabilities on the initial settlement of RSUs in connection with this offering. The manner in which we fund these tax liabilities may have an adverse effect on our financial condition or may add to the dilution of our stockholders in the offering. In light of the large number of RSUs that will initially settle in connection with this offering, we anticipate that we will expend substantial funds to satisfy tax withholding and remittance obligations on the effective date of our registration statement. Substantially all of the RSUs granted prior to the date of this prospectus, which we sometimes refer to as the pre-offering RSUs, vest upon the satisfaction of both a service-based vesting condition and a liquidity event-based vesting condition. The service-based vesting condition is generally satisfied over a period of four years, and the liquidity event-based condition is satisfied on the earlier of (i) the effective date of this offering and (ii) the date of a change in control. As a result, a large number of RSUs which have previously satisfied the service-based vesting condition will vest in connection with the effectiveness of this offering. On the settlement dates for the pre-offering RSUs, we plan to withhold shares and remit income taxes on behalf of the holders of the pre-offering RSUs at applicable statutory rates, which we refer to as a net settlement. We anticipate that we will net settle RSUs that have previously satisfied the service-based vesting condition and will vest in connection with this offering, and withhold and remit income taxes at applicable statutory rates based on the value of the underlying shares on the settlement date. For pre-offering RSUs that will vest after the effectiveness of our offering and prior to the expiration of the lockup period, we anticipate that we will continue to net settle RSUs. However, we will continue to have discretion to sell-to-cover rather than net settle with respect to these RSUs. Based on the number of pre-offering RSUs outstanding as of , 2019 for which the service-based vesting condition had been satisfied on that date, and assuming (i) the liquidity event-based vesting condition had been satisfied on that date, (ii) that the price of our common stock at the time of settlement was equal to the assumed initial public offering price of $ per share, and (iii) a % tax withholding rate, we estimate that this tax obligation on the initial settlement date would be approximately $ billion in the aggregate. Accordingly, we would expect to deliver an aggregate of approximately million shares of our common stock to pre-offering RSU holders after withholding an aggregate of approximately million shares of our common stock. In connection with these net settlements, we would withhold and remit the tax liabilities on behalf of the pre-offering RSU holders to the relevant tax authorities in cash. The amount of this obligation could be higher or lower, depending on the price of shares of our common stock in this offering, and the actual number of pre-offering RSUs outstanding for which the service-based vesting condition has been satisfied on the initial settlement date. Concentration of ownership of our common stock among our existing executive officers, directors, and principal stockholders may prevent new investors from influencing significant corporate decisions, including mergers, consolidations, or the sale of us or all or substantially all of our assets. Upon the closing of this offering, our executive officers, directors, and current beneficial owners of 5% or more of our common stock will, in the aggregate, beneficially own approximately % of our outstanding shares of common stock, assuming no exercise of the underwriters’ over-allotment option. These persons, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations, or the sale of us or all or substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation, or other business combination involving our company, or discouraging a potential acquirer from otherwise attempting to obtain control, even if that change of control would benefit our other stockholders. Additionally, certain of our stockholders, including SoftBank (our largest stockholder), Alphabet, and Didi, have made substantial investments in certain of our competitors, and may increase such investments or make new investments in other competitors in the future. Therefore, the interests of this group of stockholders may not align with the interests of other stockholders. We have broad discretion in how we use the net proceeds from this offering, and we may not use them effectively. We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in applying the net proceeds we receive from this offering. We may use the net proceeds for general corporate purposes, including working capital, operating expenses, and capital expenditures, and we may use a portion of the net proceeds to acquire complementary businesses, products, offerings, or technologies. We expect to use some of the net proceeds to satisfy tax withholding obligations related to the vesting of RSUs, which will vest in connection with this offering. We may also spend or invest these proceeds in a way with which our stockholders disagree. If our management fails to use these funds effectively, our business could be seriously harmed. Pending their use, the net proceeds from our initial public offering may be invested in a way that does not produce income or that loses value. If securities or industry analysts either do not publish research about us, or publish inaccurate or unfavorable research about us, our business, or our market, or, if such analysts change their recommendations regarding our common stock adversely, the trading price or trading volume of our common stock could decline. The trading market for our common stock will be influenced in part by the research and reports that securities or industry analysts may publish about us, our business, our market, or our competitors. If one or more of the analysts initiate research with an unfavorable rating or downgrade our common stock, provide more favorable recommendations about our competitors, or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our common stock to decline. We do not intend to pay cash dividends for the foreseeable future. We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any cash dividends in the foreseeable future. In addition, certain of our existing debt instruments include restrictions on our ability to pay cash dividends. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. The requirements of being a public company may strain our resources, result in more litigation, and divert management’s attention from operating our business. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE, and other applicable securities rules and regulations. Complying with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. By disclosing information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If those claims are successful, our business could be seriously harmed. Even if the claims do not result in litigation or are resolved in our favor, the time and resources needed to resolve them could divert our management’s resources and seriously harm our business. As a result of being a public company, we are obligated to develop and maintain proper and effective internal controls over financial reporting, and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year ending December 31, 2020. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting for the year ending December 31, 2020. We are required to disclose changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting on a quarterly basis. We have commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing, and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. In addition, as our business continues to grow in size and complexity, we are improving our processes and infrastructure to help ensure we can prepare financial reporting and disclosures within the timeline required for a public company. We may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404. In addition, prior to completing our internal control assessment under Section 404, we may become aware of and disclose material weaknesses that will require timely remediation. Due to our significant growth, especially with respect to high-growth emerging offerings like Uber Eats and Uber Freight, we face challenges in timely and appropriately designing controls in response to evolving risks of material misstatement. During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or operating results. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain these and other effective control systems required of public companies, could also restrict our future access to the capital markets. If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution. The assumed initial public offering price of $ per share is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share of $ per share as of December 31, 2018, based on the assumed initial public offering price of $ per share. That is because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock and also due to the conversion of our outstanding Convertible Notes at the consummation of the initial public offering. You will experience additional dilution when option holders exercise their right to purchase common stock under our equity incentive plans, when RSUs vest and settle, when we issue equity awards to our employees under our equity incentive plans, or when we otherwise issue additional shares of our common stock. For more information, see the section titled “Dilution.” Our amended and restated certificate of incorporation that will be in effect at the closing of this offering will provide that the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees. Our amended and restated certificate of incorporation that will be in effect at the closing of this offering will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us or our directors, officers, or employees arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; any action regarding our amended and restated certificate of incorporation or our amended and restated bylaws; any action as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware; and any action asserting a claim against us that is governed by the internal-affairs doctrine. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction. Our amended and restated certificate of incorporation will provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive forum provision. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If any other court of competent jurisdiction were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business. For example, the Court of Chancery of the State of Delaware recently determined that a provision stating that U.S. federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable. However, this decision may be reviewed and ultimately overturned by the Delaware Supreme Court. This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties, some of which cannot be predicted or quantified. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “hope,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. In particular, information appearing under “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following: our ability to successfully compete in highly competitive markets; our ability to effectively manage our growth and maintain and improve our corporate culture; our expectations regarding future financial performance, including but not limited to revenue, Core Platform Adjusted Net Revenue, potential profitability, ability to generate positive Core Platform Contribution Margin and Adjusted EBITDA, expenses, and other results of operations; our expectations regarding future operating performance, including but not limited to our expectations regarding future MAPCs, Trips, Gross Bookings, and Take Rate; our expectations regarding our competitors’ use of incentives and promotions, our competitors’ ability to raise capital, and the effects of such incentives and promotions on our growth and results of operations; our anticipated investments in new products and offerings, and the effect of these investments on our results of operations; our anticipated capital expenditures and our estimates regarding our capital requirements; our ability to close the acquisition of Careem and to integrate Careem and any future acquisitions into our operations; anticipated technology trends and developments and our ability to address those trends and developments with our products and offerings; the size of our addressable markets, market share, category positions, and market trends, including our ability to grow our business in the six countries we have identified as near-term priorities; the safety, affordability, and convenience of our platform and our offerings; our ability to identify, recruit, and retain skilled personnel, including key members of senior management; our expected growth in the number of platform users, and our ability to promote our brand and attract and retain platform users; our ability to maintain, protect, and enhance our intellectual property rights; our ability to introduce new products and offerings and enhance existing products and offerings; our ability to successfully enter into new geographies, expand our presence in countries in which we are limited by regulatory restrictions, and manage our international expansion; the availability of capital to grow our business; our ability to meet the requirements of our existing debt; our ability to prevent disturbance to our information technology systems; our ability to successfully defend litigation brought against us; our ability to comply with existing, modified, or new laws and regulations applying to our business; our ability to implement, maintain, and improve effective internal controls; and our use of the net proceeds from this offering. Actual events or results may differ from those expressed in forward-looking statements. As such, you should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, prospects, strategy, and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions, and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a highly competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe that such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information, actual results, revised expectations, or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including the size and opportunity of the markets in which we operate, is based on information from various sources, on assumptions that we have made that are based on such information and other similar sources, and on our knowledge of the markets in which we operate. This information involves many assumptions and limitations and is inherently imprecise, and you are cautioned not to give undue weight to these estimates. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors,” that could cause results to differ materially from the assumptions underlying these publications and reports. We use multiple sources and assumptions to calculate our TAM and our SAM discussed in the section titled “Business—Market Opportunity.” Our population estimates are based on data from the International Monetary Fund’s World Economic Outlook report from October 2018. When we refer to the 63 countries in which we have Ridesharing operations, we include only countries where we had at least 10,000 Ridesharing Trips on our platform during the quarter ended December 31, 2018. We calculate the number of urban public transportation passenger miles based on the Organisation for Economic Co-operation and Development’s (“OECD”) estimate of 5.2 trillion total public transportation passenger miles in 2015, which includes urban public passenger miles. Of these 5.2 trillion public transportation passenger miles, we estimate that 4.4 trillion are in our TAM based on the geographical mix of vehicle miles. We calculate the breakdown of miles by trip distance based on data from the 2017 National Household Travel Survey Transferability Statistics from the U.S. Department of Transportation’s Bureau of Transportation Statistics. For additional detail, see the section titled “Business—Market Opportunity.” We use data from Euromonitor International, Consumer Foodservice, 2019 edition for the consumer foodservice sales figures, which are foodservice value RSP, year-over-year exchange rate, on pages 11, 167, and 168. We use data from Euromonitor International, Retailing 2019 edition for the spend through store-based grocery retailers, which figures are Retail Value RSP including sales tax, at current price, on page 168. We use data from the following Temple University study on pages 160 and 222: Greenwood, Brad N. and Sunil Wattal, “Show Me the Way to Go Home: An Empirical Investigation of Ride-Sharing and Alcohol Related Motor Vehicle Fatalities.” MIS Quarterly 41.1 (2017): 163-187. This article is not incorporated into this prospectus. Certain monetary amounts, percentages, and other figures included elsewhere in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them. We estimate that net proceeds from the sale of our common stock that we are offering will be approximately $ billion (or approximately $ billion if the underwriters exercise their over-allotment option in full), based on the assumed initial public offering price of $ per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive proceeds from the sale of common stock in this offering by the selling stockholders. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $ million, based on the assumed initial public offering price of $ per share remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to increase our capitalization and financial flexibility and to create a public market for our common stock. We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. We may also use a portion of the net proceeds to acquire or make investments in businesses, products, offerings, and technologies, although we do not have agreements or commitments for any material acquisitions or investments at this time. We expect to use some of the net proceeds from this offering to satisfy a portion of the anticipated tax withholding and remittance obligations related to the settlement of our outstanding RSUs that will vest in connection with this offering. Based on RSUs outstanding as of December 31, 2018 for which the service condition has been met as of , 2019, and based on the assumed initial public offering price of $ per share, we estimate that these tax withholding obligations on the initial settlement date would be approximately $ billion in the aggregate. Each $1.00 increase in the price of our common stock at the time of settlement from the assumed initial public offering price of $ per share, assuming no change in the applicable tax rates, would increase the amount we would be required to pay to satisfy these obligations by approximately $ million. Each $1.00 decrease in the price of our common stock at the time of settlement from the assumed initial public offering price of $ per share, assuming no change to the applicable tax rates, would decrease the amount we would be required to pay to satisfy these obligations by approximately $ million. The foregoing discussion does not include the issuance of up to shares of common stock issuable from time to time upon the settlement of RSUs outstanding as of December 31, 2018, for which the service condition has not been satisfied as of , 2019, or the issuance of up to shares of common stock subject to RSUs granted after December 31, 2018. The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have broad discretion in applying the net proceeds of this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending their use, we intend to invest the net proceeds of this offering in a variety of capital-preservation investments, including short- and intermediate-term investments, interest-bearing investments, investment-grade securities, government securities, and money market funds. We have never declared or paid cash dividends on our capital stock. We intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate declaring or paying any cash dividends in the foreseeable future. The terms of certain of our outstanding debt instruments restrict our ability to pay dividends or make distributions on our common stock, and we may enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends or make distributions on our capital stock. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant. The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2018: on an actual basis; on a pro forma basis, giving effect to (i) the automatic conversion of 903.6 million shares of redeemable convertible preferred stock outstanding as of December 31, 2018 into 903.6 million shares of our common stock immediately prior to the closing of this offering, (ii) the net issuance of shares of our common stock upon the vesting and settlement of RSUs for which the service-based vesting condition was satisfied as of December 31, 2018 and the liquidity event-based vesting condition will be satisfied in connection with this offering, after giving effect to shares withheld to satisfy the associated withholding tax obligations (based on the assumed initial public offering price of $ per share and an assumed % tax withholding rate) and the related increase in liabilities and corresponding decrease in additional paid-in capital, (iii) stock-based compensation expense of $ associated with restricted stock awards, RSUs, SARs, and stock options for which the service-based vesting condition was satisfied or partially satisfied as of December 31, 2018 and the liquidity event-based vesting condition will be satisfied in connection with this offering, reflected as an increase in accumulated deficit, and an increase in additional paid-in capital for equity-settled awards or an increase in liabilities for cash-settled awards, (iv) the assumed cash exercise of a warrant to purchase 150,071 shares of our Series E redeemable convertible preferred stock outstanding as of December 31, 2018, which will result in the issuance of 150,071 shares of our common stock in connection with this offering, and the related reclassification of the redeemable convertible preferred stock warrant liability to additional paid-in capital for this exercise, (v) the automatic conversion of 922,655 shares of our Series G redeemable convertible preferred stock issued upon the exercise of a warrant in February 2019 into 922,655 shares of our common stock in connection with this offering, and the related reclassification of the redeemable convertible preferred stock warrant liability to additional paid-in capital for this exercise, (vi) shares of our common stock issuable upon the conversion of $2.9 billion aggregate principal amount of Convertible Notes outstanding as of December 31, 2018, plus additional accrued principal of $ (through an assumed conversion date of , 2019 and based on the assumed initial public offering price of $ per share) in connection with the closing of this offering, and (vii) the filing and effectiveness of our amended and restated certificate of incorporation that will be in effect immediately prior to the closing of this offering; and on a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above and (ii) the issuance and sale by us of shares of common stock in this offering at the assumed initial public offering price, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the use of proceeds to satisfy the withholding tax obligations described above. You should read this table together with the sections titled “Selected Consolidated Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus. Actual Pro Forma(1) Pro Forma, As Adjusted(1) Long-term debt: 2016 Senior Secured Term Loan(2) $ 1,101 $ 2021 Convertible Notes(4) 2023 Senior Notes(6) Total long-term debt $ 52 $ $ Redeemable convertible preferred stock, $0.00001 par value; 946 shares authorized, 904 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted $ 14,177 $ $ Stockholders’ deficit: Preferred stock, $0.00001 par value; no shares authorized, issued and outstanding, actual; 10 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted Common stock, $0.00001 par value; 2,696 shares authorized, 457 shares issued and outstanding, actual; 5,000 shares authorized, pro forma and pro forma as adjusted; shares issued and outstanding, pro forma; shares issued and outstanding, pro forma as adjusted $ (7,385 ) $ $ Total capitalization Pro forma (items (ii)(b) and (vi)) and pro forma as adjusted consolidated cash and cash equivalents and capitalization data are illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $ million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit, and total capitalization by approximately $ million, assuming the assumed initial public offering price of $ per share remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. 2016 Senior Secured Term Loan consists of $1,124 million of principal, net of discount and issuance costs of $23 million. 2021 Convertible Notes consists of $1,844 million of principal, net of discount and issuance costs of $339 million. 2023 Senior Notes consists of $500 million of principal, net of discount and issuance costs of $4 million. 2026 Senior Notes consists of $1,500 million of principal, net of discount and issuance costs of $8 million. If the underwriters exercise their over-allotment option in full, pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ deficit, total capitalization, and shares of common stock outstanding as of December 31, 2018 would be $ , $ , $ , $ , and shares, respectively. 217,359 shares of our common stock issuable upon the exercise of warrants outstanding as of December 31, 2018, with a weighted-average exercise price of $10.44 per share (excluding warrants that are assumed to be exercised prior to the closing of this offering); 130.0 million shares of our common stock reserved for future issuance under our 2019 Plan, which will become effective on the date of the underwriting agreement between us and the underwriters for this offering; and 25.0 million shares of our common stock reserved for issuance under our ESPP, which will become effective on the date of the underwriting agreement between us and the underwriters for this offering. If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma as adjusted net tangible book value per share immediately after this offering. Our historical net tangible book value as of December 31, 2018 was $(7,620) million or $(0.02) per share. Our pro forma net tangible book value as of December 31, 2018 was $ , or $ per share, based on the total number of shares of our common stock outstanding as of December 31, 2018, after giving effect to (i) the automatic conversion of 903.6 million shares of redeemable convertible preferred stock outstanding as of December 31, 2018 into 903.6 million shares of our common stock immediately prior to the closing of this offering, (ii) the net issuance of shares of our common stock upon the vesting and settlement of RSUs for which the service-based vesting condition was satisfied as of December 31, 2018 and the liquidity event-based vesting condition will be satisfied in connection with this offering, after giving effect to shares withheld to satisfy the associated withholding tax obligations (based on the assumed initial public offering price of $ per share and an assumed % tax withholding rate), and the related increase in liabilities and corresponding decrease in additional paid-in capital, (iii) stock-based compensation expense of $ associated with restricted stock awards, RSUs, SARs, and stock options for which the service-based vesting condition was satisfied or partially satisfied as of December 31, 2018 and the liquidity event-based vesting condition will be satisfied in connection with this offering, reflected as an increase in accumulated deficit, and an increase in additional paid-in capital for equity-settled awards or an increase in liabilities for cash-settled awards, (iv) the assumed cash exercise of a warrant to purchase 150,071 shares of our Series E redeemable convertible preferred stock outstanding as of December 31, 2018, which will result in the issuance of 150,071 shares of our common stock in connection with this offering, and the related reclassification of the redeemable convertible preferred stock warrant liability to additional paid-in capital for this exercise, (v) the automatic conversion of 922,655 shares of our Series G redeemable convertible preferred stock issued upon the exercise of a warrant in February 2019 into 922,655 shares of our common stock in connection with this offering, and the related reclassification of the redeemable convertible preferred stock warrant liability to additional paid-in capital for this exercise, (vi) shares of our common stock issuable upon the conversion of $2.9 billion aggregate principal amount of Convertible Notes outstanding as of December 31, 2018, plus additional accrued principal of $ (through an assumed conversion date of , 2019 and based on the assumed initial public offering price of $ per share) in connection with the closing of this offering, and (vii) the filing and effectiveness of our amended and restated certificate of incorporation that will be in effect immediately prior to the closing of this offering. Our pro forma as adjusted net tangible book value represents our pro forma net tangible book value after giving effect to (i) the pro forma adjustments set forth above and (ii) the issuance and sale by us of shares of common stock in this offering at the assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the use of proceeds to satisfy the withholding tax obligations described above. For additional information, see Note 1 to our audited consolidated financial statements included elsewhere in this prospectus. Our pro forma as adjusted net tangible book value as of December 31, 2018 would have been $ , or $ per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $ per share to new investors purchasing common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share Historical net tangible book value per share as of December 31, 2018 $ (0.02 ) Increase per share attributable to the pro forma adjustments described above Pro forma net tangible book value per share as of December 31, 2018 Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering Pro forma as adjusted net tangible book value per share Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $ per share and increase (decrease) the dilution to new investors by $ per share, in each case assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value by approximately $ per share and decrease (increase) the dilution to new investors by the assumed initial public offering price of $ per share, in each case assuming the assumed initial public offering price of $ per share remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses. If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share, as adjusted to give effect to this offering, would be $ per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $ per share. The following table summarizes, as of December 31, 2018, on a pro forma as adjusted basis, as described above, the number of shares of our common stock, the total consideration, and the average price per share (i) paid to us by existing stockholders and (ii) to be paid by new investors acquiring our common stock in this offering at the assumed initial public offering price of $ per share, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Shares Acquired Total Consideration Average Number Percent Amount Percent Existing stockholders % $ % $ New investors 100.0% $ 100.0% Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $ million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to shares, or % of the total number of shares of our common stock outstanding following the closing of this offering, and will increase the number of shares held by new investors to shares, or % of the total number of shares outstanding following the closing of this offering. After giving effect to the sale of shares in this offering by us and the selling stockholders, if the underwriters exercise in full their over-allotment option, the total number of shares held by new investors will increase to shares, or % of the total number of shares outstanding following the closing of this offering. up to 30.4 million shares of our common stock issuable upon the conversion of up to approximately $1.7 billion aggregate principal amount of the Careem Convertible Notes that we may issue in connection with the acquisition of Careem, which will be convertible at a conversion price of $55.00 per share. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Careem Convertible Notes” for more information; To the extent any outstanding options or warrants to purchase our common stock are exercised or any outstanding RSUs or RSUs that we may grant in the future vest, or we issue additional shares of common stock, new investors will experience further dilution. If all outstanding awards under our Amended and Restated 2010 Stock Plan (the “2010 Plan”) and Amended and Restated 2013 Equity Incentive Plan (the “2013 Plan”), as well as outstanding awards granted outside of our equity compensation plans, as of December 31, 2018, were exercised or settled, assuming no net settlement of RSUs or net or cashless exercise of stock options, then our existing stockholders, including the holders of these equity awards, would own % and our new investors would own % of the total number of shares of our common stock outstanding on the closing of this offering. The following unaudited pro forma consolidated financial information presents our unaudited pro forma consolidated statement of operations for the year ended December 31, 2018 after giving effect to the divestitures of our businesses in Russia/CIS and Southeast Asia. During the year ended December 31, 2018, we divested the following two operations (“Divestitures”): In February 2018, we divested and contributed our operations in Russia/CIS to a newly created entity, MLU B.V., in exchange for a non-controlling interest in that entity. We received a 38.0% equity ownership interest in MLU B.V. based upon the total shares outstanding at the close of the transaction on an as-converted basis but without taking into account securities exercisable or exchangeable for shares of capital stock or its equivalent (including outstanding vested or unvested stock-based awards and any reserved but unissued stock-based awards under any equity incentive plan). Based on our currently available information, we estimate our equity ownership interest in MLU B.V. to be 38.0% as of December 31, 2018. In March 2018, we completed the sale of our operations in Southeast Asia to Grab Holdings Inc. (“Grab”) in exchange for shares of Grab Series G Preferred Stock representing a 30.0% equity ownership interest based upon the total shares outstanding at the close of the transaction on an as-converted basis but without taking into account securities exercisable or exchangeable for shares of capital stock or its equivalent (including outstanding vested or unvested stock-based awards and any reserved but unissued stock-based awards under any equity incentive plan). Based on our currently available information, we estimate our equity ownership interest in Grab to be 23.2% as of December 31, 2018. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2018 assumes that the Divestitures occurred on January 1, 2018. The unaudited pro forma consolidated statement of operations is intended for illustrative purposes only, and does not necessarily indicate our results of operations that would have been achieved if the Divestitures had occurred on January 1, 2018, nor is it indicative of our future results of operations. The unaudited pro forma consolidated statement of operations should be read in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. Uber Technologies, Inc. Unaudited Pro Forma Consolidated Statement of Operations For the Year Ended December 31, 2018 Pro Forma Adjustments Technologies, Inc. Divestiture of Southeast Asia(a) Divestiture of Russia/CIS(b) Other Pro Forma (in millions, except share amounts which are reflected in thousands, and per share amounts) $ 11,270 $ (10 ) $ (4 ) $ — $ 11,256 5,623 (28 ) (7 ) — 5,588 1,505 — — — 1,505 2,082 (4 ) — (14 )(c)(d) 2,064 426 (2 ) — — 424 14,303 (130 ) (13 ) (14 ) 14,146 (3,033 ) 120 9 14 (2,890 ) (648 ) — — — (648 ) 4,993 — — (3,254 )(e)(f) 1,739 1,312 120 9 (3,240 ) (1,799 ) 283 — — (121 )(g) 162 (42 ) — — — (42 ) 987 120 9 (3,119 ) (2,003 ) (10 ) — — — — $ 997 $ 120 $ 9 $ (3,119 ) $ (2,003 ) Net loss per share attributable to Uber Technologies, Inc. common stockholders: $ — $ (4.52 ) The pro forma adjustments are based on estimates and assumptions that management believes are reasonable. These pro forma adjustments include those adjustments that are directly attributable to the Divestitures, factually supportable, and expected to have a continuing impact. These adjustments are described below: Reflects the elimination of the operating results of our Southeast Asia operations as reflected in our historical consolidated financial statements for the year ended December 31, 2018. Reflects the elimination of the operating results of our Russia/CIS operations as reflected in our historical consolidated financial statements for the year ended December 31, 2018. Reflects the removal of $8 million of legal, tax, and accounting fees incurred by us that were directly related to the Divestitures but were not allocated to the Southeast Asia and Russia/CIS operations in our accounting records. Reflects the removal of $6 million of regulatory fines that were directly attributable and levied subsequent to the Southeast Asia divestiture. Reflects the removal of $40 million of other income related to transition services we provided in connection with the Divestitures. Reflects the elimination of $2.3 billion of pre-tax gain associated with the Southeast Asia divestiture and $954 million of pre-tax gain associated with the Russia/CIS divestiture as reflected in other income (expense), net in our consolidated financial statements for the years ended December 31, 2017 and 2018. Reflects the estimated income tax impact of $121 million as a result of the pro forma adjustments. The amount primarily represents the tax impact of the gain recognized from the Divestitures based on the statutory rates in effect for the period presented. The following tables set forth our selected consolidated financial and operating data. The selected consolidated statements of operations data for the years ended December 31, 2016, 2017, and 2018 (except the pro forma share and pro forma net income per share information) and the selected consolidated balance sheet data as of December 31, 2017 and 2018 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2016 is derived from our audited consolidated financial statements that are not included in this prospectus. The selected consolidated statements of operations and comprehensive loss data for the years ended December 31, 2014 and 2015 and the selected consolidated balance sheet data as of December 31, 2014 and 2015 have been derived from our accounting records and have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus, except that such data has not been recast to conform to Topic 606, as discussed in footnote (1) below. You should read the following selected consolidated financial and operating data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The selected audited consolidated financial and operating data in this section are not intended to replace our audited consolidated financial statements and the related notes and are qualified in their entirety by the audited consolidated financial statements and the related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results in any future period. 2014(1) 2015(1) 2016(1) 2017 2018 (unaudited) (unaudited) (in millions, except share amounts which are reflected in thousands and per share amounts) Consolidated Statements of Operations Data: $ 495 $ 1,995 $ 3,845 $ 7,932 $ 11,270 245 626 1,594 2,524 3,151 81 348 864 1,201 1,505 1,139 3,334 6,868 12,012 14,303 (644 ) (1,339 ) (3,023 ) (4,080 ) (3,033 ) Gain on bargain purchase — 39 — — — — (179 ) (334 ) (479 ) (648 ) (7 ) (124 ) 139 (16 ) 4,993 (651 ) (1,603 ) (3,218 ) (4,575 ) 1,312 2 (13 ) 28 (542 ) 283 — — — — (42 ) (653 ) (1,590 ) (3,246 ) (4,033 ) 987 Income (loss) from discontinued operations, net of income taxes (including gain on disposition in 2016)(4) (17 ) (1,098 ) 2,876 — — (670 ) (2,688 ) (370 ) (4,033 ) 987 $ (670 ) $ (2,688 ) $ (370 ) $ (4,033 ) $ 997 Net income (loss) per share attributable to Uber Technologies, Inc. common stockholders(5), basic and diluted: $ (1.64 ) $ (3.89 ) $ (7.89 ) $ (9.46 ) $ — (0.04 ) (2.68 ) 6.99 — — On January 1, 2017, we adopted Topic 606 on a full retrospective basis. Accordingly, our audited consolidated financial statements for 2016 were recast to conform to Topic 606. See Notes 1 and 2 to our audited consolidated financial statements included elsewhere in this prospectus. Comparative information for 2014 and 2015 continues to be reported under the accounting standards in effect for those periods. $ 8 $ 13 $ 21 $ 30 $ 15 2 7 13 9 9 $ 97 $ 209 $ 128 $ 137 $ 172 $ — $ 9 $ 22 $ 71 $ 104 — (41 ) (91 ) 42 (45 ) — — — — 3,214 — (95 ) 142 (173 ) (501 ) (7 ) 3 66 44 225 Other income expense, net $ (7 ) $ (124 ) $ 139 $ (16 ) $ 4,993 See Notes 1 and 12 to our audited consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net income (loss) per share attributable to common stockholders and basic and diluted pro forma net income (loss) per share attributable to common stockholders, and for the weighted-average number of shares used in the computation of the per share amounts. As of December 31, $ 1,961 $ 4,188 $ 6,241 $ 4,393 $ 6,406 2,241 6,740 15,713 15,426 23,988 — 1,423 3,087 3,048 6,869 — 3 211 125 52 330 4,078 9,198 11,773 17,196 (1,109 ) (4,265 ) (4,806 ) (8,874 ) (7,865 ) Working capital is defined as total current assets less total current liabilities. See our audited consolidated financial statements and the related notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities as of December 31, 2017 and 2018. See the section titled “Summary Consolidated Financial and Operating Data—Notes about Certain Key Metrics—Core Platform Adjusted Net Revenue” for more information. See the section titled “Summary Consolidated Financial and Operating Data—Notes about Certain Key Metrics—Core Platform Contribution Margin” for more information. See the section titled “Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measure—Adjusted EBITDA” for more information and for a reconciliation of net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA. We collect and analyze operating and financial data to evaluate the health of our business and assess our performance. In addition to revenue, net income (loss), loss from operations, and other results under GAAP, we use Adjusted EBITDA to evaluate our business. We have included this non-GAAP financial measure in this prospectus because it is a key measure used by our management to evaluate our operating performance. Accordingly, we believe that this non-GAAP financial measure provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team and board of directors. Our calculation of this non-GAAP financial measure may differ from similarly-titled non-GAAP measures, if any, reported by our peer companies. This non-GAAP financial measure should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. See the section titled “Summary Consolidated Financial and Operating Data—Non-GAAP Financial Measure” for additional information and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the sections titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this prospectus. Opportunities, Challenges, and Risks We have a number of significant opportunities to continue to grow our business. These opportunities include increasing Ridesharing and Uber Eats category penetration in existing markets, expanding Ridesharing and Uber Eats into new markets, increasing MAPCs and Trips per MAPC, investing in and expanding our New Mobility products, including dockless e-bikes and e-scooters, and investing in and expanding Uber Freight. We will also continue to leverage our platform to test and launch new products, such as Uber Bus, our high-capacity vehicle product, as well as invest in consumer and Driver rewards programs across our offerings. We believe that autonomous vehicle technologies will be an important part of our platform over the long term, and we plan to continue to invest in these technologies. For more information on our strategies for growing our business, see the section titled “Business—Our Growth Strategy.” While we have a number of key opportunities for growth, we also face a number of challenges and risks. The markets in which we operate are highly competitive and include well-funded competitors in the ridesharing and meal delivery spaces, which have low barriers to entry and low switching costs; well-established and low-cost public transportation options; and personal vehicle ownership. We may lower fares or service fees, or increase Driver incentives or consumer discounts and promotions, to remain competitive in existing markets or expand into new markets. Our ability to increase our market share relative to other transportation options depends in part on our ability to reduce the average cost per mile traveled on our platform, including through the introduction of lower price-point products such as Express POOL and Uber Bus. We also face challenges increasing penetration in existing markets, including suburban and rural areas where our network is smaller and less liquid, the cost of personal vehicle ownership is lower, and personal vehicle ownership is more convenient. Further, we are making substantial investments in new products and offerings, such as autonomous vehicles, dockless e-bikes, and e-scooters, which are inherently risky. These investments, in conjunction with sustained Driver incentives or consumer discounts and promotions, pose a challenge to future profitability. Furthermore, we face legal and regulatory obstacles, including in the six countries that we have identified as near-term priorities, that could adversely affect our revenue, costs, and ability to enter and grow in new markets. For more information on challenges we face, see the section titled “Risk Factors” and the subsection titled “Factors Affecting Our Performance” in this section. While we have a leading ridesharing category position in every major region of the world where we operate through our owned operations, our category position has declined in certain geographies in recent periods. In 2017 our category position in the United States and Canada was significantly impacted by adverse publicity events. Our ridesharing category position generally declined in 2018 in the substantial majority of the regions in which we operate, although at a slower rate. We believe our category position is also impacted by heavy subsidies and discounts by our competition. Well-capitalized competitors, many of which took advantage of the adverse publicity we experienced in 2017 to improve their category positions, have pressured and may continue to put pressure on our margins as they are able to fund lower fares, service fee reductions, and consumer discounts and promotions to enter new markets and grow their category position. In certain markets, we intend to invest aggressively, even at short-term cost, based on our belief in the long-term value of the market opportunity that we address. Additionally, we anticipate that Gross Bookings per Trip may continue to decline as we continue to penetrate markets with lower price points and expand our lower-priced products, such as UberPOOL, dockless e-bikes, e-scooters, auto rickshaws, and Uber Bus, in certain markets. While Gross Bookings per Trip may decline, we believe that servicing consumers at lower price points can unlock significant growth based on the large number of consumers, especially in certain regions, for whom our current offerings may be perceived as too expensive. However, long-term adoption rates and profitability of these new products are uncertain. We also expect our Core Platform Contribution Margin to decline in the near term due to, among other factors, competition in Ridesharing and planned significant investments in Uber Eats, based upon our long-term growth expectations for Uber Eats. Our Uber Eats Take Rate has declined in recent periods, and may continue to decline, as we onboard large-volume restaurants at a lower service fee and restaurants with lower average basket sizes, and as we invest in more nascent and competitive markets, such as India. Our Personal Mobility offering includes Ridesharing and New Mobility. Ridesharing refers to products that connect consumers with Drivers who provide rides in a variety of vehicles, such as cars, auto rickshaws, motorbikes, minibuses, or taxis. New Mobility refers to products that provide consumers with access to rides through a variety of modes, including dockless e-bikes and e-scooters. We aim to provide everyone, everywhere on our platform with access to a safe, reliable, affordable, and convenient trip within a few minutes of tapping a button. In the quarter ended December 31, 2018, the average wait time for a rider to be picked up by a Driver was five minutes. In addition to powering movement for riders, our platform powers opportunity for Drivers, fueling the future of independent work by providing Drivers with a reliable and flexible way to earn money. We calculate our ridesharing category position within a given region by dividing our Ridesharing Gross Bookings by our estimates of total ridesharing Gross Bookings generated by us and other companies with similar ridesharing products. We estimate total ridesharing Gross Bookings in a given region by utilizing internal source data, including historical trips, bookings, product mix, and fare information, and external source data from publicly available information and marketing analytics firms. Based on these estimates, we have a leading ridesharing category position in every major region of the world where we operate, as shown in the graphic below. We also participate in certain regions through our minority-owned affiliates and intend to maintain our interests in these minority-owned affiliates to participate in the expected growth of ridesharing and other modes of personal mobility in the regions where they operate. Percentages are based on our internal estimates of Gross Bookings and miles traveled using our currently available information. For more detail on ownership stakes, see the section titled “—Minority-Owned Affiliates.” Our Uber Eats offering allows consumers to search for and discover local restaurants, order a meal at the touch of a button, and have the meal delivered reliably and quickly. We launched our Uber Eats app just over three years ago, and we believe that Uber Eats has grown to be the largest meal delivery platform in the world outside of China based on Gross Bookings. We believe that our scale enables the average delivery time for Uber Eats to be faster than the average delivery time for our competitors. For the quarter ended December 31, 2018, the average delivery time was approximately 30 minutes. We believe that Uber Eats not only leverages, but also increases, the supply of Drivers on our network. For example, Uber Eats enables Ridesharing Drivers to

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professional_accounting

Rev. Rul. 85-13: Is There a Limit to Disregarding Disregarded Entities? Although the federal estate tax is not extinct, with the combined marital exemption now north of $10 million, it is an endangered species. Recently, Governor Cuomo signaled his intent — likely to be affirmed by State Republicans — to increase the New York estate tax exemption to perhaps the federal level. With the threat of high federal estate taxes no longer a concern for the vast majority of taxpayers, attention has turned to the income tax, which has enjoyed a resurgence under the Obama Administration. An important objective in estate planning is now to preserve the step up in basis at death. This will provide heirs with the ability to sell inherited assets without incurring a capital gains tax. For the past decade or so, an arrow in the quiver of estate planners seeking to reduce eventual estate taxes has been to sell or gift assets to a grantor trust. The objective of the sale was to make a complete transfer for transfer (estate and gift) tax purposes, but to retain enough powers such that the transfer was incomplete for income tax purposes. The mechanism seemed to be perfect: appreciation of the assets sold to the trust was forever out of the grantor’s estate, and the grantor would remain liable (if he wished, since he could be reimbursed) for the yearly income tax liability. This would result in a tax-free ““gift” by the grantor to the trustee of the trust of the income tax liability of the trust. Trust assets would thereby grow unimpeded by an annual income tax. So far so good. The catalyst that made possible the dichotomy in tax treatment for income tax and estate tax purposes was in substantial part the interpretation of the grantor trust rules in Revenue Ruling 85-13. There, the IRS found that the “sale” by the grantor of assets to a grantor trust was not a realization event for income tax purposes since the grantor was deemed to be making a sale to himself. The ability to draft a trust constituting a grantor trust for income tax purposes, yet be irrevocable, so that for transfer tax purposes the sale was complete, was the linchpin of the technique. Many candidates emerged for making a trust a grantor trust. The ability to borrow from the trust without adequate security (IRC §675(2))was one provision. Another was the ability to substitute assets of the trust in a nonfiduciary capacity for assets of equal value (IRC §675(4)(C)). This latter “swap” power became the most popular provision to accomplish grantor trust status. The provision had another serendipitous benefit: if low basis assets had initially been sold to the trust, they could (presumably) later be swapped out with higher basis assets. This would enable the grantor’s estate to receive a valuable step up in basis at the grantor’s death. All seemed fine. With the federal exclusion now so high, selling assets to grantor trusts is now less common; gifting assets to such trusts is now in vogue. The purpose of the gift may now be to utilize the federal exemption of the surviving spouse — which now includes the ported DSUE amount — in order to remove appreciation from the estate of the surviving spouse. The desired objective of swapping out low basis assets later in the life of the surviving spouse is to achieve basis step up to fair market value at his or her death. The ability to substitute assets and obtain a basis step up is lauded by numerous tax authorities. However, anecdotal evidence seems to indicate that few practitioners have actually undertaken such swaps; certainly, the IRS has not ruled on the issue, and no cases have discussed whether the swap works. Some would dogmatically maintain that the swap clearly accomplishes the tax objective of accomplishing an ameliorative basis shift. However, reliance on dogma itself in this context could be risky. How the IRS would learn of such a swap is debatable. Apparently, the swap would not be required to be reported on any tax return. However, one must assume, as is almost always the case, the IRS would find out. Given, then, the paucity of guidance on this issue, and its importance, a closer look at whether the technique is unassailable, is in order. [a] power of administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity. For purposes of this paragraph, the term “power of administration” means any one or more of the follower powers . . . (C) a power to reacquire the trust corpus by substituting other property of an equivalent value. Although not drafted particularly clearly, Section 675 is stating that if any person acting in a nonfiduciary capacity, can direct any person acting in a fiduciary capacity, to substitute trust assets of equal value, the trust will be grantor trust, to the extent of the power. We note as an initial matter that the statute uses the term “substitut[e] property of an equivalent value.” It appears that Congress was not contemplating basis implications when drafting Section 675. However, there is no reason to believe that the same immunization against income tax would not also apply to the swap. This is why estate planners believe that the assets swapped will carry their respective bases with them. Now, let us look at an example. Suppose in the context of a gift or sale to a grantor trust, the grantor takes back a promissory note bearing adequate interest at the applicable federal rate. Later on, someone acting in a nonfiduciary capacity directs the trust to substitute higher basis assets with the grantor. The rationale for the substitution is to preserve the step up. Is it clear that Revenue Ruling 85-13 and IRC §675(4)(C) unimpeachably allow the grantor to accomplish this tax result? Most have assumed that it would. However, if this assumption is wrong, then dire income tax consequences could ensue. It is therefore important to prove (or disprove) the validity of this assumption. To test the hypothesis, we first consult Revenue Ruling 85-13 itself. We next consider ancillary sources, such as rulings promulgated in the context of qualified personal residence trusts, court decisions, and Section 1031, which provides for tax-free exchanges of certain property in certain contexts. A’s basis in the shares received from T will be equal to A’’s basis in the shares at the time he funded T because the basis of the shares was not adjusted during the period that T held them. See Rev. Rul. 72-406, a ruling involving the determination of the grantor’s basis in property upon the reversion of that property to the grantor at the expiration of the trust’s term. Apparently, most planners have blithely assumed that the basis implications provided for in Revenue Ruling 85-13, which involved a loan, and a reversion, would also extend to situations involving a substitution. While perhaps not an implausible or unjustified assumption, the nexus of this perceived connection must be examined. Loans by their very nature do not constitute taxable events. The argument would apparently be that since a substitution of assets is also not considered a taxable event, the basis of assets received by the grantor in such a swap would be a substituted basis of those assets. However, the authority for treating a loan as a nontaxable event is doctrinal, whereas the authority for treating the swap as a nontaxable event emanates merely from IRS guidance. Is it correct, or reasonable, to assume that the basis implications for assets received through an IRC §675(3) loan are identical to those that result from an IRC §675(4) swap? Further inquiry is necessary. A first line of inquiry will be to consider qualified personal residence trusts, which have spawned similar basis issues, and later, an austere Treasury response. Qualified personal residence trusts (QPRTs), not yet quite in the dustbin of estate planners, but getting there, boast a statutory lineage. Also grantor trusts, they have been used to reduce gift and estate taxes. In creating a QPRT, the grantor transfers his personal residence to a trust, retains the right to live in the residence for a term of years, and makes a gift of the remainder interest. For the technique to work, the grantor must live to the trust term. If the term of the QPRT is 10 years, the grantor is deemed to make a gift of the remainder interest in the trust corpus to trust beneficiaries. Reflecting the lengthy term of the QPRT, the amount of the gift would presumably be small, since most of the value of the trust principal would be locked up with the retained life estate of the grantor. The residual gift would tend to be small, because of its low present value. However, as interest rates have declined, the present value of the remainder interests created by QPRTs has increased, thereby resulting in larger gifts to remainder beneficiaries. This, coupled with the massive increase in the federal gift tax exemption, and the decline in residential values, has made QPRTs rather unattractive today in most estate planning situations. [Some estate planners still advocate the use of QPRTs, although those planners are in the distinct minority. Without unduly digressing, it should be noted that QPRTs do possess some attractive nontax attributes, such as asset protection.] Returning to our inquiry, we note that astute estate planners saw an opportunity to ameliorate adverse income tax basis problems by enabling the grantor of the QPRT to repurchase the residence prior to the expiration of the QPRT term. In response to a flood of grantors repurchasing residences to gain an increase in basis at death, Treasury promulgated Reg. §25.2702-5(c)(9) for trusts created after May 16, 1996. This requirement prohibiting a sale or transfer prevents families using personal residence trusts or QPRTs from realize large income tax savings. If the grantor leaves the residence in trust until expiration of its term, the remainder beneficiaries will acquire the property with a carryover basis from the grantor, often leaving them with a large built-in gain. On the other hand, if the grantor were allowed to repurchase the residence just before the end of the term, more favorable tax results could be obtained. No gain would be recognized to the grantor on the repurchase, and at the end of the trust term, the beneficiaries would receive flat-basis cash. Further, the residence would return to the grantor, would be included in the grantor’s gross estate, and would receive a step-up basis under Code Sec. 1014. What Treasury addressed in Reg. §25.2702-5(c)(9) is essentially a rather close variation of the problem we are addressing. Now we must ask the question: Is it plausible that IRS would not object to a swap of assets by the grantor shortly before death if the principal purpose was to create a basis step up? Revenue Rulings, now less common than they were in 1985, are pronouncements issued by the Service of its own accord. In contrast to Private Letters Rulings, taxpayers may rely on Revenue Rulings. (In practice, taxpayers rely on Private Letter Rulings as well). Assuming taxpayers can safely rely on Revenue Ruling 85-13, we then ask, does it unassailably support the proposition that the taxpayer may accomplish in the realm of a grantor trust swap what the Service forbade in the context of a QPRT? And even if it does, can the Service reverse itself; or worse, could Treasury enact regulations that could foreclose the technique? And if Treasury could so enact regulations, could those regulations be retroactive? Ascertaining the likelihood of these various unpleasant scenarios should inform us of the risk we take should we advise our clients of the feasibility of substituting assets pursuant to IRC §675(4)(C) to achieve favorable basis results. Undeniably, Revenue Ruling 85-13, standing alone, clearly supports the proposition that an ill grantor may shortly before death swap out low basis trust assets in order to achieve a basis step up at death. Treas. Reg. §25.2702-5(c)(9), which applies in the case of QPRTs, was a “fix” implemented by Treasury to stop a technique perceived by Treasury as abusive. Notably, the regulations do not themselves purport to alter the income tax consequences of the technique in the context of QPRTs — they only forbid the taxpayer from executing a trust that permits the forbidden transaction. Presumably, were the taxpayer to violate the regulation and the IRS to learn of it, the Service could argue in Tax Court — perhaps with success — that the QPRT failed. Whatever tax consequences this conclusion would entail, they would certainly not be pleasant. Therefore, all but the most uninformed planners would draft a QPRT containing such language. If such language were to inadvertantly appear, prudence would dictate that the power should lay dormant, so as not to increase the risk already attendant with the errant provision. The Tax Court deciding such a case would not necessarily be required to decide whether the mere presence of the forbidden language in the QPRT — or an actual forbidden repurchase — would have achieved its intended result for tax purposes but for the regulation. Most likely, the Tax Court would not reach this issue, since the violation of the regulation forbidding the repurchase would suffice to decide the case. The question then becomes what would occur if Treasury attempted to impede the desired swap through the implementation of regulations, as it did with QPRTs which attempted to accomplish the same objective? With the foregoing in mind, we return to IRC §675(4)(C), which provides that the grantor is treated as owner of any portion of a trust if any person in a nonfiduciary capacity exercises a power to “reacquire the trust corpus by substituting other property of an equivalent value.” Let us compare IRC §675(4)(C) with IRC §675(1) — the subject of Revenue Ruling 85-13 — which provides that grantor trust status will ensue where the grantor or a nonadverse party purchases, exchanges or otherwise deals with the or disposes of the corpus or income of the trust without adequate consideration in money or money’s worth. Since IRC §675(4)(C) uses the term “reacquire,” it must be the grantor to whom the statute is referring as the person who substitutes the assets. Are the income tax consequences of a later “substitution” of property comparable to the initial sale of property to the trust? If they are, does that similarity arise from doctrinal sources, such as the grantor trust rules themselves? Or, could Congress enact regulations seeking to curtail the desired tax result? A grantor trust becomes a nongrantor trust when the grantor dies. Tax attorneys are sharply divided concerning the income tax consequences arising on the death of the grantor of a trust trust holding appreciated property. There are three camps: One camp, the majority, believes that no realization event occurs, and no basis step up results. The second camp believes that a recognition event occurs, a captial gains tax is imposed, and a basis step up occurs. The third camp, a distinct minority, believes that no realization or recognition event occurs, but that the beneficiares receive a basis step up. It is clear that no consensus exists as to what income tax rules govern the grantor trust when it becomes a nongrantor trust at the death of the grantor. Similarly, no known adverse authority (by “authority,” we expand the definition beyond what the IRS considers as authority, to include tax attorneys) exists which considers the possibility that the IRS could reverse course and attempt to limit the QPRT-like technique which we find in a substitution of assets to achieve a basis step up. Yet as noted, the IRS or the Treasury could conceivably attempt to forbid this transaction, and could possibly make the rule retroactive without violating the Constitution. With that in mind, we next consider a swap of assets under IRC §1031. Section 1031 provides for nonrecognition of gain in the context of certain exchanges of property held for productive use in a trade or business or for investment. The statute and regulations governing like kind exchanges fastidiously require deferred basis to be later reported in the event of a taxable sale. Why should Congress be less concerned with basis consequences in the case of a swap of assets involving a grantor trust than in, for example, an exchange of assets under Section 1031? It is therefore Section 1031 that we shall turn for guidance as to how Congress views the taxation of swaps in other contexts. Section 1031 enables taxpayers to sell assets and defer gain provided their investment continued unabated in identical, or nearly identical form. A formal examination is beyond the scope of this Note, and is, more importantly, unnecessary. One of the basic precepts of Section 1031 is that a taxpayer cannot exchange property with himself. This rule was articulated in Bloomington Coca-Cola v. Com’r, 189 F.2d 14 (7th Cir. 1951) where Coca Cola conveyed land and cash to a contractor in exchange for the construction of a bottling plant on other land owned by Coca Cola. Consider as another example the rules governing exchange proceeds in a Section 1031 exchange. Even though the taxpayer is not deemed to be in constructive receipt of exchange funds for purposes of Section 1031 if a qualified intermediary is employed, the taxpayer is considered as receiving the exchange funds for other income tax purposes. IRC §468B, Treas. Regs. §1.468B. The point here is that while the basis consequences of the swap power may indeed be sanguine, one should not dogmatically assume such to be the case. Basis provisions for income and estate tax purposes are provided for in Sections 1011 through 1023 of the Code. Section 675(4)(C) makes no mention of basis. The IRS issue no ruling with respect to the swap power in Section 675(4)(C) and any basis consequences attaching to such a swap. It is somewhat disconcerting to realize that we may have inadvertently assumed that the Service would forever interpret Revenue Ruling 85-13 in the manner to which we have become accustomed. Quite conceivably, the IRS could come to view these swaps as it did grantors who repurchased assets from QPRTs to gain a basis advantage. In conclusion, the Section 675(4)(C) power of substitution is an excellent choice for conferring grantor trust status on a trust. However, those who view the transaction as also conferring upon the grantor a later ability to shift basis may do so at their own peril. In this sense, Revenue Ruling 85-13 could be a Trojan Horse, inviting the taxpayer to reap substantial tax benefits only to incur unwarranted tax risks in doing so. Even if the IRS does not challenge the transaction, the victory — removing the appreciation from the grantor’s estate — may be pyrrhic if, as many believe, the estate tax is eventually eliminated. This entry was posted in Asset Sales to Grantor Trusts, Estate Planning and tagged defective grantor trusts, disregarded entities, estate planning, federal estate tax exemption, grantor trusts, IRC section 675, irc section 675(4)(C), nongrantor trust, nys estate tax, Portability, qprts purchase residence, Revenue Ruling 85-13, sales to defective grantor trusts, sales to grantor trusts, substitution power. Bookmark the permalink.

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professional_accounting

Association of International Certified Professional Accountants–AICPA Institute of Management Accountants The financial reporting framework in the United States is established under several laws and regulations such as the Securities Exchange Act of 1934 (the Act) and the Sarbanes–Oxley Act of 2002 as well as in the Accounting Standards Codification issued by the Financial Accounting Standards Board (FASB). The Accounting Standards Codification, commonly known as the U.S. Generally Accepted Accounting Principles (U.S. GAAP), is developed for application by all nongovernment entities; however, only public business entities are legally required to prepare financial statements. In accordance, with the FASB definition, a public business entity meets one of the following criteria: It is required by the U.S. Securities and Exchange Commission (SEC) to file financial statements, or does file financial statements, with the SEC: It is required by the Act, to file financial statements with a regulatory agency other than the SEC; It is required to file financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer; It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market; and It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis. Although nonpublic entities are not required by law to use U.S. GAAP, there are numerous situations, such as obtaining credit or seeking investors, which require, by contract, those entities to also follow U.S. GAAP when preparing their financial statements. Recognizing the differences in the reporting needs and objectives of public and nonpublic entities, the FASB also takes into consideration through its Private Company Council the appropriate accounting treatment for these types of entities. The FASB and the International Accounting Standards Board have been working together since 2002 to achieve convergence of IFRS and U.S. GAAP; however, differences still exist. The SEC has the authority to establish the standards for public business entities under the Act of 1934; however, it relies on the FASB to fulfil this responsibility and officially recognizes as authoritative the FASB-issued U.S. GAAP through the Financial Reporting Release No. 1, Section 101, which was most recently reaffirmed in its April 2003 Policy Statement. Banks and saving institutions are regulated by four agencies: the Federal Reserve, responsible for the regulation of state member institutions; the Federal Deposit Insurance Corporation, responsible for regulating non-member banks; the Office of Comptroller of the Currency, regulating national banks and savings institutions. These agencies require regulatory reporting to be conducted in accordance with generally accepted accounting principles that are also used for general-purpose external financial reporting. However, in some cases the regulators can limit the option available under U.S. GAAP. Similar with the preparation of financial statements, only public business entities are legally required to be audited. Nonpublic entities are not generally required to be audited. However, entities seeking funding through private placements or debt or equities securities may, in certain circumstances, be required to produce audited financial statements. Entities in regulated industries that have Government contracts, or that are seeking government funding or that have contractual or other reasons to produce audited financial statements, are expected to be audited in accordance with auditing standards generally accepted in the United States. These standards are promulgated by the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) and constitute what is known as the U.S. Generally Accepted Auditing Standards. The ASB has completed its own clarity project whereby all auditing standards have been redrafted using the format of the IAASB and where possible based on ISA and ISQC1. Per the Sarbanes–Oxley Act of 2002, auditing standards for public business entities are established by the Public Company Accounting Oversight Board (PCAOB) and approved by the SEC. The PCAOB requires the use of the AICPA Statements on Auditing Standards, as in existence of April 16, 2003 (also referred to “Interim Standards”) as well as 18 Audit Standards issued by the PCAOB. The standards differ from ISA. The PCAOB requires that auditors of public business entities be subject to external and independent oversight. Firms auditing public business entities are required to be registered with the PCAOB and to adhere to all PCAOB rules and standards in those audits. The regulation of professional accountants in the United States is primarily carried out by the state boards of accountancy, which coordinate through the National Association of State Boards of Accountancy (NASBA), and the Public Company Accounting Oversight Board (PCAOB) for firms auditing public business entities. The professional accountancy organizations—the American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA)—each have self-regulatory practices for their respective members. Each state board has the authority, in its respective jurisdiction, to regulate all licensed accounting professionals—certified public accountants (CPA) or public accountants—and the services these professionals are authorized to perform. The state boards also set initial professional development (IPD) and continuing professional development (CPD) requirements, ethical requirements, carry out investigation and disciplinary processes, and require quality assurance reviews for auditors, conducted by the PCAOB for auditors providing services to public business entities and the AICPA for auditors engaged in public practice for nonpublic entities. Certain regulated services are restricted to licensed accountants who are either owners or employees of registered public accounting firms. Only CPAs can perform the mandatory audits of public business entities. The Sarbanes–Oxley Act of 2002 requires that auditors of U.S. public business entities be subject to external and independent oversight by the PCAOB. Its mandate includes (a) registration of accounting firms that audit public business entities trading in the United States securities markets, brokers, or dealers; (b) inspection of registered accounting firms; (c) establishment of standards for auditing, quality control, ethics, and independence, as well as attestation, for registered accounting firms; and (d) investigation and discipline of registered accounting firms and their associated persons for violations of law or professional standards. Firms auditing public business entities are required to be registered with the PCAOB and to adhere to all PCAOB rules and standards in those audits. Also, the Securities and Exchange Commission and other federal government agencies may, under federal law or regulation, discipline CPAs who provide services to entities under their respective supervision. The AICPA sets ethical as well as IPD and CPD requirements for its members; develops and grades the Uniform CPA Examination; conducts quality assurance reviews for its members engaged in public practice for nonpublic entities; and establishes an investigation and discipline system to monitor and enforce compliance with the profession’s technical and ethical standards of its members. The AICPA, together with the Chartered Institute of Management Accountants, formed the Association of International Certified Professional Accountants (the “Association”). Qualified members of the Association hold the designation Chartered Global Management Accountant. IMA also represents management accounting professionals. Qualified members of the IMA hold the designation of Certified Management Accountant. The IMA sets ethical as well as IPD and CPD requirements for its members, and it maintains an investigation and discipline system to enforce ethical requirements. Audit oversight in the United States is performed by the Public Company Accounting Oversight Board (PCAOB). PCAOB is a private-sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002 to oversee the auditors of public business entities in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports. The mandate of the PCAOB includes (a) registration of accounting firms that audit public business entities trading in the United States securities markets, brokers, or dealers; (b) inspection of registered accounting firms; (c) establishment of standards for auditing, quality control, ethics, and independence, as well as attestation, for registered accounting firms; and (d) investigation and discipline of registered accounting firms and their associated persons for violations of law or professional standards. The PCAOB is a member of the International Forum of Independent Audit Regulators. In addition, individuals that offer auditing services may voluntarily join the American Institute of Certified Public Accountants (AICPA) and become subject to its regulations. The AICPA develops standards for audits of nonpublic entities; sets initial professional development, continuing professional development and ethical requirements for its members; provides educational guidance materials to its members; develops and grades the Uniform CPA Examination; and establishes an investigation and discipline system to monitor and enforce compliance with the profession’s technical and ethical standards of its members. All other firms or individual members of the AICPA engaged in public practice for nonpublic entities must be enrolled in the AICPA’s Peer Review Program. The requirement for a quality assurance review system for nonpublic entities is at the level of the individual state boards of accountancy. Fifty-two of the fifty-five U.S. territories have enacted peer review systems. The following are professional accountancy organizations in the United States, listed in alphabetical order: The American Institute of Certified Public Accountants (AICPA) The AICPA is a voluntary member association representing the accounting profession, with members in 144 countries. Founded in 1887, the AICPA represents the CPA profession nationally regarding rule-making and standard-setting, and serves as an advocate before legislative bodies, public interest groups, and other professional organizations. The AICPA develops standards for audits of nonpublic entities; sets initial professional development (IPD), continuing professional development (CPD) and ethical requirements for its members; provides educational guidance materials to its members; develops and grades the Uniform CPA Examination; conducts quality assurance reviews for its members engaged in public practice for nonpublic entities; and establishes an investigation and discipline system to monitor and enforce compliance with the profession’s technical and ethical standards of its members. In addition to being a member of IFAC, the AICPA is also a member of the Confederation of Asian and Pacific Accountants and the Institute of Chartered Accountants of the Caribbean. IMA is a voluntary member association focused on addressing the needs of management accounting professionals. Qualified members of IMA hold the designation of Certified Management Accountant (CMA). Founded in 1919, IMA states in its mission that its role is to provide a forum for research, practice development, education, knowledge sharing, and the advocacy of the highest ethical and best business practices in management accounting and finance. IMA sets ethical as well as IPD and CPD requirements for CMAs, and maintains an investigation and discipline system to enforce ethics requirements. The National Association of State Boards of Accountancy and the American Institute of Certified Public Accountants have developed a Uniform Accountancy Act proposed as a single comprehensive piece of legislation to be adopted by the state boards to unify requirements and regulation. The level of adoption by the state boards needs to be clarified. The Sarbanes–Oxley Act of 2002 grants the Public Company Accounting Oversight Board (PCAOB) authority for establish a mandatory quality assurance (QA) review system for auditors of public business entities. The PCAOB conducts regular inspections of audit firms that issue audit reports on the financial statements of public business entities. The PCAOB inspects each firm either annually or triennially, depending upon whether the firm provides audit reports for more than 100 public business entities (annual inspection) or 100 and fewer (triennial inspection). ISQC 1 and ISA 220 have not been adopted by the PCAOB and the extent of alignment of the PCAOB’s QA system with other SMO 1 needs to be established. QA reviews for auditors of nonpublic entities are required by the state boards of accountancy in fifty-two of the fifty-five U.S. territories. These territories require auditors of nonpublic entities to participate in the peer-review system operated by the American Institute of Certified Public Accountants (AICPA). The AICPA reports that the AICPA’s Peer Review Program fulfills all the requirements of SMO 1. Initial professional development (IPD) and continuing professional development (CPD) requirements are established by the state boards of accountancy and the professional accountancy organizations in the United States. Each state board of accountancy has authority to regulate licensed accounting professionals—certified public accountants (CPA) or public accountants—in their respective jurisdictions. The Uniform CPA Exam, professional experience requirement, and mandatory CPD are generally required in all states to be licensed as a CPA and maintain the qualification. CPAs must adhere to CPD requirements set forth by the state boards of accountancy of the state where a CPA license is held. It is unclear if all the state boards have incorporated all the IES requirements. The American Institute of Certified Public Accountants (AICPA) sets IPD and CPD requirements for its members, and develops and grades the Uniform CPA Examination. The AICPA reports that its IPD and CPD requirements fulfill the requirements of the revised IES. The Institute of Management Accountants (IMA) sets IPD and CPD requirements for its certified members. The IMA reports that its Certified Management Accountant qualifications address the requirements of the revised IES. Overall, although many of the requirements of the IES appear to have been adopted in the US, the extent of adoption needs to be further clarified. The Section 13 (a) (2) of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 requires public business entities to be audited. The auditing standards to be used in the audits of the financial statements of public business entities are set by the Public Company Oversight Board (PCAOB) and approved by the Securities Exchange Commission. The PCAOB requires the use of the Statements on Auditing Standards, issued by the American Institute of Certified Public Accountants (AICPA) as in existence of April 16, 2003, as well as 18 Audit Standards issued by the PCAOB. The standards differ from ISA. Similar with the preparation of financial statements, only public business entities are legally required to be audited. Nonpublic entities are generally audited on a voluntary basis. However, entities seeking funding through private placements or debt or equities securities may in certain circumstances, be required to produce audited financial statements. Entities in regulated industries that have Government contracts, or that are seeking government funding or that have contractual or other reasons to produce audited financial statements, are expected to be audited in accordance with auditing standards generally accepted in the United States. These standards are promulgated by the Auditing Standards Board (ASB) of the AICPA and constitute what is known as the U.S. Generally Accepted Auditing Standards. The ASB has completed its own clarity project whereby all auditing standards have been redrafted using the format of the IAASB and, where possible, based on ISA and ISQC1. Prior to the adoption of the Sarbanes–Oxley Act, the ASB’s auditing standards applied to audits of all entities. Since 2002, with the establishment of PCAOB, the standards have been applied for audits of nonpublic entities only. Ethical requirements are established by the state boards of accountancy and the professional accountancy organizations in the United States. The state boards of accountancy have the authority to set ethical requirements for licensed accounting professionals. Each of the state boards has ethical rules and regulations that its licensees are obligated to observe as a condition of their licensure. The provisions of the rules and regulations of many of the state boards are identical or similar to the provisions of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. The AICPA reports that the ethical requirements of the AICPA Code of Professional Conduct meet those of the 2015 IESBA Code of Ethics and in some cases are more restrictive than those of the IESBA Code. However, not all state boards have adopted the AICPA Code of Professional Conduct, and the extent to which they incorporate all of the requirements of the IESBA Code varies. Licensed accounting professionals and firms that provide services to public business entities are also regulated by the Public Company Accounting Oversight Board (PCAOB) in accordance with the Sarbanes-Oxley Act. The PCAOB requires the use of the AICPA’s Code of Professional Conduct, as in existence of April 16, 2003, as well as additional rules issued by the PCAOB and the Securities and Exchange Commission (SEC). The extent of alignment of the 2003 version of the AICPA Code with the current version of the IESBA Code is not clear. The AICPA reports that in some cases, SEC and PCAOB independence rules are more restrictive than that of the IEBSA rules for public business entities (e.g., partner rotation, certain non-audit services). The Institute of Management Accountants (IMA) sets ethical requirements for its members. The IMA indicates that the Statement of Ethical Professional Practice and other requirements are no less stringent than those of the IESBA Code of Ethics. In the United States, public sector accounting standards to be applied in the financial reporting at the federal and the state levels are different. The federal government and government agencies use the Statements of Federal Financial Accounting Standards issued by the Federal Accounting Standards Advisory Board (FASAB). State Governments and local government use the standards issued by the Governmental Accounting Standards Board (GASB). Neither FASAB nor GASB have made a decision to adopt IPSAS; however, both the FASAB and the GASB monitor the IPSASB work, participate in certain IPSASB due process efforts, and share information with the IPSASB on common projects. The state boards of accountancy have the authority to carry out investigative and disciplinary processes for licensed accounting professionals, in their respective jurisdictions. The American Institute of Certified Public Accountants (AICPA) and 48 out of 53 of the state boards have joined together to create and participate in the Joint Ethics Enforcement Program (JEEP). AICPA reports that the JEEP Manual of Procedures fulfills all the requirements of the Statement of Membership Obligations (SMO) 6, Investigation and Discipline. In accordance with the Sarbanes–Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) has the authority to investigate and discipline registered public accounting firms and persons associated with those firms. The extent to which the PCAOB’s investigation and discipline system is in line with the requirements of the SMO 6 requirements is unclear. The Institute of Management Accountants (IMA) is responsible for establishing and maintaining an investigative and disciplinary system for its members. The IMA Board Policy C-400 Ethics Compliance Procedures defines the governing process for disciplining members for ethical breaches. IMA’s Committee on Ethics has the responsibility for investigating possible ethics violations. IMA reports that the investigative and disciplinary processes within C-400 is mostly in line with the SMO 6 requirements. The Section 13 (a) of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 Section 404 and 302 state that public business entities must prepare annual statutory financial statements following the Accounting Standards Codification, commonly known as the U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Financial Accounting Standards Board (FASB) is the designated organization for establishing standards of financial accounting governing the preparation of financial reports by nongovernmental entities; however, only public business entities are legally required to prepare financial statements. Although nonpublic entities are not required to use U.S. GAAP, there are certain situations, such as obtaining credit or seeking investors, which require, by contract, those entities to also follow U.S. GAAP when preparing their financial statements. U.S. GAAP as issued by the FASB are officially recognized by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants. The FASB and the International Accounting Standards Board have been working together since 2002 to achieve convergence of IFRS and U.S. GAAP but differences still exist. The SEC has the statutory authority to establish financial accounting and reporting standards for public business entities; while it relies on the FASB’s standards for domestic public business entities, it does permit foreign public business entities to use IFRS as issued by the IASB. There are no plans to adopt IFRS for SMEs. American Institute of Certified Public Accountants (AICPA) Board of Governors of the Federal Reserve System (FED) Federal Accounting Standards Advisory Board (FASAB) International Forum of Independent Audit Regulators (IFIAR) National Association of State Boards of Accountancy (NASBA) Office of the Comptroller of the Currency (OCC) Public Company Accounting Oversight Board (PCAOB) Securities and Exchange Commission (SEC) PCAOB, Bylaws and Rules Sarbanes–Oxley Act of 2002 FASB, “Definition of a Public Business Entity,” December 2013 Uniform Accountancy Act, Seventh Edition, May 2014 AICPA, SMO Action Plan, January 2018. IMA, SMO Action Plan, June 2018. AICPA, “Substantive Differences Between the International Standards on Auditing and Generally Accepted Auditing Standards,” February 2014. IAASB, “The New Auditor’s Report: A Comparison between the ISAs and the PCAOB Reproposal,” May 2016. IFRS Foundation, “IFRS Application Around the World, Jurisdictional Profile: United States of America,” April 2017.

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professional_accounting

What goes on When a REIT Fails to Meet Its Distribution Requirement? To be able to maintain its status, a real estate investment trust (REIT) should distribute 90 percent of its taxable income (excluding internet capital gain and income from foreclosures but reduced by noncash earnings). Generally, only dividends actually paid during the taxable year are thought when performing this calculation. Certain events, such as the receipt of the large prepaid rent amount near the end of the taxes year, can cause a REIT to fail to meet the actual distribution requirement. There are two provisions available to a REIT that does not meet its distribution requirement. These provisions result in the payment of what are commonly known as either year-end dividends or subsequent-year dividends (dividends paid in the following tax year but treated as distributed in the present year). Section 857(b)(9) of the interior Revenue Code allows a REIT to treat dividends declared within October, November, or December, and payable to shareholders of record on the specified date within such months, to be deemed paid through the REIT on December 31 of the tax year. In purchase to qualify, these dividends must be paid during January from the following tax year. While this provision does not allow the REIT to change the quantity of the dividend, which has already been declared, it does allow a dividend paid in January to become considered as paid by December 31st of the prior 12 months. Section 858 of the Internal Revenue Code provides even much more flexibility, allowing the REIT to elect a specified dollar amount of the dividend declared in the following year to be treated as having been paid in the present year. This is permitted provided that the dividend is paid prior to the due date of the REIT’s tax return, including extensions, and just before its first regular dividend made after such declaration for which subsequent year. These dividends are commonly referred to as “subsequent year” or even “spill-over dividends. ” The REIT shareholders would report these dividends in the year that they’re received by the shareholders. Due to the fact that the REIT can reduce its taxable income in the current year by a dividend that won’t be recognized as income by the shareholder until the subsequent tax year, an interest charge will be assessed on the income reduction caused by the subsequent year dividend. In your search for solid dividend-paying businesses, you will frequently encounter three special kinds of corporations. They’ve chosen to organize themselves under federal laws that allow these phones avoid corporate taxation provided that they pay out, or deliver, the bulk of their profits to shareholders. For this cause, these companies appear frequently in lists of high-yielding dividend-payers. All three special types of companies have ticker symbols, and their stocks trade just as others trade. REITs were developed by Congress in 1960. They come in two flavors: Most REITs tend to be essentially landlords, holding properties from office parks to apartments to departmental stores. A far smaller number of REITs are “mortgage REITs, ” involved with real estate financing. To qualify as a REIT, a company must distribute at least 90 percent of its taxable income as dividends. Historically, most of the return from REITs has originate from these dividends, although many have delivered attractive price returns as well. REITs are the only practical way for most individuals to purchase residential and commercial real estate developments. Real estate is often regarded as a distinct asset class (beyond the “big three” associated with stocks, bonds, and cash), so REITs offer the buyer some diversification benefits. Current dividend yields often are 5 to 8 percent or even more, right out of the gate for new buyers. Note, REIT dividends don’t qualify for the 15 percent federal income tax rate of all dividends. They are taxed to the shareholder as ordinary earnings. That is because the earnings were not taxed at the actual corporation’s level. MLPs will also be a special form of structure. In fact, they are not corporations whatsoever, but partnerships. By law, their activities are limited to the actual production, processing, and transport of natural resources, plus some operations in property. MLPs appear mostly in the oil and gas industry. They provide small investors a method to participate in pipeline partnerships and other oil and gas operations that otherwise wouldn’t be possible. Because the shares trade, beyond the partnership distributions addititionally there is the usual potential for capital gain or loss. Every MLP includes a general partner which manages and controls the partnership. Shareholders in MLPs (technically “unit holders”) are limited partners within the enterprise. They own an interest in the assets of the company, which in turn entitles them to dividends and other distributions, and to benefit from depreciation of the assets of the business. Taxation associated with MLPs was established in 1987 by Congress. The partnership doesn’t pay taxes itself, so the distributions sent to unit holders don’t qualify for the federal 15 percent cap on dividend earnings. However, not all of the distribution sent each quarter to unit holders is really a “dividend. ” Some of it is a return of the initial capital invested. The returned capital, in effect, reduces the cost basis of the investment (as if the shareholder had spent less per share to begin with). Returned capital is not taxed in the year it’s distributed, but it is taxed when the unit holder offers the shares. That is because there will appear to become more profit on the sale of the shares, since the returned capital through the years reduced the cost basis. So the returned capital is not really, as is sometimes stated, non-taxable; rather the taxation is deferred. Whenever you finally sell those shares, the taxation catches up to the administrative centre returned over time. Because of their unique structure and taxes situation, MLPs must mail an IRS Schedule K-1 to each unit holder each year. This reports the unit holder’s share of the partnership’s taxable as well as non-taxable income, gain, loss, deduction, and credits. It is really not that difficult to cope with, and any competent tax preparer is familiar with K-1’s. BDC’s were created by Congress in 1980 to assist provide capital to small businesses. They have been much within the news lately, usually under the term “private equity, ” as there has been dozens of recent deals in which companies have been “taken personal. ” That means that public companies-some of them quite large-have been bought within their entirety by private equity companies with huge amounts of funds at their disposal. Many of these private equity deals happen to be made by companies which are truly private, but some of the private equity firms have themselves went public, becoming BDCs. (Never mind that the size and nature from the resulting entity and its investments may be far outside the initial purpose and spirit of the law. )#) When a personal equity firm is itself public, that means that the individual investor has an opportunity to participate in “big deals” that would otherwise not be feasible. The law requires BDCs to at least annually distribute the majority of their net investment income and capital gains to shareholders. Thus they frequently have attractive dividend yields. As with REITs, these dividends aren’t subject to the 15% cap on dividend tax rates for his or her recipients. And since the shares of BDCs trade, there may be the potential for capital gain or loss associated with any open public company.

{'timestamp': '2019-04-22T00:26:22Z', 'url': 'http://reitmind.com/explaination-of-the-reit-distribution-requirements/', 'language': 'en', 'source': 'c4'}

professional_accounting

Security Agreement STOCK PURCHASE AGREEMENT Filed: June 12th, 2008 Contract Type Security Agreement Industry Services-advertising Company Financialcontent Inc Law Firm Kramer Levin Naftalis & Frankel SEC Exhibit ID ex-10 ARTICLE I TRANSFER OF STOCK 1.2. Closing 1.3. Delay in Closing 1.1. Transfer of Stock ARTICLE II CONSIDERATION; ALLOCATION OF COSTS 2.3. Costs 2.2. Additional Consideration (d) Seller’s Additional Consideration to Lender (b) Purchaser’s Consideration to Lender (e) Corporation and Purchaser’s Consideration to Lender (a) Purchaser’s Consideration to Seller (c) Seller’s Consideration to Lender ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE CORPORATION 3.3. No Breach 3.1. Existence and Power 3.5. Title to Assets 3.2. Authorization and Execution 3.10. No Default 3.11. ERISA 3.4. Compliance with Laws 3.12. Full Disclosure 3.8. Suppliers and Partners 3.6. Litigation 3.7. Proprietary Rights ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER 4.1. Finder's Fees ARTICLE V REPRESENTATION AND WARRANTIES OF LENDER 5.2. No Consent 5.1. Organization Authorization ARTICLE VI INDEMNIFICATION 6.1. Survival 6.2. Indemnification by Seller 6.4. Notice of Third Party Claims 6.3. Indemnification by Purchaser ARTICLE VII CONFIDENTIALITY 7.1. Confidentiality ARTICLE VIII MISCELLANEOUS PROVISIONS 8.13. IN WITNESS WHEREOF 5. ____Release By the Corporation 1. Assignment and Assumption 16. Waivers and Amendments 15. Successors and Assigns Transfer of Rights 20. Confidentiality of this Agreement 7. Unknown Facts Or Change In Facts 23. Warranty of Signatures 3. Release By Seller 11. Corporation 's Warranty of Ownership of Corporation's Released Claims 2. Release By Lender 25. Counterparts 10. Amendment and Waiver 4. Adjustment of Warrant Price (a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale (b) Stock Dividends, Subdivisions and Combinations (f) Superseding Adjustment (iii) Fractional Interests (ii) When Adjustments to Be Made (iv) When Adjustment Not Required (j) Escrow of Warrant Stock (b) Reservation (j) Superseding Adjustment (d) Loss, Theft, Destruction of Warrants (i) Form of Warrant after Adjustments (a) Stock Fully Paid (c) Covenants (d) Issuance of Additional Shares of Common Stock (c) Certain Other Distributions (a) Time of Exercise (b) Method of Exercise (e) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise (g) Continuing Rights of Holder (c) Cashless Exercise (h) Compliance with Securities Laws (i) Accredited Investor Status (d) Issuance of Stock Certificates (f) Transferability of Warrant 3. SECURITY AGREEMENT 1. Term 3. Stock Fully Paid; Reservation and Listing of Shares; Covenants 2. Method of Exercise; Payment; Issuance of New Warrant; Transfer and Exchange 17. Headings 2. Notices 9. Other Notices 6. Fractional Shares 7. Ownership Cap and Certain Exercise Restrictions 16. Modification and Severability 14. Remedies 5. Notice of Adjustments 13. Warrant Agent Section 1. Grant of Security Interest Section 3. Representations and Warranties; Covenants Section 17. Remedies Cumulative Section 7. Debtor Remains Liable Section 18. Notices Section 2. Collateral Section 8. Security Interest Absolute Section 15. Governing Law; Jurisdiction Section 11. Expenses Section 10. Representations, Warranties and Covenants Concerning Debtor’s Legal Status Section 20. Termination 3. Other Names, Etc 2. Other Identifying Factors Section 16. Counterparts Section 5. Secured Party May Perform Section 6. Obligations Secured; Certain Remedies Section 19. Entire Agreement Section 9. Additional Assurances Section 4. Disposition of Collateral in Ordinary Course Section 12. Notices of Loss or Depreciation Section 14. Successor and Assigns Section 13. No Waivers 4. Other Current Locations 2. INTEREST 10. Purchaser 's Warranty of Ownership of Purchaser's Released Claims 22. Integration Clause 8. Lender's Warranty of Ownership of Lender's Released Claims 24. Captions 12. Warranty of No Other Claims 18. Attorneys' Fees and Costs 13. Further Assurances 6. Waiver of Civil Code § 1542 17. Governing Law Jurisdiction 19. Joint Effort 9. Seller's Warranty of Ownership of Seller's Released Claims 8.4. Notices 8.6. Headings 8.12. Counterparts 8.11. Governing Law 8.2. Amendment and Modification 8.5. Assignment 8.1. Further Assurances 8.10. Confidentiality 8.3. Waiver of Compliance; Consents 8.7. Joint Effort 8.9. Bulk Sales Law W, T H E R E F O R E, EVENTS OF DEFAULT Execution and Enforceability NO RIGHTS OR LIABILITIES AS STOCKHOLDER SUCCESSORS AND ASSIGNS TREATMENT OF NOTE GOVERNING LAW; JURISDICTION TERMS BINDING (h) Other Provisions applicable to Adjustments under this Section (h) Superseding Adjustment (l) Superseding Adjustment (n) Superseding Adjustment (p) Superseding Adjustment THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into by and between FinancialContent, Inc., a Delaware corporation ("Seller"), the sole shareholder of FinancialContent Services, Inc., a Delaware corporation (the “Corporation”), Jade Special Strategy, LLC, a Delaware limited liability company (“Lender”), and Wing Yu, an individual ("Purchaser"). RECITALS: WHEREAS, the Corporation operates a content syndication service through which it aggregates and distributes data, news and editorial content in audio, video and text formats via a hosted online solution (the "Online Platform Business"); and WHEREAS, the Seller is the record owner and holder of all of the issued and outstanding shares of the capital stock of the Corporation, which Corporation has issued capital stock of 5,714,286 shares of $ .001 par value common stock, and WHEREAS, the Purchaser desires to purchase all of the issued and outstanding capital stock of the Corporation (referred to as the "Corporation's Stock"), and the Seller desires to sell or cause to be sold all of the Corporation's Stock, upon the terms and subject to the conditions hereinafter set forth; and WHEREAS, on February 13, 2006, the Seller executed a Note and Warrant Purchase Agreement and Exhibits attached thereto (the “Purchase Agreement”) with the Lender. Pursuant to the terms of the Purchase Agreement the Company sold to the Lender three senior secured convertible promissory notes dated on or about February 13, 2006 (“Note 1”), March 31, 2006 (“Note 2”), and on June 9, 2006 (“Note 3”), in the amounts of $350,000.00, $350,000.00 and $300,000.00, respectively, with each having a maturity date two years from the date of issuance (collectively the “Note” or “Notes”) and otherwise having identical terms and conditions; and WHEREAS, under the term of the Notes, the Notes are secured by the assets of the Seller (the “Security Agreement”); and WHEREAS, under the terms of the Notes, as amended, the Seller is indebted to the Lender and there is now due and owing by the Seller to the Lender an aggregate amount of $1,165,000.00, not inclusive of interest (the "Existing Debt") and the amount due thereon is in default as of March 24, 2008; and WHEREAS, upon the Closing Date, as defined below, the Lender shall further enter into that certain Assignment and Assumption and Release Agreement with respect to the Existing Debt, pursuant to which the Seller shall assign the Existing Debt to the Corporation, the Corporation shall assume the Existing Debt and the Lender shall consent to the assignment by the Seller and assumption by the Corporation of the Existing Debt. NOW, THEREFORE, Seller and Purchaser, respectively, for good and valuable consideration as provided herein below, the sufficiency of which is hereby acknowledged and intending to be legally bound, in order to induce each other party to execute and perform the obligations contemplated by this Agreement and the Assignment and Assumption and Release Agreement, substantially in the form of Exhibit A attached hereto, and incorporated herein by reference, hereby agree as follows: TRANSFER OF STOCK 1.1 Transfer of Stock. Subject to the terms and conditions set forth herein, Seller shall transfer, assign and deliver to Purchaser and Purchaser shall accept and acquire from Seller, all of the Corporation’s Stock including without exception all of the assets and liabilities of the Corporation. The Purchaser acknowledges and agrees that as the current chief executive officer of the Corporation he is in possession of a list of all of the Corporation’s liabilities. The assets of the Corporation include the following: (a) All of Corporation’s right, title and interest in and to the Online Platform Business, including, all of the Corporation’s current customer licenses, contracts, records, software, billing data and other materials (including, without limitation, all claims and actions in respect of the foregoing, collectively, the "Assigned Contracts") relating to the Online Platform Business. The Purchaser acknowledges and agrees that as the current chief executive officer of the Corporation that he is in possession of all of the Corporation’s Assigned Contracts. (b) All of the Corporation’s right, title and interest in and to: (i) the names "FinancialContent Services" and "FinancialContent" together with all related logos and the Corporation’s right, title and interest, if any, to or in any indicia of identity of the Online Platform Business as the Corporation may possess, (ii) the software programs and applications encompassing the entire Online Platform Business, (iii) all databases, precursors, portions and work in progress with respect thereto and all inventions, works of authorship, technology, information, know-how, materials and tools relating thereto or to the development, support or maintenance thereof and (iv) all copyrights, patent rights, trade secret rights, trademark rights, mask works rights and all other intellectual and industrial property rights of any sort and all business, contract rights, and goodwill in, incorporated or embodied in, used to develop, or related to any of the foregoing (collectively "Intellectual Property"). Seller shall within reasonable period of time from the execution of this Agreement, amend its Certificate of Incorporation to change the corporate name to any name other than FinancialContent. (c) All lead sheets, lead sheet databases, files, indexes, surveys, reports, analyses, records, market research, other consulting and/or marketing studies and similar information. (d) All promotional and sales solicitation and training materials in hard copy, CD-ROM and/or current electronic form relating to the Technology. All prepaid expenses associated with the Technology. (f) All goodwill of the Online Platform Business, together with the right of the Corporation to modify, extend, terminate or otherwise amend the Contracts (defined below). (g) All finished products, work-in-process, fixtures and furniture, personal computers (including all software to the extent assignable), procedure manuals, and any telephone equipment and related controllers/switches, telecopier machines, photocopiers and certain office supplies located at the Corporation's offices in Foster City, California and server co-location located in San Francisco, California. (h) All of the Corporation’s rights in the following domain names and their subdomains: (1) "www xxxxxxxxxxxxxxxx.xxx", “xxx.xxxxxxxx.xxx”, and (2) any other domain names related to the Online Platform Business (collectively, the "Domain Names"). (i) All other property and rights of every kind and nature owned or held by the Corporation that relate primarily to the operation of the Online Platform Business. 1.2 Closing. The Closing shall occur two business days after the written consent of Stockholders of the Seller shall have become effective which shall become effective on the twentieth day following the filing of a definitive proxy statement by the Corporation with the Securities and Exchange Commission (the “Closing Date”) and shall occur on such day at 1:00 p.m. at the offices of the Corporation, 000 Xxxxxxx Xxxxxx Xxxxx, Xxxxx 000, Xxxxxx Xxxx, Xxxxxxxxxx 00000, or at such other time and place as the parties mutually agree in writing. At the Closing, the parties hereto shall deliver the consideration set forth below under Article II below and as set forth under the Assignment and Assumption and Release Agreement. 1.3 Delay in Closing. In the event the Closing does not take place by August 31, 2008, Lender has the right to terminate its obligations and forbearance hereunder and in the documents related hereto by written notice to the other parties hereto. CONSIDERATION; ALLOCATION OF COSTS 2.1 Consideration for Transfer of Corporation’s Stock; In exchange for the transfer by Seller of the Corporation’s Stock to Purchaser, which transfer is hereby consented to by the Lender, the Seller shall assign and transfer the Existing Debt to the Corporation, the Corporation shall assume the Existing Debt, and the Lender agrees to the assignment and transfer by the Seller to the Corporation of the Existing Debt and the assumption of the Existing Debt by the Corporation under the terms of the Assignment and Assumption and Release Agreement. Additional Consideration: (a) Purchaser’s Consideration to Seller. In exchange for the Seller agreeing to the transfer by Seller of the Corporation’s Stock to Purchaser hereunder, Purchaser agrees to transfer to Seller 500,000 shares of the Sellers restricted common stock on the Closing Date. (b) Purchaser’s Consideration to Lender. In exchange for the Lender consenting to the Corporation’s assumption of the Existing Debt under the terms of the Assignment and Assumption and Release Agreement, Purchaser agrees to transfer to Lender 500,000 shares of the Sellers restricted common stock on the Closing Date. (c) Seller’s Consideration to Lender. In exchange for the Lender forbearing on its rights to foreclose on the Seller’s assets, Seller agrees to issue to Lender on the Closing Date an unsecured promissory note in the amount of $50,000.00 payable on the second annual anniversary of the Effective Date with interest accruing on the unpaid balance at 9%, compounded annually, dated as of the date hereof, substantially in the form of Exhibit B attached hereto. (d) Seller’s Additional Consideration to Lender. In exchange for the Lender forbearing on its rights to foreclose on the Seller’s assets , Seller agrees to reprice the exercise price of the six (6) warrants issued by the Seller to the Lender upon incurring the Existing Debt to $0.75, substantially in the form of Exhibit C-1 through C-6 attached hereto. (e) Corporation and Purchaser’s Consideration to Lender. In exchange for the Lender forbearing on its rights to foreclose on the Seller’s assets, the Purchaser and Corporation agree to grant the Lender a security interest in the Corporation’s assets as set forth in the Assignment and Assumption and Release Agreement. 2.3 Costs. The costs incurred by the Seller, Corporation and Purchaser in closing this transaction shall be born by the Purchaser, including all legal and accounting fees. Lender shall assume its own costs herein. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE CORPORATION The Seller, Corporation, and Purchaser (collectively, the “Seller”) jointly and severally, hereby make the following representations and warranties to Lender and to eachother: 3.1 Existence and Power. Each the Seller and Corporation is a corporation duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation, and has all corporate power and all governmental licenses, authorizations, consents and approvals required to carry on the Business as now conducted. Each the Seller and the Corporation is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary except where failure to so qualify does not have a material adverse effect on the Business or the Purchased Assets. Each the Seller and the Corporation has heretofore delivered to the Lender true and complete copies of the corporate charter and bylaws of such Seller as currently in effect. Authorization and Execution. (a) The execution, delivery and performance by each Seller and the Corporation of this Agreement and the transaction documents to which it is party, and the consummation by each the Seller and the Corporation of the transactions contemplated hereby and thereby are within such corporate powers and have been duly authorized by all necessary corporate action on the part of each the Seller and the Corporation, except, as to the Seller, for the required approval of the Seller’s stockholders in connection with the approval of this Agreement and the consummation of the Transactions. This Agreement constitutes, and, when executed at the Closing, each transaction document will constitute, a valid and binding agreement of each Seller, enforceable against such Seller in accordance with its terms, subject to applicable bankruptcy, insolvency and other laws affecting the rights and remedies of creditors and to general equitable principles. (b) At a meeting duly called and held, the Seller’s board of directors has (i) unanimously determined that this Agreement and the Transactions are fair to and in the best interests of the Seller’s stockholders, (ii) unanimously approved and adopted this Agreement and the Transactions and (iii) unanimously resolved to recommend approval and adoption of this Agreement to its stockholders (such recommendation, the “Seller’s Board Recommendation”). (c) Seller has delivered to the Purchaser simultaneously with the execution and delivery of this Agreement an irrevocable written consent of stockholders executed by Xxxxxxx Xxxxxx, who holds by Proxy not less than fifty percent (50)% of the votes entitled to be cast (the “Written Consent of Stockholder”) approving this Agreement and the transactions contemplated hereby. The Written Consent of the Stockholder has been duly and validly obtained in accordance with the DGCL and applicable Law and shall become effective not later than twenty (20) days after the Definitive Information Statement (as defined below) is first sent to the Seller’s stockholders. The Written Consent of Stockholder has been filed with the Secretary of the Company may not be revoked by the stockholder, and the vote taken by the stockholders of Seller as set forth in the Written Consent of Stockholder is the only vote of the holders of any of the Company’s capital stock necessary in connection with the consummation of the transactions contemplated hereby. (d) Corporation’s Stock to be transferred by Seller to Purchaser hereunder shall be validly and legally issued, fully paid and nonassessable shares of the Corporation’s common stock, free and clear of any liens, claims, encumbrances and restrictions. 3.3 No Breach. Except as set forth on Schedule 3.3, neither the authorization, execution, delivery or performance of this Agreement by the Sellers or the consummation of any transactions contemplated by this Agreement will (i) violate, conflict with or result in the material breach or termination of, or otherwise give any person the right to terminate, or constitute (or with notice or lapse of time or both would constitute) a default (by way of substitution, novation or otherwise) under the terms of, any contract, lease, bond, agreement, franchise or other instrument to which the Corporation is a party relating to the Online Platform Business or any of the Assets, or (ii) result in the creation of any encumbrance upon the Corporate Stock or any of the Assets. 3.4 Compliance with Laws. Except as set forth on Schedule 3.4, the operation of the Online Platform Business and the ownership and use of the Assets are in compliance with all applicable judgments, orders, injunctions, awards or decrees and all federal, state or local laws, rules or regulations, codes or ordinances. The Corporation has duly obtained and holds all consents, authorizations, permits, licenses, orders or approvals of all federal, state or local governmental or regulatory bodies that are material to the conduct of the Online Platform Business or the ownership or use of the Assets; no violations are or have been recorded in respect of any such permit and no proceeding is pending or threatened to revoke, deny or limit any such Permit. 3.5 Title to Assets. Except as set forth on Schedule 3.5, the Corporation has good and marketable title to, or valid leasehold interests in, the Assets free and clear of all liens, pledges, claims, charges, easements, security interests, encumbrances or other rights of any third party ("Encumbrances"). No other person has any right, title or interest in the Corporate Stock or Online Platform Business. The Corporation has performed all material obligations required to be performed by it with respect to all Assets leased by it. 3.6 Litigation. Except as set forth on Schedule 3.6, there are no actions, suits, or claims, or any administrative inquiries, arbitration, proceedings or investigations or by any agency, pending or threatened against the Corporation or the Assets (or against the Corporation or any of its affiliates pertaining to the Online Platform Business or the Assets). 3.7 Proprietary Rights. Except as set forth on Schedule 3.7, the Corporation owns or possesses adequate licenses or other rights to use all trademarks, trademark applications, trade secrets, service marks, trade names, copyrights, patents, inventions, drawings, designs, customer lists, proprietary know-how or information or other rights used by the Corporation in the Online Platform Business and all such rights are included in the Assets. 3.8 Suppliers and Partners. Except as set forth on Schedule 3.8, the Corporation is not in default with any of the suppliers or partners of the Online Platform Business and no supplier or partner has canceled or otherwise terminated, or threatened in writing to cancel or otherwise terminate, its relationship with the Online Platform Business or has during the past 12 months decreased or limited materially, or threatened in writing to decrease or limit materially, its services, supplies or materials to the Corporation with respect to the Online Platform Business. The Corporation has no knowledge that any material supplier or partner intends to cancel or decrease or limit its relationship with the Corporation, to increase the prices charged to the Corporation, or to decrease or limit its services, supplies or materials to the Online Platform Business and, the acquisition of the Corporation’s Stock by the Purchaser will not adversely affect the relationship of Corporation, in its operation of the Online Platform Business, with any material supplier or partner of the Online Platform Business Tax Matters. Except as set forth on Schedule 3.9: (a) The Corporation has duly filed, or has obtained a filing extension from the appropriate governmental agencies with respect to, all federal, state and local tax returns required to be filed by the Corporation and has paid or provided for any taxes shown as due on such returns relating to the Online Platform Business or the Assets. (b) The Corporation is not a party to any proceeding or 'inquiry by any governmental agency for the assessment or the proposed assessment or for the collection of taxes which if unpaid might result in an Encumbrance upon the Online Platform Business or the Assets as of the Closing Date, nor to the Corporation’s knowledge has any claim for such assessment been asserted against the Corporation. 3.10 No Default. Except as set forth on Schedule 3.10, the Corporation is in material default or claimed, purported or alleged material default of any material contract or agreement with respect to the Online Platform Business. 3.11 ERISA. Except as set forth on Schedule 3.11, the Corporation does not maintain or have any liability with respect to any employee benefit, inactive, bonus, fringe benefit or other compensatory plan, policy or arrangement (whether or not an employee benefit plan as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) with respect to employees, consultants, contractors or subcontractors of the Online Platform Business. The Corporation does not have any obligation to contribute to, or other liability with respect to, any multiemployer plan, as defined in Section 3(37) of ERISA in connection with the Online Platform Business. 3.12 Full Disclosure. Except as otherwise disclosed in the Schedules or Exhibits hereto or the other representations and warranties made by Sellers herein, the Sellers have no actual knowledge of any fact as of the date hereof that materially adversely affects or will materially adversely affect, the operations or condition of the Online Platform Business of the ability of the Corporation to perform its obligations under this Agreement or the agreements referred to herein and the transactions contemplated hereby or thereby. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby makes the following representations and warranties to Seller: 4.1 Finder's Fees. Purchaser has not employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. REPRESENTATION AND WARRANTIES OF LENDER 5.1 Organization Authorization. Lender is a limited liability company duly organized, validly existing and in good standing under the laws of the State of New York and has full power and authority to carry on its business as it is now being conducted. The execution, delivery and performance of this Agreement by Lender and the performance by Lender of the transactions contemplated hereby have been duly authorized and approved by all necessary corporate proceedings of Lender. This Agreement has been duly executed and delivered by Lender and constitutes a valid and binding agreement of Lender enforceable against Lender in accordance with its terms. 5.2 No Consent. No consent, order, license, approval or authorization of, or exemption by, or registration or filing with, any governmental authority, bureau or agency, and no consent or approval of any person is required to be obtained or made by Lender in connection with the execution, delivery, or performance by Lender of this Agreement or the consummation of the transactions contemplated by this Agreement. 6.1 Survival. All representations and warranties made by Seller and Purchaser in this Agreement shall survive the Closing, and shall not be extinguished or in any way modified on the date thereof or as a result of any investigation made by or on behalf of Seller or Purchaser. 6.2 Indemnification by Seller. Seller agrees to indemnify and hold harmless Purchaser and Lender from and against any and all losses, liabilities, damages, obligations, costs and expenses including, without limitation, reasonable costs and expenses (including reasonable attorneys' fees and expenses) of enforcing the provisions of this Section 5.2 if Purchaser is the prevailing party in enforcing such provisions, or of investigating, preparing to defend and defending any claim, action, suit, proceeding, inquiry or investigation in respect thereof, suffered or incurred by Purchaser resulting from, relating to or arising out of: (a) the inaccuracy of any representation or warranty of the Seller under this Agreement or any documents executed to convey the Assets under this Agreement; or (b) breach of any agreement or covenant by the Seller under this Agreement or any other documents executed to convey the Assets under this Agreement. 6.3 Indemnification by Purchaser. Purchaser agrees to indemnify and hold harmless the Seller from and against any and all losses, liabilities, damages, obligations, costs and expenses, including, without limitation, reasonable costs and expenses (including reasonably attorneys' fees and expenses) of enforcing the provisions of this Section 5.3 if the Seller is the prevailing party in enforcing such provisions, or of investigating, preparing to defend and defending any claim, action, suit proceeding, inquiry or investigation in respect thereof, suffered or incurred by Seller resulting from, relating to or arising out of: (a) the inaccuracy of any representation or warranty of the Purchaser under this Agreement or any documents executed to convey the Assets under this Agreement; (b) breach of any agreement or covenant by Purchaser under this Agreement or any documents executed to convey the Corporate Stock under this Agreement; or (c) liabilities in respect of the Online Platform Business arising solely as a result of Purchaser's operation of the Online Platform Business after the Closing Date. 6.4 Notice of Third Party Claims. The party seeking indemnification under this Article VI (the "Indemnitee") shall, within thirty (30) days of receipt, provide the party from whom indemnification is sought (the "Indemnitor") with notice of all third party actions, suits, proceedings, claims, demands or assessments which may be subject to the indemnification provisions of this Article VI (collectively, "Third Party Claims") brought at any time following the Closing Date, and shall otherwise make available all relevant information material to the defense of any Third Party Claims. The Indemnitor shall have the right to defend any such Third Party Claim at its sole expense. Where such Third Party Claim affects the interests of the Indemnitee, the Indemnitee may elect to participate in (but not control) the defense of such claim at its sole expense; provided, that the Indemnitor shall pay the Indemnitee's expenses (including reasonable attorneys' fees and expenses) if the Indemnitor's counsel would be inappropriate due to a conflict of interest between the Indemnitee and any party represented by such counsel with respect to such claim. No claim shall be settled or compromised without the consent of the Indemnitee (which consent shall not be unreasonably withheld, it being understood that it shall be reasonable for the Indemnitee to decline to consent to any settlement or compromise that does not include as a condition thereof a release of all claims against such Indemnitee) unless the Indemnitee shall have failed, after the lapse of a reasonable time, but in no event more than thirty (30) days, after notice to it of such proposed settlement to notify the Indemnitor or the Indemnitee's objection thereto. The Indemnitee's failure to give timely notice or to provide copies of documents or to furnish relevant data in connection with any Third Party Claim shall not constitute a basis for reduction of any claim for indemnification by the Indemnitee, except to the extent that such failure shall result in any material prejudice to the Indemnitor's ability to defend such claim. Further, where the Indemnitor has undertaken the defense of a Third Party Claim, the Indemnitee, recognizing its community of interest with the Indemnitor in the resolution of the claim, shall provide such reasonable support to the Indemnitor as shall be reasonably requested, including affidavits, documents and testimony. The cost of reasonable out of pocket expenses incurred by the Indemnitee in providing such support to the Indemnitor shall be reimbursed to the Indemnitee by the Indemnitor. If the Indemnitor declines to defend any Third Party Claim, the Indemnitor shall pay all of the Indemnitee's expenses (including, without limitation, reasonable attorneys' fees and expenses) relating to such Third Party Claim. 7.1 Confidentiality. Neither the Seller nor any of its affiliates shall, directly or indirectly, use or disclose to any Person any confidential or proprietary information of or relating to the Online Platform Business or the Assets except with Purchaser's prior written consent, except as shall be disclosed to the Seller’s attorneys and accountants. Neither the Purchaser nor any or its affiliates shall, directly or indirectly, use or disclose to any Person any confidential or proprietary information of or relating to the Seller without the Seller’s prior written consent, except as shall be disclosed to Purchaser's attorneys and accountants. For purposes of this Section, the term "confidential or proprietary information" shall mean all information that is known to a party or its respective affiliates or to their employees, consultants or others in a confidential relationship with such party and relates to such matters as marketing plans, strategies, customer lists, forecasts, prices of any other party hereto and shall further include all terms and conditions under this Agreement, provided that any information relating to the Online Platform Business or the Assets shall in no event be deemed to be confidential or proprietary information of the Seller; and provided further that the term "confidential or proprietary information" shall not include information (i) rightfully received by the Seller or Purchaser, as the case may be, from parties other than the parties to this Agreement; (ii) generally available to the public; or (iii) required to be disclosed by applicable law. If disclosure is required by law, the party required to make such disclosure shall give notice to the other party hereto so that such other party may seek a protective order. 8.1 Further Assurances. From time to time after the Closing Date, upon Purchaser's reasonable request, the Seller will execute, deliver and acknowledge all such further instruments of transfer and conveyance and do and perform all such other acts and things as Purchaser may reasonably require to more effectively transfer the Corporation’s Stock and the Assets to the Purchaser and to put Purchaser in possession of the Corporation’s Stock and the Assets. 8.2 Amendment and Modification. Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement of the Seller and Purchaser. Waiver of Compliance; Consents. (a) Any failure of the Seller, on the one hand, or the Purchaser, on the other hand, to comply with any obligation, covenant, agreement or condition herein may be waived in writing by the party entitled to the performance of such obligation, covenant or agreement or who has the benefit of such condition, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or conditions shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. (b) Whenever this Agreement requires or permits consents by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth above. 8.4 Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or three (3) days after being mailed by certified or registered mail, return receipt requested, with postage prepaid: If to the Seller to: FinancialContent, Inc. 000 Xxxxxxx Xxxxxx Xxxxx Xxxxx 000 Xxxxxx Xxxx, Xxxxxxxxxx 00000 Attn: Authorized Agent or to such other person or address as the Seller shall furnish to Purchaser in writing pursuant to the above. If to Purchaser to: Wing Yu. or to such other person or address as Purchaser shall furnish to Seller in writing pursuant to the above. If to Lender to: Jade Special Strategy, LLC 0000 Xxxx Xxxxxxx Xxxx, Xxxxx 000 Xxxxxxxx, XX 00000 Attn: Xxxxx Xxxxxx Copy to: Xxxxxxxxx Ball Xxxxxx Xxxxxx & Xxxxxxxxxx, LLP 000 Xxx Xxxxxxx Xx., 0xx Xx. Xxxxxxx, XX 00000 Attn: Xxxxx Xxxx, Esq. or to such other person or address as Purchaser shall furnish to Seller in writing pursuant to the above If to Corporation to: Attention: Wing Yu 8.5 Assignment. This Agreement shall not be assigned by either party hereto without the prior written consent of the other party hereto. No permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respect successors, assigns, heirs, executors and personal representative. 8.6 Headings. The Article and Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 8.7 Joint Effort. The provisions of this Agreement have been examined, negotiated and revised by counsel for each party, and no implication shall be drawn against any party hereto by virtue of the drafting of this Agreement. 8.8 Entire Agreement. This Agreement and any other document to be furnished pursuant to the provisions hereof embody the entire Agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants, or undertakings, other than those expressly set forth or referred to in such documents. This Agreement and such documents supersede all prior agreements and understandings between the parties with respect to such subject matter. 8.9 Bulk Sales Law. The Seller and Purchaser hereby agree to waive compliance by the other with the provisions of any applicable Bulk Sales Law of any jurisdiction. The Seller agrees to defend, indemnify and hold the Purchaser and the Assets harmless from and against any claim, liability, obligation, cost and expense, including reasonable attorneys' fees, which arises from or as a result of such non-compliance by the parties. 8.10 Confidentiality. The Seller and the Purchaser agree to keep the terms of this Agreement confidential unless disclosure is required by law or authorized in writing by both parties. 8.11 Governing Law. ALL MATTERS WITH RESPECT TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO MATTERS OP VALIDITY, CONSTRUCTION; EFFECT AND PERFORMANCE, SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED THEREIN BETWEEN RESIDENTS THEREOF (REGARDLESS OF THE LAWS THAT. MIGHT BE APPLICABLE UNDER PRINCIPLES OF CONFLICTS OF LAW). ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL HE TRIED AND LITIGATED EXCLUSIVELY IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK. 8.12 Counterparts. This Agreement may be executed in two or more fully or partially executed counterparts, each of which shall be deemed an original, but all counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been executed by each of the individual parties hereto and signed by an officer thereunto duly authorized and attested under the corporate seal by the Secretary of the corporate party hereto, all on the date first above written. Signed, sealed and delivered in the presence of: FINANCIALCONTENT SERVICES, INC. (the “CORPORATION”) (CORPORATE SEAL) By: /s/ Wing Yu Its Authorized Agent FINANCIALCONTENT, INC. (“SELLER”) By: /s/ Xxxxxxx Xxxxxx WING YU (“PURCHASER”) Wing Yu JADE SPECIAL STRATEGY, LLC (the “LENDER”) By: /s/ Xxxxx Xxxxxx Its Manager ARTICLE THREE SCHEDULE OF EXCEPTIONS 3.3 The transfer of the Corporation’s Stock may be deemed a transfer or assignment under certain licensing agreements the Corporation has entered into with clients and under certain agreements the Corporation has with its vendors. These agreements require the client or vendor’s consent to transfer or assign the agreement. Without the client or vendor’s consent, the client or vendor may terminate the agreement and subject the Corporation to liability for breach. The office lease for 000 Xxxxxxx Xxxxxx Xxxxx, Xxxxx 000, Xxxxxx Xxxx, Xxxxxxxxxx 00000 requires the landlord’s consent upon a transfer which includes a change in control event. Without the landlords consent the landlord may terminate the agreement and subject the Corporation to liability for breach. The Sellers make no warranties or representations that this transaction as contemplated hereunder will not be voidable under federal bankruptcy law and or uniform fraudulent dispositions law. 3.5 The Corporation’s Stock is encumbered by a UCC-1 financing statement recorded by the Lender. 3.6 Press Association, Inc. has a claim of approximately $6,000.00 against the Corporation for breach of contract arising under a vendor agreement. The claim arose approximately 3 years ago. The Corporation has disputed CAM charges levied by the landlord regarding office lease for 000 Xxxxxxx Xxxxxx Xxxxx, Xxxxx 000, Xxxxxx Xxxx, Xxxxxxxxxx 00000 which has been resolved. 3.7 The Corporation has a consent agreement for use of the SWIFTIR trademark with the registered owner of the XXXXX xxxx. The transfer of the Corporation’s Stock will cause a change of control event under certain agreements the Corporation has with its vendors. These agreements define a change of control as a transfer or assignment that requires the vendor’s consent to transfer and or assign the agreement. Without the vender’s consent the agreement may be subject to termination by the vendor for breach and subject the Corporation to liability. 3.10 Press Association, Inc. has a claim of approximately $6,000.00 against the Corporation for breach of contract arising under a vendor agreement. The claim arose approximately 3 years ago. The Seller is in material default under the terms of the Notes as of March 24, 2008 for failure to pay the full amount due and owing on the maturity date of the Notes. 3.11 The employees of the Corporation participate in the Sellers stock option plan. Other benefit plans of the Corporation include vacation benefits and health and dental plans. ASSIGNMENT AND ASSUMPTION AND RELEASE AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AND RELEASE AGREEMENT (this "Agreement") is entered into by and between FinancialContent, Inc., a Delaware corporation ("Seller"), the sole shareholder of FinancialContent Services, Inc., a Delaware corporation (the “Corporation”), Wing Yu, an individual ("Purchaser"), and Jade Special Strategy, LLC, a Delaware limited liability company (the “Lender”). WHEREAS, concurrently herewith, Seller and Purchaser shall enter into that certain Stock Purchase Agreement (the “Stock Purchase Agreement”) which is incorporated herein by reference, which together shall close on the Closing Date as defined under the Stock Purchase Agreement, pursuant to which the Seller shall transfer to the Purchaser the Corporation’s Stock, as said term is defined under the Stock Purchase Agreement, and in consideration for such acquisition, Seller shall assign the Existing Debt, as said term is defined under the Stock Purchase Agreement, to the Corporation and the Corporation agrees to assume the Existing Debt; and WHEREAS, the Seller is in default on the Notes, as said term is defined under the Stock Purchase Agreement, for failure to make timely payments thereunder, and on March 24, 2008, the Seller received a letter from the Lender demanding full repayment of the Notes; and WHEREAS, the Lender consents to the Seller assigning the Existing Debt and the Lender consents to the Corporation assuming the Existing Debt subject to the terms and conditions set forth below; and WHEREAS, the Seller, Purchaser, Lender and Corporation desire to set forth their understandings with respect to their respective obligations as set forth herein. NOW, THEREFORE, in consideration of the foregoing, the covenants contained herein, and other good and valuable consideration, the receipt of which is acknowledged by the parties hereto, the undersigned parties agree as follows: 1. Assignment and Assumption. Simultaneous with the closing of the Stock Purchase Agreement, the Seller hereby assigns and transfers the Existing Debt to the Corporation and the Corporation hereby agrees to assume the Existing Debt. The Lender hereby consents to the assignment and transfer of the Existing Debt by the Seller to the Corporation and the assumption of the Existing Debt by the Corporation. The Purchaser agrees to the assignment and transfer of the Existing Debt by the Seller to the Corporation and the assumption of the Existing Debt by the Corporation. Upon Lender's and of Seller’s reasonable request, the Purchaser shall cause the Corporation to execute, deliver and acknowledge all such further instruments of the assignment and transfer and do and perform all such other acts and things as Lender and or Seller may reasonably require to carry out the terms of the assignment and assumption hereunder. Without limiting the foregoing, the Purchaser shall cause the Corporation to execute a new security agreement substantially in the form as attached hereto as Exhibit A-1 and a UCC-1 financing statement for recordation by the Lender and the Corporation agrees to grant the Lender such a security interest in its assets in consideration of the Lender’s forbearance on exercising its rights to foreclose on the Corporation’s Stock. By accepting this assignment and assumption, the Lender, Purchaser and Corporation agree and acknowledge that the only obligation assumed by the Purchaser and Corporation under this assignment and assumption is the current and future payments under the terms of the Existing Debt, and the giving of a security interest in all of the assets of the Corporation for the payment obligations assumed hereunder, and only those terms of the Notes and the related transaction documents attached necessary to carry out the intent of the Lender and Purchaser shall continue in full force and effect. 2. Release By Lender. Lender, individually and on behalf of its directors, officers, subsidiaries, affiliates, divisions, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, shall, and hereby does, release the Seller and its directors, officers, subsidiaries, affiliates, divisions, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, both past and present, from any and all claims, demands, alleged sums of money owing, actions, rights, liens, obligations, costs, expenses, compensation of any nature whatever, damages, liabilities, chosen in action, and causes of action of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, which Lender may now hold or own, or may at any time, past, present or future, hold or own against the Seller, Corporation, and Purchaser arising or resulting from any act or omission by or on the part of the Seller on or before the Closing of the Stock Purchase Agreement ("Lender's Released Claims") specifically including, but not limited to, claims arising out of or relating to the issuance the Notes, as amended, to the Lender by the Seller, any default thereon, and payment of the Existing Debt, whether based in tort, contract (express and implied), or in any other theory of recovery, whether for compensatory or punitive damages, in law or in equity, under any law or legal theory including but not limited to, state or federal, common or statutory, or otherwise. In addition, the Lender hereby agrees to execute as Seller may reasonably require a UCC-3 financing statement, in form and substance satisfactory to Seller, for recordation by the Seller to terminate the Lender’s Security Agreement in the Seller’s collateral. 3. Release By Seller. Seller, individually and on behalf of its directors, officers, subsidiaries, affiliates, divisions, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, shall, and hereby does, release the Lender and its directors, officers, subsidiaries, affiliates, divisions, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, both past and present, from any and all claims, demands, alleged sums of money owing, actions, rights, liens, obligations, costs, expenses, compensation of any nature whatever, damages, liabilities, choses in action, and causes of action of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, which the Seller may now hold or own, or may at any time, past, present or future, hold or own against the Lender, Purchaser and Corporation arising or resulting from any act or omission by or on the part of the Lender occurring on or before the closing of the Stock Purchase Agreement (“Seller's Released Claims") specifically including, but not limited to, claims arising out of the Purchaser Agreement or the issuance of the Notes to the Lender by the Seller, claims of breach of contract , whether based in tort, contract (express and implied), or in any other theory of recovery, whether for compensatory or punitive damages, in law or in equity, under any law or legal theory including but not limited to, state or federal, common or statutory, or otherwise. 4. Release By Purchaser. Purchaser, individually and on behalf of his affiliates, agents, successors, partners, employees, signs, attorneys, representatives, insurers, and related entities, shall, and hereby does, release the Seller and its directors, officers, subsidiaries, affiliates, divisions, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, both past and present, from any and all claims, demands, alleged sums of money owing, actions, rights, liens, obligations, costs, expenses, compensation of any nature whatever, damages, liabilities, choses in action, and causes of action of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, which Purchaser may now hold or own, or may at any time, past, present or future, hold or own against the Seller and Lender arising or resulting from any act or omission by or on the part of the Seller occurring on or before the closing of the Stock Purchase Agreement (“Seller's Released Claims") specifically including, but not limited to, claims arising out of the Purchaser Agreement or the issuance of the Notes to the Lender by the Seller, claims of breach ofcontract, whether based in tort, contract (express and implied), or in any other theory of recovery, whether for compensatory or punitive damages, in law or in equity, under any law or legal theory including but not limited to, state or federal, common or statutory, or otherwise. 5.____Release By the Corporation. The Corporation, individually and on behalf of its directors, officers, subsidiaries, affiliates, divisions, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, shall, and hereby does, release the Seller and its directors, officers, subsidiaries, affiliates, divisions, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, both past and present, from any and all claims, demands, alleged sums of money owing, actions, rights, liens, obligations, costs, expenses, compensation of any nature whatever, damages, liabilities, choses in action, and causes of action of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, which the Corporation may now hold or own, or may at any time, past, present or future, hold or own against the Seller or Lender arising or resulting from any act or omission by or on the part of the Seller occurring on or before the closing of the Stock Purchase Agreement (“Seller's Released Claims") specifically including, but not limited to, claims arising out of the Purchaser Agreement or the issuance of the Notes to the Lender by the Seller, claims of breach of contract , whether based in tort, contract (express and implied), or in any other theory of recovery, whether for compensatory or punitive damages, in law or in equity, under any law or legal theory including but not limited to, state or federal, common or statutory, or otherwise. 6. Waiver of Civil Code § 1542. Each of the parties hereto has been advised by counsel concerning California Civil Code § 1542 which states: A General Release does not extend to all claims which the Lender does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. This Agreement covers and includes all claims that Lender may have against the Seller or the Seller may have against the Lender whether known or unknown, suspected or unsuspected, notwithstanding the terms of California Civil Code § 1542. Each party hereto expressly waives any right or benefit available to him or it under the provisions of California Civil Code § 1542. 7. Unknown Facts Or Change In Facts. Each party has made such investigation of the facts as it deems necessary pertaining to this Agreement. In order to settle this claim, each party hereto voluntarily and knowingly releases the other from all future claims, both known and unknown, of the type released under this Agreement. The parties understand and agree that, if the facts with respect to or upon which this Agreement is based are found hereafter to be other than, or different from, the facts now believed to be true, they expressly accept and assume the risk of such possible difference in facts and agree that this Agreement shall be, and remain, effective notwithstanding such difference in facts. Each releasing party understands that this means it cannot later make a claim regarding any matter covered by this Release arising against the other party, even if the releasing party did not know about the claim when it signed this Release. Each party understands that it has released any claims that it may have under California Civil Code § 1542. 8. Lender's Warranty of Ownership of Lender's Released Claims. Lender represents and warrants that: (1) it owns the Lender's Released Claims; (2) no person other than itself has or has had any claim to, title to, right in, or any interest in the Lender's Released Claim; (3) that it has the sole right and exclusive authority to execute this Agreement; and (4) that it has not sold, assigned, transferred, conveyed, or otherwise disposed of any Lender's Released Claims or any interest therein and will not do so. Lender shall defend, indemnify and hold harmless the Seller and its directors, officers, subsidiaries, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, both past and present, from and against any and all claims, demands, alleged sums of money owing, actions, rights, liens, obligations, costs, expenses, compensation of any nature whatsoever, whether known or unknown, suspected or unsuspected, arising or resulting from or related to, including attorneys' fees, any claim of a property or other interest in Lender's Released Claims by Lender's assigns, past or present attorneys, or other persons or entities claiming through Lender. 9. Seller's Warranty of Ownership of Seller's Released Claims. Seller represents and warrants that: (1) it owns Seller's Released Claims; (2) no person other than itself has or has had any claim to, title to, right in, or any interest in any Seller's Released Claim; (3) that it has the sole right and exclusive authority to execute this Agreement; and (4) that it has not sold, assigned, transferred, conveyed, or otherwise disposed of any Seller's Released Claims and will not so do. Seller shall defend, indemnify and hold harmless the Lender, Purchaser and the Corporation and its directors, officers, subsidiaries, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, both past and present, for any and all costs and expenditures, including attorneys' fees, relating to any claim of a property or other interest in Seller's Released Claims by Seller's heirs, assigns, Lenders, past or present attorneys, or other persons or entities claiming through Seller. 10. Purchaser 's Warranty of Ownership of Purchaser's Released Claims. Purchaser represents and warrants that: (1) he owns Purchaser's Released Claims; (2) no person other than himself has or has had any claim to, title to, right in, or any interest in any of Purchaser's Released Claim; (3) that he has the sole right and exclusive authority to execute this Agreement; and (4) that he has not sold, assigned, transferred, conveyed, or otherwise disposed of any of Purchaser's Released Claims and will not so do. Purchaser shall defend, indemnify and hold harmless the Seller and its directors, officers, subsidiaries, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, both past and present, for any and all costs and expenditures, including attorneys' fees, relating to any claim of a property or other interest in Purchaser's Released Claims by Purchaser's heirs, assigns, Lenders, past or present attorneys, or other persons or entities claiming through Purchaser. 11. Corporation 's Warranty of Ownership of Corporation's Released Claims. The Corporation represents and warrants that: (1) it owns Corporation's Released Claims; (2) no person other than itself has or has had any claim to, title to, right in, or any interest in any Corporation's Released Claim; (3) that it has the sole right and exclusive authority to execute this Agreement; and (4) that it has not sold, assigned, transferred, conveyed, or otherwise disposed of any Corporation's Released Claims and will not so do. Corporation shall defend, indemnify and hold harmless the Seller and its directors, officers, subsidiaries, supervisors, agents, successors, partners, employees, shareholders, assigns, attorneys, representatives, insurers, parents, subsidiaries, and related entities, both past and present, for any and all costs and expenditures, including attorneys' fees, relating to any claim of a property or other interest in Corporation's Released Claims by Corporation’s heirs, assigns, Lenders, past or present attorneys, or other persons or entities claiming through Seller. 12. Warranty of No Other Claims. The parties hereto represent and warrant that they have not filed any charges, grievances, complaints, lawsuits, liens, or other claims with any court agency, professional organization, or regulatory or administrative body against any other party hereto. 13. Further Assurances. Lender agrees to execute, deliver, and acknowledge any further instruments, documents, or amendments and to do and perform all such other acts and things as may be necessary from time to time after the Effective Date, upon Issuer's reasonable request or Seller's reasonable request, to effectuate the purposes of this Agreement, including, without limitation, any filing, registration or recordation upon any applicable public records. 14. Notices. All written. notices, demands and request of any kind which any party may be required or may desire to serve upon the other parties hereto in connection with this Agreement shall be delivered only by courier or other means of personal service which provides written verification of receipt or by registered or certified mail return receipt requested. All notices shall be addressed to the party to be served as follows: If to Seller: 000 Xxxxxxx Xxxxxx Xxxxx, Xxxxx 000 Xxxxxx Xxxx, XX 00000 If to Purchaser: If to Lender: With Copy to: If to the Corporation: 15. Successors and Assigns Transfer of Rights. This Agreement shall be binding upon and shall inure to the benefit of the Lender’s successors and assigns. 16. Waivers and Amendments. None of the terms or provisions of this Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by each party to this Agreement. 17. Governing Law Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflict of laws principles, except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. Unless otherwise defined herein, terms defined in the Uniform Commercial Code in effect in the State of California are used herein as therein defined. Each party hereto irrevocably and unconditionally: (i) agrees that any suit, action, or other legal proceeding arising out of this Agreement shall be tried and litigated exclusively in the state and federal courts located in the State of California; (ii) consents to thejurisdiction of any such court in any such suit, action, or proceeding; and (iii) waives any objection which such party may have to the laying of venue of any such suit, action, or proceeding in any such court. 18. Attorneys' Fees and Costs. Each party shall pay and bear its own costs and fees of any kind, including without limitation attorneys' fees and costs, in connection with the negotiation, drafting, and delivery of this Agreement. The execution and delivery of this Agreement by the parties shall not constitute or be construed as an admission of any wrongdoing or fault in respect of the claims released hereunder or any other claims whatsoever. In the event of any arbitration, lawsuit, or other proceeding arising out of or relating to this Agreement, the prevailing party shall be entitled to recover from the other party hereto its reasonable attorneys' fees and costs of suit_ 19. Joint Effort. Each party hereto warrants that he, she, or it has had a reasonable time to review this Agreement, and in fact has read it. Each party hereto further warrants that he, she, or it has had the opportunity to consult with an attorney regarding the content and significance of this Agreement, and in fact has either so consulted or knowingly waived his, her, or its right to so consult. In executing this Agreement, each party hereto acknowledges that he, she, or it does so with full knowledge of any and all rights he, she, or it may have, and after the contents of this Agreement and its meaning and ramifications have been fully explained to him, her, or it by their respective attorney. 20. Confidentiality of this Agreement. This Agreement and all of its terns are confidential, and said confidentiality is of the essence of this Agreement. Accordingly, the parties hereto and their agents, attorneys, advisors and assigns shall keep confidential and not disclose, publicize, or knowingly permit, authorize, or instigate disclosure or publication of the Agreement or its terms or contents to any person, firm, organization, or entity of any type, whether public or private, for any reason, except to attorneys, accountants and other advisors or as required by law. 21. Severability. Should any of the provisions set forth herein be determined to be invalid, illegal, or unenforceable by any court, agency, mediator, or any other tribunal of competent jurisdiction, such term will be enforced to the fullest extent permitted by applicable law, and such determination shall not affect the validity, legality, and enforceability of the other provisions herein. To this end, the provisions of this Agreement are agreed and declared to be severable. 22. Integration Clause. This Agreement sets forth the entire understanding and agreement between the parties with respect to the subject matter herein and supersedes any prior or contemporaneous, oral or written, agreements, understandings, or representations, if any, between the parties except as otherwise specifically set forth herein. 23. Warranty of Signatures. Each of the signatories to this Agreement represents and warrants that the signatory has full power and authority, and has been duly authorized, to execute this Agreement. 24. Captions. All headings and captions to the paragraphs of this Agreement are solely for the convenience of the parties, are not a part of this Agreement, and shall not be used for the interpretation of a determination of the validity of this Agreement or any portion hereof. 25. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original, but all of which shall constitute one agreement, with the same effect as if the signatures were on the same instrument. All executed copies of this Agreement shall constitute duplicate originals and shall be equally admissible in evidence. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first above written. By:___________________________ JADE SPECIAL STRATEGY, LLC (“LENDER”) EXHIBIT A-1 This Security Agreement (the “Security Agreement”), dated as of _______ __, 2008, by and between FinancialContent Services, Inc., a Delaware corporation (the “Debtor”) and Jade Special Strategy, LLC, a Delaware limited liability company (the “Secured Party”). FinancialContent Inc., the sole shareholder of Debtor ("Parent"), issued certain promissory notes to the Secured Party (the “Notes”). The aggregate outstanding principal balance of the Notes as of the date hereof is $1,1650,000 (the "Existing Debt"). The Notes are secured by a lien on all or substantially all of the assets of Parent, including without limitation, the stock of Debtor. FinancialContent Services, Inc., the original maker of the Notes is in default on its obligations thereunder. To induce the Secured Party to forebear on its right to foreclose on the stock of Debtor and exercise other remedies available to Secured Party pursuant to the Security Agreement between Parent and Secured Party dated on or about February 13, 2006, as amended, the Parent has agreed to sell all of the shares of Debtors capital stock pursuant to a Stock Purchase Agreement among the Debtor, the Parent and the Secured Party dated as of the date hereof (the “Stock Purchase Agreement”). The Debtor will assume the Notes and the Existing Debt from Parent as of the effective date of the Stock Purchase Agreement. As a further inducement for the Secured Party to forebear on its rights, the Debtor has agreed to provide the Secured Party with a first priority security interest in the Collateral (as hereinafter defined). N O W, T H E R E F O R E, In consideration of the promises and the mutual covenants and agreements herein set forth, the Debtor hereby agrees with the Secured Party as follows: Section 1. Grant of Security Interest. The Debtor hereby grants to the Secured Party, on the terms and conditions hereinafter set forth, a first priority security interest in the collateral hereinafter identified (the “Collateral”). Section 2. Collateral. The Collateral is all tangible and intangible assets of the Debtor of whatever kind and nature (including without limitation all intellectual property of whatever kind or nature of the Debtor including patents, trademarks, tradenames, copyrights and all other intellectual property and any applications or registrations therefore, accounts, chattel paper, commercial tort claims, documents, equipment, farm products, general intangibles, instruments, inventory, investment property, and the stock of all of Debtor’s subsidiaries), in each case whether now owned or hereafter acquired and wherever located, and all proceeds thereof, together with all proceeds, products, replacements and renewals thereof. Section 3. Representations and Warranties; Covenants. The Debtor hereby warrants and covenants as follows: The Debtor has title to the Collateral free from any lien, security interest, encumbrance or claim (confirm for inventory and any other trades payable). The Debtor will maintain the Collateral so as to preserve its value subject to wear and tear in the ordinary course. The Debtor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Debtor will pay when due all existing or future charges, liens, or encumbrances on the Collateral, and will pay when due all taxes and assessments now or hereafter imposed or affecting it unless such taxes or assessments are diligently contested by the Debtor in good faith and reasonable reserves are established therefor. All information with respect to the Notes and the Collateral and account debtors set forth in any schedule, certificate or other writing at any time heretofore or hereafter furnished by the Debtor to the Secured Party, and all other written information heretofore or hereafter furnished by the Debtor to the Secured Party, is or will be true and correct in all material respects, as of the date furnished. Promptly following execution of this Agreement, the Secured Party will prepare, execute and file with the Secretary of State in the State of Delaware, a UCC-1 Financing Statement covering the Collateral, naming the Secured Party as Secured Party thereunder. The Debtor will keep its records concerning the Collateral at its address shown in Section 18 below. Such records will be of such character as to enable the Secured Party or their representatives to determine at any time the status thereof, and the Debtor will not, unless the Secured Party shall otherwise consent in writing, maintain any such record at any other address. The Debtor will furnish the Secured Party information on a quarterly basis concerning the Debtor, the Notes and the Collateral as the Secured Party may at any time reasonably request. The Debtor will permit the Secured Party and its representatives at any reasonable time on five (5) day prior written notice to inspect any and all of the Collateral, and to inspect, audit and make copies of and extracts from all records and all other papers in possession of the Debtor pertaining to the Notes and the Collateral and will, on request of the Secured Party, deliver to the Secured Party all such records and papers for the purpose of enabling the Secured Party to inspect, audit and copy same. Any of the Debtor’s records delivered to the Secured Party shall be returned to the Debtor as soon as the Secured Party shall have completed its inspection, audit and/or copying thereof. The Debtor will, at such times as the Secured Party may request, deliver to the Secured Party a schedule identifying the Collateral subject to the security interest of this Security Agreement, and such additional schedules, certificates, and reports respecting all or any of the Collateral at the time subject to the security interest of this Security Agreement, and the items or amounts received by the Debtor in full or partial payment or otherwise as proceeds received in connection with any Collateral. Any such schedule, certificate or report shall be executed by a duly authorized officer of the Debtor on behalf of the Debtor and shall be in such form and detail as the Secured Party may specify. The Debtor shall immediately notify the Secured Party of the occurrence of any event causing loss or depreciation in the value of the Collateral, and the amount of such loss or depreciation. If and when so requested by the Secured Party, the Debtor will stamp on the recordsof the Debtor concerning the Collateral a notation, in a form satisfactory to the Secured Party, of the security interest of the Secured Party under this Security Agreement. Section 4. Disposition of Collateral in Ordinary Course. Debtor shall not sell, transfer, assign, convey, license, grant any right to use or otherwise dispose of any Collateral except in the ordinary course of business, without the prior written consent of the Secured Party. Section 5. Secured Party May Perform. Upon the occurrence and continuation of an “Event of Default” under any of the Notes, at the option of the Secured Party, the Secured Party may discharge taxes, liens or security interests, or other encumbrances at any time hereafter levied or placed on the Collateral; may pay for insurance required to be maintained on the Collateral pursuant to Section 3; and may pay for the maintenance and preservation of the Collateral. The Debtor agrees to reimburse the Secured Party on demand for any payment made, or any expense incurred, by the Secured Party pursuant to the foregoing authorization. Until the occurrence and continuation of an Event of Default, the Debtor may have possession of the Collateral and use it in any lawful manner not inconsistent with this the Security Agreement. Section 6. Obligations Secured; Certain Remedies. This Security Agreement secures the payment and performance of all obligations of the Debtor to the Secured Party under the Notes, whether now existing or hereafter arising and whether for principal, interest, costs, fees or otherwise (collectively, the “Obligations”). The Debtor acknowledges that the amount of the Existing Debt is $1,165,000 exclusive of interest as of the date hereof and Debtor owes such amount without any defense, set-off or counterclaim. Upon the occurrence and continuation of an Event of Default under any of the Notes, the Secured Party may declare all obligations secured hereby immediately due and payable and may exercise the remedies of a secured party under the Uniform Commercial Code. Without limiting the foregoing, the Secured Party may require the Debtor to assemble the Collateral and make it available to the Secured Party at a place to be designated by the Secured Party which is reasonably convenient to both parties or to execute appropriate documents of assignment, transfer and conveyance, in each case, in order to permit the Secured Party to take possession of and title to the Collateral. Unless the Collateral is perishable or threatens to decline rapidly in value or is of a type customarily sold on a recognized market, the Secured Party will give the Debtor reasonable notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. The requirements of reasonable notice shall be met if such notice is mailed to the Debtor via registered or certified mail, postage prepaid, at least fifteen (15) days before the time of sale or disposition. Expenses of retaking, holding, preparing for sale, selling or the like, shall include the Secured Party’s reasonable attorneys’ fees and legal expenses. Section 7. Debtor Remains Liable. Anything herein to the contrary notwithstanding: Notwithstanding the exercise of any remedy available to the Secured Party hereunder or at law in connection with an Event of Default, the Debtor shall remain liable to repay the balance remaining unpaid and outstanding under the Notes after the value or proceeds received by the Secured Party in connection with such remedy is subtracted. The Secured Party shall promptly deliver and pay over to the Debtor any portion of the value or proceeds received in connection with such remedy that remains after the unpaid and outstanding portion of the Notes is paid in full. The Debtor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, and shall perform all of its duties and obligations under such contracts and agreements to the same extent as if this Security Agreement had not been executed. The exercise by the Secured Party of any of its rights hereunder shall not release the Debtor from any of its duties or obligations under any such contracts or agreements included in the Collateral. The Secured Party shall not have any obligation or liability under any such contracts or agreements included in the Collateral by reason of this Security Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of the Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. Section 8. Security Interest Absolute. All rights of the Secured Party and the security interests granted to the Secured Party hereunder shall be absolute and unconditional, to the maximum extent permitted by law, irrespective of: Any lack of validity or enforceability of the Notes or any other document or instrument relating thereto; Any change in the time, manner or place of payment of, or in any other term of, all or any part of the Obligations or any other amendment to or waiver of or any consent to any departure from the Notes or any other document or instrument relating thereto; Any exchange, release or non-perfection of any collateral (including the Collateral), or any release of or amendment to or waiver of or consent to or departure from any guaranty, for all or any of the Obligations; or Any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Debtor, a guarantor or a third party grantor of a security interest. Section 9. Additional Assurances. At the request of the Secured Party, the Debtor will join in executing or will execute, as appropriate, all necessary financing statements in a form satisfactory to the Secured Party, and the Debtor will pay the cost of filing such statements, including all statutory fees. The Debtor will further execute all other instruments deemed necessary by the Secured Party and pay the cost of filing such instruments. The Debtor warrants that no financing statement covering Collateral or any part or proceeds thereof is presently on file in any public office. The Debtor covenants that it will not grant any other security interest in the Collateral without first obtaining the written consent of the Secured Party. Section 10. Representations, Warranties and Covenants Concerning Debtor’s Legal Status. (a) The Debtor has previously executed and delivered to the Secured Party a Perfection Certificate in the form of Schedule I hereto. The Debtor represents and warrants to the Secured Party as follows: Debtor’s exact legal name is as indicated on the Perfection Certificate and on the signature page hereof; Debtor is an organization of the type, and is organized in the jurisdiction, set forth in the Perfection Certificate; the Perfection Certificate accurately sets forth Debtor’s organizational identification number or accurately states that Debtor has none; the Perfection Certificate accurately sets forth Debtor’s place of business or, if more than one, its chief executive office as well as Debtor’s mailing address, if different; and all other information set forth on the Perfection Certificate is accurate and complete. The Debtor covenants with the Secured Party as follows: without providing 15 days prior written notice to the Secured Party, Debtor will not change its name, its place of business, or, if more than one, its chief executive offices or its mailing address or organizational identification number, if it has one if Debtor does not have an organizational identification number and later obtains one, Debtor shall forthwith notify the Secured Party of such organizational identification number; and Debtor will not change its type of organization, jurisdiction of organization or other legal structure, unless Debtor is subject to a merger, acquisition or Liquidity Event. Section 11. Expenses. The Debtor will upon demand pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral upon the occurrence and continuation of an Event of Default, (ii) the exercise or enforcement of any of the rights of the Secured Party hereunder, or (iii) the failure by the Debtor to perform or observe any of the provisions hereof. Section 12. Notices of Loss or Depreciation. The Debtor will immediately notify the Secured Party of any claim, suit or proceeding against any Collateral or any event causing loss or depreciation in the value of Collateral, including the amount of such loss or depreciation Section 13. No Waivers. No waiver by the Secured Party of any default shall operate as a waiver of any other default or of the same default on any subsequent occasion. Section 14. Successor and Assigns. The Secured Party shall have the right to assign this Security Agreement and its rights hereunder without the consent of the Debtor. All rights of the Secured Party shall inure to the benefit of the successors and assigns of the Secured Party. All obligations of the Debtor shall be binding upon the Debtor’s successors and assigns. Section 15. Governing Law; Jurisdiction. This Security Agreement shall be governed by the laws of the State of New York, without giving effect to such jurisdiction’s principles of conflict of laws, except to the extent that the validity or the perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York. Each of the parties hereto submits to the personal jurisdiction of and each agrees that all proceedings relating hereto shall be brought in federal or state courts located within Nassau or Suffolk Counties in the State of New York. Section 16. Counterparts. This Security Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. Section 17. Remedies Cumulative. The rights and remedies herein are cumulative, and not exclusive of other rights and remedies which may be granted or provided by law. Section 18. Notices. Any demand upon or notice to the Debtor hereunder shall be effective when delivered by hand or when properly deposited in the mails postage prepaid, or sent by electronic facsimile transmission, receipt acknowledged, or delivered to an overnight courier, in each case addressed to the Debtor at the address shown below or as it appears on the books and records of the Secured Party. Demands or notices addressed to any other address at which the Secured Party customarily communicates with the Debtor also shall be effective. Any notice by the Debtor to the Secured Party shall be given as aforesaid, addressed to the Secured Party at the address shown below or such other address as the Secured Party may advise the Debtor in writing: If to the Secured Party: 0000 Xxxx Xxxxxxx Xxxx, Xxxxx 000X With a copy to: 000 Xxx Xxxxxxx Xxxx Attn: Xxxx X. Xxxxxx, Esq. If to the Debtor: FinancialContent Services, Inc. Attn.: Mr. Wing Yu Section 19. Entire Agreement. This Security Agreement and the documents and instruments referred to herein embody the entire agreement entered into between the parties relating to the subject matter hereof, and may not be amended, waived, or discharged except by an instrument in writing executed by the Secured Party. Section 20. Termination. This Security Agreement shall terminate upon the repayment in full of the Notes upon which the Secured Party shall cooperate in the filing of the necessary or appropriate documents and instruments to release the security interest created hereby and will execute and deliver any and all documents and/or instruments reasonably requested by Debtor in connection therewith. IN WITNESS WHEREOF, the parties hereto, by their duly authorized agents, have executed this Security Agreement as of the date set forth above. By:___________________________________________ PERFECTION CERTIFICATE The undersigned, the Chief Executive Officer of FinancialContent Services, Inc., a Delaware corporation (the "Company"), hereby certifies, with reference to a certain Security Agreement, dated as of ______ __, 2008 (terms defined in such Security Agreement having the same meanings herein as specified therein), between the Company and Jade Special Strategy, LLC (the "Secured Party"), to the Secured Party as follows: 1. Name. The exact legal name of the Company as that name appears on its Certificate of Incorporation is as follows: FinancialContent Services, Inc. Other Identifying Factors. (a) The following is the mailing address of the Company: Xxxxxx City___________________________San Mateo_____California (b) If different from its mailing address, the Company’s place of business or, if more than one, its chief executive office is located at the following address: ____________Same as above The following is the type of organization of the Company: Corporation (d) The following is the jurisdiction of the Company’s organization: Delaware. (e) The following is the Company's state issued organizational identification number: ___________________ Other Names, Etc. The following is a list of all other names (including trade names or similar appellations) used by the Company, or any other business or organization to which the Company became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwise, now or at any time during the past five years: FinancialContent Other Current Locations. (a) The following are all other locations in the United States of America in which the Company maintain any books or records relating to any of the Collateral consisting of accounts, instruments, chattel paper, general intangibles or mobile goods: Xxxxxx City (b) The following are all other places of business of the Company in the United States of America: (c) The following are all other locations in the United States of America where any of the Collateral consisting of inventory or equipment is located: 200 Xxxx Avenue San Francisco_______________San Francisco________________California (d) The following are the names and addresses of all persons or entities other than the Company, such as lessees, consignees, warehousemen or purchasers of chattel paper, which have possession or are intended to have possession of any of the Collateral consisting of instruments, chattel paper, inventory or equipment: IN WITNESS WHEREOF, I have hereunto signed this Perfection Certificate on _____ __, 2008. Name: Wing Yu May ___, 2008 PROMISSORY NOTE. Subject to all the following terms and conditions set forth in this Promissory Note (this “Note”), FinancialContent, Inc., a Delaware corporation (the “Company”), for value received, promises to pay to Jade Special Strategy, LLC (the “Holder”), in accordance with the provisions hereof, on April ___, 2010, the principal amount of Fifty Thousand Dollars ($50,000.00), with interest as set forth in Section 2 below accrued on such unpaid and principal amount from time to time outstanding until paid. All payments of principal and/or interest under this Note will be made at the office of the Holder as set forth below. 2. INTEREST. Interest under this Note shall accrue at the rate of six (6) percent, compounded annually, from the date of such Note until paid in full. Such interest shall only be payable upon the repayment of all principal due hereunder or as otherwise specified herein. SECURITY AGREEMENT. n/a ACCELERATION. Notwithstanding the provisions contained in this Note, the entire amount of principal advanced to the Company under this Note and remaining unpaid, plus all unpaid interest on unpaid principal under this Note, shall immediately be due and payable upon an Event of Default (as hereinafter defined). EVENTS OF DEFAULT. If any of the following events shall occur (each herein individually referred to as an “Event of Default”), the Company shall immediately provide notice thereof to the Holder of this Note, who may declare the entire unpaid principal and accrued interest on this Note immediately due and payable, by written notice to the Company effective upon dispatch (provided that upon the occurrence of an event described in subsection 4.1 or 4.2 below, the entire unpaid principal and accrued interest on this Note shall immediately become due and payable), without any other presentment, demand, protest or other notice of any kind or character, all of which are hereby expressly waived, anything herein to the contrary notwithstanding: The institution by the Company of proceedings to be adjudicated bankrupt or insolvent, or the cconsent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or aanswer or consent seeking reorganization or release under the Federal Bankruptcy Code, or any other similar ffederal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liliquidator, assignee, trustee, or other similar official, of the Company, or of any substantial part of its property, or tthe making by it of an assignment for the benefit of creditorsns; or If, within sixty (60) days after the commencement of an action against the Company seeking any bbankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future sstatute, law or regulation, such action shall not have been dismissed or all orders or proceedings thereunder aaffecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding sshall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or oacquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; or The Company shall have defaulted in payment of principal or interest under this Note and such default shall have continued for ten days following written notice thereof from the Holder. REPRESENTATIONS. The Company hereby represents and warrants that: Organization and Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Due Authorization, Execution and Enforceability. The execution and delivery by the Company of and the performance of its obligations under this Note have been duly authorized by all necessary corporate action on the part of the Company and this Note has been duly and validly executed and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable in accordance with its terms. No Default or Conflicts. The execution and delivery of this Note by the Company and the performance by the Company of its obligations under this Note do not and will not conflict with or result in a violation or breach of, or require any consent, approval, authorization or order under, (i) any applicable law, statute, rule or regulation, judgment, injunction, order, decree or agreement or (ii) the certificate of incorporation or bylaws of the Company. NO RIGHTS OR LIABILITIES AS STOCKHOLDER. This Note does not by itself entitle the Holder to any voting rights or other rights as a stockholder of the Company AMENDMENT; WAIVER. Any term of this Note may be amended, and the observance of any term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively) by the written consent of the Company and the Holder. Any amendment or waiver effected in accordance with the previous sentence shall be binding upon each future holder or transferee of this Note (or part thereof) and the Company. The Company and all endorsers and guarantors of this Note hereby waive presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity and notice of protest for nonpayment of this Note and consent to any extension or postponement of the time of payment or any other indulgence. ASSIGNMENT. This Note may not be assigned or transferred by the Holder without the prior written consent of the Company. SUCCESSORS AND ASSIGNS. Subject to Section 8, all covenants, agreements and undertakings in this Note by or on behalf of any of the parties shall bind and inure to the benefit of the respective successors and assigns of the parties whether so expressed or not. TREATMENT OF NOTE. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities. HEADINGS. The headings in this Note are for purposes of convenience of reference only, and shall not be used to interpret this Note. NOTICES. Any notice, request or other communication required or permitted hereunder must be given in writing and shall be deemed to have been duly given when personally delivered or when deposited in the United States mail by registered or certified mail, postage prepaid or sent via a nationally recognized overnight courier service to the Company or the Holder at their respective addresses set forth below: To the Company: 000 Xxxxxx Xxxxx Xxxxxxxxx, Xxxxx 000 Xxxxx Xxx Xxxxxxxxx, XX 00000 To the Holder: Jade Special Strategy, LLC 0000 Xxxx Xxxxxxx Xxxx, Xxxxx 000 Xxxxxxxx, XX 00000 Attn: Xxxxx Xxxxxx Fax: The Company or Holder may each by written notice so given change its address for future notices hereunder. GOVERNING LAW; JURISDICTION. This Note shall be construed and enforced in accordance with, and governed by, the internal laws of the State of New York, excluding that body of law applicable to conflicts of law. ATTORNEYS’ FEES. The parties hereto shall pay their own legal fees. If action is brought to enforce the provisions of this Note, the prevailing party shall be entitled to recover its reasonable costs and expenses, including legal fees and disbursements of counsel. TERMS BINDING. By execution hereof, the Holder of this Note (and each subsequent holder of this Note) accepts and agrees to be bound by all the terms and conditions of this Note. SEVERABILITY. In the event any one or more of the provisions of this Note shall for any reason be held to be invalid, illegal or unenforceable, in whole or in part or in any respect, or in the event that any one or more of the provisions of this Note operate or would prospectively operate to invalidate this Note, then and in any such event, such provision(s) only shall be deemed null and void and shall not affect any other provision of this Note and the remaining provisions of this Note shall remain operative and in full force and effect and in no way shall be affected, prejudiced or disturbed thereby. ENTIRE AGREEMENT. This Note constitutes and contains the entire agreement of the parties and supersedes any and all prior negotiations, correspondence, understandings, agreements, duties or obligations between the parties respecting the subject matter hereof. IN WITNESS WHEREOF, the parties have entered into this Note as of the date first written above. Authorized Agent Name: Xxxxx Xxxxxx EXHIBIT C-1 SERIES A WARRANT ISSUED FEBRURARY 13, 2006 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED. SERIES A WARRANT TO PURCHASE SHARES OF COMMON STOCK Expires February 13, 2011 No.: W-A-06- __ Number of Shares: 116,667 Date of Issuance: February 13, 2006 FOR VALUE RECEIVED, the undersigned, FinancialContent, Inc., a Delaware corporation (together with its successors and assigns, the "Issuer"), hereby certifies that Jade Special Strategy, LLC or its registered assigns is entitled to subscribe for and purchase, during the Term (as hereinafter defined), up to one hundred sixteen thousand six hundred sixty seven (116,667) shares (subject to adjustment as hereinafter provided) of the duly authorized, validly issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise price per share equal to the Warrant Price then in effect, subject, however, to the provisions and upon the terms and conditions hereinafter set forth. Capitalized terms used in this Warrant and not otherwise defined herein shall have the respective meanings specified in Section 8 hereof. 1. Term. The term of this Warrant shall commence on February 13, 2006 and shall expire at 6:00 p.m., eastern time, on February 13, 2011 (such period being the "Term"). Method of Exercise; Payment; Issuance of New Warrant; Transfer and Exchange. (a) Time of Exercise. The purchase rights represented by this Warrant may be exercised in whole or in part during the Term. (b) Method of Exercise. The Holder hereof may exercise this Warrant, in whole or in part, by the surrender of this Warrant (with the exercise form attached hereto duly executed) at the principal office of the Issuer, and by the payment to the Issuer of an amount of consideration therefor equal to the Warrant Price in effect on the date of such exercise multiplied by the number of shares of Warrant Stock with respect to which this Warrant is then being exercised, payable at such Holder's election (i) by certified or official bank check or by wire transfer to an account designated by the Issuer, (ii) by "cashless exercise" in accordance with the provisions of subsection (c) of this Section 2, but only when a registration statement under the Securities Act providing for the resale of the Warrant Stock is not then in effect, or (iii) by a combination of the foregoing methods of payment selected by the Holder of this Warrant. Cashless Exercise. n/a (d) Issuance of Stock Certificates. In the event of any exercise of this Warrant in accordance with and subject to the terms and conditions hereof, (i) certificates for the shares of Warrant Stock so purchased shall be delivered to the Holder hereof within a reasonable time, not exceeding three (3) Trading Days after such exercise (the “Delivery Date”) or, at the request of the Holder (provided that a registration statement under the Securities Act providing for the resale of the Warrant Stock is then in effect), issued and delivered to the Depository Trust Company (“DTC”) account on the Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) within a reasonable time, not exceeding three (3) Trading Days after such exercise (provided, however that the Issuer or its transfer agent shall only be obligated to issue and deliver the shares to the DTC on the Holder’s behalf via DWAC or certificates free of restrictive legends if such exercise is in connection with a sale (as evidenced by documentation furnished to and reasonably satisfactory to the Issuer) and the registration statement providing for the resale of the Warrant Stock is effective, and the Holder hereof shall be deemed for all purposes to be the holder of the shares of Warrant Stock so purchased as of the date of such exercise and (ii) unless this Warrant has expired, a new Warrant representing the number of shares of Warrant Stock, if any, with respect to which this Warrant shall not then have been exercised (less any amount thereof which shall have been canceled in payment or partial payment of the Warrant Price as hereinabove provided) shall also be issued to the Holder hereof at the Issuer's expense within such time. (e) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Issuer fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Stock pursuant to an exercise on or before the Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Stock which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Issuer shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of shares of Warrant Stock that the Issuer was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of shares of Warrant Stock for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Issuer timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Issuer. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof. (f) Transferability of Warrant. Subject to Section 2(h) hereof, this Warrant may be transferred by a Holder without the consent of the Issuer. If transferred pursuant to this paragraph, this Warrant may be transferred on the books of the Issuer by the Holder hereof in person or by duly authorized attorney, upon surrender of this Warrant at the principal office of the Issuer, properly endorsed (by the Holder executing an assignment in the form attached hereto) and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. This Warrant is exchangeable at the principal office of the Issuer for Warrants to purchase the same aggregate number of shares of Warrant Stock, each new Warrant to represent the right to purchase such number of shares of Warrant Stock as the Holder hereof shall designate at the time of such exchange. All Warrants issued on transfers or exchanges shall be dated the Original Issue Date and shall be identical with this Warrant except as to the number of shares of Warrant Stock issuable pursuant thereto. (g) Continuing Rights of Holder. The Issuer will, at the time of or at any time after each exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing the extent, if any, of its continuing obligation to afford to such Holder all rights to which such Holder shall continue to be entitled after such exercise in accordance with the terms of this Warrant, provided that if any such Holder shall fail to make any such request, the failure shall not affect the continuing obligation of the Issuer to afford such rights to such Holder. Compliance with Securities Laws. (i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Warrant Stock to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of Warrant Stock to be issued upon exercise hereof except pursuant to an effective registration statement, or an exemption from registration, under the Securities Act and any applicable state securities laws. (ii) Except as provided in paragraph (iii) below, this Warrant and all certificates representing shares of Warrant Stock issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form: THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED. (iii) The Issuer agrees to reissue this Warrant or certificates representing any of the Warrant Stock, without the legend set forth above if at such time, prior to making any transfer of any such securities, the Holder shall give written notice to the Issuer describing the manner and terms of such transfer. Such proposed transfer will not be effected until: (a) either (i) the Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the effect that the registration of such securities under the Securities Act is not required in connection with such proposed transfer, (ii) a registration statement under the Securities Act covering such proposed disposition has been filed by the Issuer with the Securities and Exchange Commission and has become effective under the Securities Act, (iii) the Issuer has received other evidence reasonably satisfactory to the Issuer that such registration and qualification under the Securities Act and state securities laws are not required, or (iv) the Holder provides the Issuer with reasonable assurances that such security can be sold pursuant to Rule 144 under the Securities Act; and (b) either (i) the Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the effect that registration or qualification under the securities or "blue sky" laws of any state is not required in connection with such proposed disposition, or (ii) compliance with applicable state securities or "blue sky" laws has been effected or a valid exemption exists with respect thereto. The Issuer will respond to any such notice from a holder within three (3) business days. In the case of any proposed transfer under this Section 2(h), the Issuer will use reasonable efforts to comply with any such applicable state securities or "blue sky" laws, but shall in no event be required, (x) to qualify to do business in any state where it is not then qualified, (y) to take any action that would subject it to tax or to the general service of process in any state where it is not then subject, or (z) to comply with state securities or “blue sky” laws of any state for which registration by coordination is unavailable to the Issuer. The restrictions on transfer contained in this Section 2(h) shall be in addition to, and not by way of limitation of, any other restrictions on transfer contained in any other section of this Warrant. Whenever a certificate representing the Warrant Stock is required to be issued to a the Holder without a legend, in lieu of delivering physical certificates representing the Warrant Stock, provided the Issuer’s transfer agent is participating in the DTC Fast Automated Securities Transfer program, the Issuer shall use its reasonable best efforts to cause its transfer agent to electronically transmit the Warrant Stock to the Holder by crediting the account of the Holder's Prime Broker with DTC through its DWAC system (to the extent not inconsistent with any provisions of this Warrant). (i) Accredited Investor Status. In no event may the Holder exercise this Warrant in whole or in part unless the Holder is an “accredited investor” as defined in Regulation D under the Securities Act. Stock Fully Paid; Reservation and Listing of Shares; Covenants. (a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees that all shares of Warrant Stock which may be issued upon the exercise of this Warrant or otherwise hereunder will, when issued in accordance with the terms of this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by or through the Issuer. The Issuer further covenants and agrees that during the period within which this Warrant may be exercised, the Issuer will at all times have authorized and reserved for the purpose of issuance upon exercise of this Warrant a number of shares of Common Stock equal to at least one hundred twenty percent (120%) of the aggregate number of shares of Common Stock to provide for the exercise of this Warrant. (b) Reservation. If any shares of Common Stock required to be reserved for issuance upon exercise of this Warrant or as otherwise provided hereunder require registration or qualification with any governmental authority under any federal or state law before such shares may be so issued, the Issuer will in good faith use its best efforts as expeditiously as possible at its expense to cause such shares to be duly registered or qualified. If the Issuer shall list any shares of Common Stock on any securities exchange or market it will, at its expense, list thereon, maintain and increase when necessary such listing, of, all shares of Warrant Stock from time to time issued upon exercise of this Warrant or as otherwise provided hereunder (provided that such Warrant Stock has been registered pursuant to a registration statement under the Securities Act then in effect), and, to the extent permissible under the applicable securities exchange rules, all unissued shares of Warrant Stock which are at any time issuable hereunder, so long as any shares of Common Stock shall be so listed. The Issuer will also so list on each securities exchange or market, and will maintain such listing of, any other securities which the Holder of this Warrant shall be entitled to receive upon the exercise of this Warrant if at the time any securities of the same class shall be listed on such securities exchange or market by the Issuer. (c) Covenants. The Issuer shall not by any action including, without limitation, amending the Certificate of Incorporation or the by-laws of the Issuer, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder hereof against dilution (to the extent specifically provided herein) or impairment. Without limiting the generality of the foregoing, the Issuer will (i) not permit the par value, if any, of its Common Stock to exceed the then effective Warrant Price, (ii) not amend or modify any provision of the Certificate of Incorporation or by-laws of the Issuer in any manner that would adversely affect the rights of the Holders of the Warrants, (iii) take all such action as may be reasonably necessary in order that the Issuer may validly and legally issue fully paid and nonassessable shares of Common Stock, free and clear of any liens, claims, encumbrances and restrictions (other than as provided herein) upon the exercise of this Warrant, and (iv) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be reasonably necessary to enable the Issuer to perform its obligations under this Warrant. (d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence satisfactory to the Issuer of the ownership of and the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security satisfactory to the Issuer or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Issuer will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same number of shares of Common Stock. 4. Adjustment of Warrant Price. The price at which such shares of Warrant Stock may be purchased upon exercise of this Warrant shall be subject to adjustment from time to time as set forth in this Section 4. The Issuer shall give the Holder notice of any event described below which requires an adjustment pursuant to this Section 4 in accordance with the notice provisions set forth in Section 5. Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale. (i) In case the Issuer after the Original Issue Date shall do any of the following (each, a "Triggering Event"): (a) consolidate or merge with or into any other Person and the Issuer shall not be the continuing or surviving corporation of such consolidation or merger, or (b) permit any other Person to consolidate with or merge into the Issuer and the Issuer shall be the continuing or surviving Person but, in connection with such consolidation or merger, any Capital Stock of the Issuer shall be changed into or exchanged for Securities of any other Person or cash or any other property, or (c) transfer all or substantially all of its properties or assets to any other Person, or (d) effect a capital reorganization or reclassification of its Capital Stock, then, and in the case of each such Triggering Event, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder of this Warrant shall be entitled upon the exercise hereof at any time after the consummation of such Triggering Event, to the extent this Warrant is not exercised prior to such Triggering Event, to receive at the Warrant Price in effect at the time immediately prior to the consummation of such Triggering Event in lieu of the Common Stock issuable upon such exercise of this Warrant prior to such Triggering Event, the Securities, cash and property to which such Holder would have been entitled upon the consummation of such Triggering Event if such Holder had exercised the rights represented by this Warrant immediately prior thereto (including the right of a shareholder to elect the type of consideration it will receive upon a Triggering Event), subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for elsewhere in this Section 4. Notwithstanding the foregoing to the contrary, this Section 4(a)(i) shall only apply if the surviving entity pursuant to any such Triggering Event is a public company that is registered pursuant to the Securities Exchange Act of 1934, as amended, and its common stock is listed or quoted on a national exchange or the OTC Bulletin Board. In the event that the surviving entity pursuant to any such Triggering Event is not a public company that is registered pursuant to the Securities Exchange Act of 1934, as amended, or its common stock is not listed or quoted on a national exchange or the OTC Bulletin Board, then the Holder shall have the right to demand that the Issuer pay to the Holder an amount equal to the value of this Warrant according to the Black-Scholes formula. (ii) Notwithstanding anything contained in this Warrant to the contrary and so long as the surviving entity pursuant to any Triggering Event is a public company that is registered pursuant to the Securities Exchange Act of 1934, as amended, and its common stock is listed or quoted on a national exchange or the OTC Bulletin Board, a Triggering Event shall not be deemed to have occurred if, prior to the consummation thereof, each Person (other than the Issuer) which may be required to deliver any Securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the Holder of this Warrant, (A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the consummation of such Triggering Event, such assumption shall be in addition to, and shall not release the Issuer from, any continuing obligations of the Issuer under this Warrant) and (B) the obligation to deliver to such Holder such Securities, cash or property as, in accordance with the foregoing provisions of this subsection (a), such Holder shall be entitled to receive, and such Person shall have similarly delivered to such Holder an opinion of counsel for such Person, which counsel shall be reasonably satisfactory to such Holder, or in the alternative, a written acknowledgement executed by the President or Chief Financial Officer of the Issuer, stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this subsection (a)) shall be applicable to the Securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto. (b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall: (i) make or issue or set a record date for the holders of the Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then (1) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (2) the Warrant Price then in effect shall be adjusted to equal (A) the Warrant Price then in effect multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such adjustment. (c) Certain Other Distributions. If at any time the Issuer shall make or issue or set a record date for the holders of the Common Stock for the purpose of entitling them to receive any dividend or other distribution of: (i) cash (other than a cash dividend payable out of earnings or earned surplus legally available for the payment of dividends under the laws of the jurisdiction of incorporation of the Issuer), (ii) any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents or Additional Shares of Common Stock), or (iii) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property of any nature whatsoever (other than cash, Common Stock Equivalents or Additional Shares of Common Stock), then (1) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such adjustment multiplied by a fraction (A) the numerator of which shall be the Per Share Market Value of Common Stock at the date of taking such record and (B) the denominator of which shall be such Per Share Market Value minus the amount allocable to one share of Common Stock of any such cash so distributable and of the fair value (as determined in good faith by the Board of Directors of the Issuer and supported by an opinion from an investment banking firm of recognized national standing acceptable to (but not affiliated with) the Holder) of any and all such evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights so distributable, and (2) the Warrant Price then in effect shall be adjusted to equal (A) the Warrant Price then in effect multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such adjustment. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Issuer to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 4(c) and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4(b). Issuance of Additional Shares of Common Stock. n/a Issuance of Common Stock Equivalents. n/a (f) Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Warrant Price then in effect shall have been made pursuant to Section 4(e) as the result of any issuance of Common Stock Equivalents, and (i) such Common Stock Equivalents, or the right of conversion or exchange in such Common Stock Equivalents, shall expire, and all or a portion of such or the right of conversion or exchange with respect to all or a portion of such Common Stock Equivalents, as the case may be, shall not have been exercised, or (ii) the consideration per share for which shares of Common Stock are issuable pursuant to such Common Stock Equivalents shall be increased, then such previous adjustment shall be rescinded and annulled and the Additional Shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Upon the occurrence of an event set forth in this Section 4(f), there shall be a recomputation made of the effect of such Common Stock Equivalents on the basis of: (i) treating the number of Additional Shares of Common Stock theretofore actually issued or issuable pursuant to the previous exercise of Common Stock Equivalents or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (ii) treating any such Common Stock Equivalents which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which Additional Shares of Common Stock are issuable under such Common Stock Equivalents; whereupon a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Warrant Price then in effect shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. (h) Other Provisions applicable to Adjustments under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Warrant Price then in effect provided for in this Section 4: Computation of Consideration. n/a (ii) When Adjustments to Be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 4(b)) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than one percent (1%) of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 4 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (iii) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest one one-hundredth (1/100th) of a share. (iv) When Adjustment Not Required. If the Issuer shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (i) Form of Warrant after Adjustments. The form of this Warrant need not be changed because of any adjustments in the Warrant Price or the number and kind of Securities purchasable upon the exercise of this Warrant. (j) Escrow of Warrant Stock. If after any property becomes distributable pursuant to this Section 4 by reason of the taking of any record of the holders of Common Stock, but prior to the occurrence of the event for which such record is taken, and the Holder exercises this Warrant, any shares of Common Stock issuable upon exercise by reason of such adjustment shall be deemed the last shares of Common Stock for which this Warrant is exercised (notwithstanding any other provision to the contrary herein) and such shares or other property shall be held in escrow for the Holder by the Issuer to be issued to the Holder upon and to the extent that the event actually takes place, upon payment of the current Warrant Price. Notwithstanding any other provision to the contrary herein, if the event for which such record was taken fails to occur or is rescinded, then such escrowed shares shall be cancelled by the Issuer and escrowed property returned. 5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number shall be adjusted pursuant to Section 4 hereof (for purposes of this Section 5, each an "adjustment"), the Issuer shall prepare and execute a certificate setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board made any determination hereunder), and the Warrant Price and Warrant Share Number after giving effect to such adjustment, and shall cause copies of such certificate to be delivered to the Holder of this Warrant promptly after each adjustment. Any dispute between the Issuer and the Holder of this Warrant with respect to the matters set forth in such certificate may at the option of the Holder of this Warrant be submitted to a national or regional accounting firm reasonably acceptable to the Issuer and the Holder, provided that the Issuer shall have ten (10) days after receipt of notice from such Holder of its selection of such firm to object thereto, in which case such Holder shall select another such firm and the Issuer shall have no such right of objection. The firm selected by the Holder of this Warrant as provided in the preceding sentence shall be instructed to deliver a written opinion as to such matters to the Issuer and such Holder within thirty (30) days after submission to it of such dispute. Such opinion shall be final and binding on the parties hereto. The costs and expenses of the initial accounting firm shall be paid equally by the Issuer and the Holder and, in the case of an objection by the Issuer, the costs and expenses of the subsequent accounting firm shall be paid in full by the Issuer. 6. Fractional Shares. No fractional shares of Warrant Stock will be issued in connection with any exercise hereof, but in lieu of such fractional shares, the Issuer shall round the number of shares to be issued upon exercise up to the nearest whole number of shares. 7. Ownership Cap and Certain Exercise Restrictions. (a) Notwithstanding anything to the contrary set forth in this Warrant, at no time may a Holder of this Warrant exercise this Warrant if the number of shares of Common Stock to be issued pursuant to such exercise would exceed, when aggregated with all other shares of Common Stock owned by such Holder at such time, the number of shares of Common Stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.9% of the then issued and outstanding shares of Common Stock; provided, however, that upon a holder of this Warrant providing the Issuer with sixty-one (61) days notice (pursuant to Section 12 hereof) (the "Waiver Notice") that such Holder would like to waive this Section 7(a) with regard to any or all shares of Common Stock issuable upon exercise of this Warrant, this Section 7(a) will be of no force or effect with regard to all or a portion of the Warrant referenced in the Waiver Notice; provided, further, that this provision shall be of no further force or effect during the sixty-one (61) days immediately preceding the expiration of the term of this Warrant. (b) The Holder may not exercise the Warrant hereunder to the extent such exercise would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 9.9% of the then issued and outstanding shares of Common Stock, including shares issuable upon exercise of the Warrant held by the Holder after application of this Section; provided, however, that upon a holder of this Warrant providing the Issuer with a Waiver Notice that such holder would like to waive this Section 7(b) with regard to any or all shares of Common Stock issuable upon exercise of this Warrant, this Section 7(b) shall be of no force or effect with regard to those shares of Warrant Stock referenced in the Waiver Notice; provided, further, that this provision shall be of no further force or effect during the sixty-one (61) days immediately preceding the expiration of the term of this Warrant. 8. Definitions. For the purposes of this Warrant, the following terms have the following meanings: “Board" shall mean the Board of Directors of the Issuer. "Capital Stock" means and includes (i) any and all shares, interests, participations or other equivalents of or interests in (however designated) corporate stock, including, without limitation, shares of preferred or preference stock, (ii) all partnership interests (whether general or limited) in any Person which is a partnership, (iii) all membership interests or limited liability company interests in any limited liability company, and (iv) all equity or ownership interests in any Person of any other type. "Certificate of Incorporation" means the Certificate of Incorporation of the Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended, modified, supplemented or restated in accordance with the terms hereof and thereof and pursuant to applicable law. "Common Stock" means the Common Stock, $0.001 par value per share, of the Issuer and any other Capital Stock into which such stock may hereafter be changed. "Common Stock Equivalent" means any Convertible Security or warrant, option or other right to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Security. "Convertible Securities" means evidences of Indebtedness, shares of Capital Stock or other Securities which are or may be at any time convertible into or exchangeable for Additional Shares of Common Stock. The term "Convertible Security" means one of the Convertible Securities. "Governmental Authority" means any governmental, regulatory or self-regulatory entity, department, body, official, authority, commission, board, agency or instrumentality, whether federal, state or local, and whether domestic or foreign. "Holders" mean the Persons who shall from time to time own any Warrant. The term "Holder" means one of the Holders. "Independent Appraiser" means a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets of corporations or other entities as going concerns, and which is not affiliated with either the Issuer or the Holder of any Warrant. "Issuer" means FinancialContent, Inc., a Delaware corporation, and its successors. "Majority Holders" means at any time the Holders of Warrants exercisable for a majority of the shares of Warrant Stock issuable under the Warrants at the time outstanding. "Original Issue Date" means February 13, 2006. "OTC Bulletin Board" means the over-the-counter electronic bulletin board. "Other Common" means any other Capital Stock of the Issuer of any class which shall be authorized at any time after the date of this Warrant (other than Common Stock) and which shall have the right to participate in the distribution of earnings and assets of the Issuer without limitation as to amount. “Outstanding Common Stock” means, at any given time, the aggregate amount of outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as applicable) of all options, warrants and other Securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that are outstanding at such time. "Person" means an individual, corporation, limited liability company, partnership, joint stock company, trust, unincorporated organization, joint venture, Governmental Authority or other entity of whatever nature. "Per Share Market Value" means on any particular date (a) the last closing bid price per share of the Common Stock on such date on the OTC Bulletin Board or another registered national stock exchange on which the Common Stock is then listed, or if there is no such price on such date, then the closing bid price on such exchange or quotation system on the date nearest preceding such date, or (b) if the Common Stock is not listed then on the OTC Bulletin Board or any registered national stock exchange, the last closing bid price for a share of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the five (5) Trading Days preceding such date of determination, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an Independent Appraiser selected in good faith by the Majority Holders; provided, however, that the Issuer, after receipt of the determination by such Independent Appraiser, shall have the right to select an additional Independent Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Independent Appraiser; and provided, further that all determinations of the Per Share Market Value shall be appropriately adjusted for any stock dividends, stock splits or other similar transactions during such period. The determination of fair market value by an Independent Appraiser shall be based upon the fair market value of the Issuer determined on a going concern basis as between a willing buyer and a willing seller and taking into account all relevant factors determinative of value, and shall be final and binding on all parties. In determining the fair market value of any shares of Common Stock, no consideration shall be given to any restrictions on transfer of the Common Stock imposed by agreement or by federal or state securities laws, or to the existence or absence of, or any limitations on, voting rights. "Securities" means any debt or equity securities of the Issuer, whether now or hereafter authorized, any instrument convertible into or exchangeable for Securities or a Security, and any option, warrant or other right to purchase or acquire any Security. "Security" means one of the Securities. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal statute then in effect. "Subsidiary" means any corporation at least 50% of whose outstanding Voting Stock shall at the time be owned directly or indirectly by the Issuer or by one or more of its Subsidiaries, or by the Issuer and one or more of its Subsidiaries. "Term" has the meaning specified in Section 1 hereof. "Trading Day" means (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or (b) if the Common Stock is not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, however, that in the event that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "Voting Stock" means, as applied to the Capital Stock of any corporation, Capital Stock of any class or classes (however designated) having ordinary voting power for the election of a majority of the members of the Board of Directors (or other governing body) of such corporation, other than Capital Stock having such power only by reason of the happening of a contingency. "Warrants" means this Warrant, and any other warrants of like tenor issued in substitution or exchange for any thereof pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or of any of such other Warrants. "Warrant Price" initially means $0.75, as such price may be adjusted from time to time as shall result from the adjustments specified in this Warrant, including Section 4 hereto. "Warrant Share Number" means at any time the aggregate number of shares of Warrant Stock which may at such time be purchased upon exercise of this Warrant, after giving effect to all prior adjustments and increases to such number made or required to be made under the terms hereof. "Warrant Stock" means Common Stock issuable upon exercise of any Warrant or Warrants or otherwise issuable pursuant to any Warrant or Warrants. Other Notices. In case at any time: the Issuer shall make any distributions to the holders of Common Stock; or the Issuer shall authorize the granting to all holders of its Common Stock of rights to subscribe for or purchase any shares of Capital Stock of any class or other rights; or there shall be any reclassification of the Capital Stock of the Issuer; or there shall be any capital reorganization by the Issuer; or there shall be any (i) consolidation or merger involving the Issuer or (ii) sale, transfer or other disposition of all or substantially all of the Issuer's property, assets or business (except a merger or other reorganization in which the Issuer shall be the surviving corporation and its shares of Capital Stock shall continue to be outstanding and unchanged and except a consolidation, merger, sale, transfer or other disposition involving a wholly-owned Subsidiary); or there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Issuer or any partial liquidation of the Issuer or distribution to holders of Common Stock; then, in each of such cases, the Issuer shall give written notice to the Holder of the date on which (i) the books of the Issuer shall close or a record shall be taken for such dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding-up, as the case may be, shall take place. Such notice also shall specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their certificates for Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding-up, as the case may be. Such notice shall be given at least twenty (20) days prior to the action in question and not less than ten (10) days prior to the record date or the date on which the Issuer's transfer books are closed in respect thereto. This Warrant entitles the Holder to receive copies of all financial and other information distributed or required to be distributed to the holders of the Common Stock. 10. Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Issuer and the Majority Holders; provided, however, that no such amendment or waiver shall reduce the Warrant Share Number, increase the Warrant Price, shorten the period during which this Warrant may be exercised or modify any provision of this Section 10 without the consent of the Holder of this Warrant. No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of this Warrant unless the same consideration is also offered to all holders of the Warrants. 11. Governing Law; Jurisdiction. This Warrant shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Warrant shall not be interpreted or construed with any presumption against the party causing this Warrant to be drafted. The Issuer and the Holder agree that venue for any dispute arising under this Warrant will lie exclusively in the state or federal courts located in New York County, New York, and the parties irrevocably waive any right to raise forum non conveniens or any other argument that New York is not the proper venue. The Issuer and the Holder irrevocably consent to personal jurisdiction in the state and federal courts of the state of New York. The Issuer and the Holder consent to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 11 shall affect or limit any right to serve process in any other manner permitted by law. The Issuer and the Holder hereby agree that the prevailing party in any suit, action or proceeding arising out of or relating to this Warrant, shall be entitled to reimbursement for reasonable legal fees from the non-prevailing party. The parties hereby waive all rights to a trial by jury. 12. Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery by telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Issuer: Attention: Chief Executive Officer Tel. No.: (000) 000-0000 Fax No.: (000) 000-0000 If to any Holder: At the address of such Holder set forth on Exhibit A to this Agreement, with copies to Holder’s counsel as set forth on Exhibit A or as specified in writing by such Holder with copies to: with copies (which copies shall not constitute notice) Xxxxxx Xxxxx Xxxxxxxx & Xxxxxxx LLP 0000 Xxxxxx xx xxx Xxxxxxxx Xxx Xxxx, Xxx Xxxx 00000 Attention: Xxxxxxxxxxx X. Xxxxxxx Any party hereto may from time to time change its address for notices by giving written notice of such changed address to the other party hereto. 13. Warrant Agent. The Issuer may, by written notice to each Holder of this Warrant, appoint an agent having an office in New York, New York for the purpose of issuing shares of Warrant Stock on the exercise of this Warrant pursuant to subsection (b) of Section 2 hereof, exchanging this Warrant pursuant to subsection (d) of Section 2 hereof or replacing this Warrant pursuant to subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 14. Remedies. The Issuer stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Issuer in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 15. Successors and Assigns. This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors and assigns of the Issuer, the Holder hereof and (to the extent provided herein) the Holders of Warrant Stock issued pursuant hereto, and shall be enforceable by any such Holder or Holder of Warrant Stock. 16. Modification and Severability. If, in any action before any court or agency legally empowered to enforce any provision contained herein, any provision hereof is found to be unenforceable, then such provision shall be deemed modified to the extent necessary to make it enforceable by such court or agency. If any such provision is not enforceable as set forth in the preceding sentence, the unenforceability of such provision shall not affect the other provisions of this Warrant, but this Warrant shall be construed as if such unenforceable provision had never been contained herein. 17. Headings. The headings of the Sections of this Warrant are for convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the Issuer has executed this Series A Warrant as of the day and year first above written. By:___________________________________ EXERCISE FORM SERIES A WARRANT The undersigned _______________, pursuant to the provisions of the within Warrant, hereby elects to purchase _____ shares of Common Stock of FinancialContent, Inc. covered by the within Warrant. Dated: _________________ Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on the date of Exercise: _________________________ FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto __________________ the within Warrant and all rights evidenced thereby and does irrevocably constitute and appoint _____________, attorney, to transfer the said Warrant on the books of the within named corporation. PARTIAL ASSIGNMENT FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto __________________ the right to purchase _________ shares of Warrant Stock evidenced by the within Warrant together with all rights therein, and does irrevocably constitute and appoint ___________________, attorney, to transfer that part of the said Warrant on the books of the within named corporation. FOR USE BY THE ISSUER ONLY: This Warrant No. W-___ canceled (or transferred or exchanged) this _____ day of ___________, _____, shares of Common Stock issued therefor in the name of _______________, Warrant No. W-_____ issued for ____ shares of Common Stock in the name of _______________. SERIES B WARRANT ISSUED FEBRURARY 13, 2006 SERIES B WARRANT TO PURCHASE (b) Method of Exercise. The Holder hereof may exercise this Warrant, in whole or in part, by the surrender of this Warrant (with the exercise form attached hereto duly executed) at the principal office of the Issuer, and by the payment to the Issuer of an amount of consideration therefor equal to the Warrant Price in effect on the date of such exercise multiplied by the number of shares of Warrant Stock with respect to which this Warrant is then being exercised, payable at such Holder's election (i) by certified or official bank check or by wire transfer to an account designated by the Issuer, (ii) by "cashless exercise" in accordance with the provisions of subsection (c) of this Section 2, but only when a registration statement under the Securities Act providing for the resale of the Warrant Stock is not then in effect, or (iii) by a combination of the foregoing methods of payment selected by the Holder of this Warrant. (e) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Issuer fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Stock pursuant to an exercise on or before the Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Stock which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Issuer shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of shares of Warrant Stock that the Issuer was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of shares of Warrant Stock for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Issuer timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Issuer. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED. (iii) The Issuer agrees to reissue this Warrant or certificates representing any of the Warrant Stock, without the legend set forth above if at such time, prior to making any transfer of any such securities, the Holder shall give written notice to the Issuer describing the manner and terms of such transfer. Such proposed transfer will not be effected until: (a) either (i) the Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the effect that the registration of such securities under the Securities Act is not required in connection with such proposed transfer, (ii) a registration statement under the Securities Act covering such proposed disposition has been filed by the Issuer with the Securities and Exchange Commission and has become effective under the Securities Act, (iii) the Issuer has received other evidence reasonably satisfactory to the Issuer that such registration and qualification under the Securities Act and state securities laws are not required, or (iv) the Holder provides the Issuer with reasonable assurances that such security can be sold pursuant to Rule 144 under the Securities Act; and (b) either (i) the Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the effect that registration or qualification under the securities or "blue sky" laws of any state is not required in connection with such proposed disposition, or (ii) compliance with applicable state securities or "blue sky" laws has been effected or a valid exemption exists with respect thereto. The Issuer will respond to any such notice from a holder within three (3) business days. In the case of any proposed transfer under this Section 2(h), the Issuer will use reasonable efforts to comply with any such applicable state securities or "blue sky" laws, but shall in no event be required, (x) to qualify to do business in any state where it is not then qualified, (y) to take any action that would subject it to tax or to the general service of process in any state where it is not then subject, or (z) to comply with state securities or “blue sky” laws of any state for which registration by coordination is unavailable to the Issuer. The restrictions on transfer contained in this Section 2(h) shall be in addition to, and not by way of limitation of, any other restrictions on transfer contained in any other section of this Warrant. Whenever a certificate representing the Warrant Stock is required to be issued to a the Holder without a legend, in lieu of delivering physical certificates representing the Warrant Stock, provided the Issuer’s transfer agent is participating in the DTC Fast Automated Securities Transfer program, the Issuer shall use its reasonable best efforts to cause its transfer agent to electronically transmit the Warrant Stock to the Holder by crediting the account of the Holder's Prime Broker with DTC through its DWAC system (to the extent not inconsistent with any provisions of this Warrant. (c) Covenants. The Issuer shall not by any action including, without limitation, amending the Certificate of Incorporation or the by-laws of the Issuer, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, to avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of the Holder hereof against dilution (to the extent specifically provided herein) or impairment. Without limiting the generality of the foregoing, the Issuer will (i) not permit the par value, if any, of its Common Stock to exceed the then effective Warrant Price, (ii) not amend or modify any provision of the Certificate of Incorporation or by-laws of the Issuer in any manner that would adversely affect the rights of the Holders of the Warrants, (iii) take all such action as may be reasonably necessary in order that the Issuer may validly and legally issue fully paid and nonassessable shares of Common Stock, free and clear of any liens, claims, encumbrances and restrictions (other than as provided herein) upon the exercise of this Warrant, and (iv) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be reasonably necessary to enable the Issuer to perform its obligations under this Warrant. (ii) Notwithstanding anything contained in this Warrant to the contrary and so long as the surviving entity pursuant to any Triggering Event is a public company that is registered pursuant to the Securities Exchange Act of 1934, as amended, and its common stock is listed or quoted on a national exchange or the OTC Bulletin Board, a Triggering Event shall not be deemed to have occurred if, prior to the consummation thereof, each Person (other than the Issuer) which may be required to deliver any Securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the Holder of this Warrant, (A) the obligations of the Issuer under this Warrant (and if the Issuer shall survive the consummation of such Triggering Event, such assumption shall be in addition to, and shall not release the Issuer from, any continuing obligations of the Issuer under this Warrant) and (B) the obligation to deliver to such Holder such Securities, cash or property as, in accordance with the foregoing provisions of this subsection (a), such Holder shall be entitled to receive, and such Person shall have similarly delivered to such Holder an opinion of counsel for such Person, which counsel shall be reasonably satisfactory to such Holder, or in the alternative, a written acknowledgement executed by the President or Chief Financial Officer of the Issuer, stating that this Warrant shall thereafter continue in full force and effect and the terms hereof (including, without limitation, all of the provisions of this subsection (a)) shall be applicable to the Securities, cash or property which such Person may be required to deliver upon any exercise of this Warrant or the exercise of any rights pursuant hereto. (h) Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Warrant Price then in effect shall have been made pursuant to Section 4(e) as the result of any issuance of Common Stock Equivalents, and (i) such Common Stock Equivalents, or the right of conversion or exchange in such Common Stock Equivalents, shall expire, and all or a portion of such or the right of conversion or exchange with respect to all or a portion of such Common Stock Equivalents, as the case may be, shall not have been exercised, or (ii) the consideration per share for which shares of Common Stock are issuable pursuant to such Common Stock Equivalents shall be increased, then such previous adjustment shall be rescinded and annulled and the Additional Shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Upon the occurrence of an event set forth in this Section 4(f), there shall be a recomputation made of the effect of such Common Stock Equivalents on the basis of: (i) treating the number of Additional Shares of Common Stock theretofore actually issued or issuable pursuant to the previous exercise of Common Stock Equivalents or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (ii) treating any such Common Stock Equivalents which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which Additional Shares of Common Stock are issuable under such Common Stock Equivalents; whereupon a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Warrant Price then in effect shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. (j) Escrow of Warrant Stock. If after any property becomes distributable pursuant to this Section 4 by reason of the taking of any record of the holders of Common Stock, but prior to the occurrence of the event for which such record is taken, and the Holder exercises this Warrant, any shares of Common Stock issuable upon exercise by reason of such adjustment shall be deemed the last shares of Common Stock for which this Warrant is exercised (notwithstanding any other provision to the contrary herein) and such shares or other property shall be held in escrow for the Holder by the Issuer to be issued to the Holder upon and to the extent that the event actually takes place, upon payment of the current Warrant Price. Notwithstanding any other provision to the contrary herein, if the event for which such record was taken fails to occur or is rescinded, then such escrowed shares shall be cancelled by the Issuer and escrowed property returned. 10. Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Issuer and the Majority Holders; provided, however, that no such amendment or waiver shall reduce the Warrant Share Number, increase the Warrant Price,shorten the period during which this Warrant may be exercised or modify any provision of this Section 10 without the consent of the Holder of this Warrant. No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of this Warrant unless the same consideration is also offered to all holders of the Warrants. By:________________________________ SERIES A WARRANT ISSUED MARCH 31, 2006 Expires March 31, 2011 Date of Issuance: March 31, 2006 1. Term. The term of this Warrant shall commence on March 31, 2006 and shall expire at 6:00 p.m., eastern time, on March 31, 2011 (such period being the "Term"). (c) Cashless Exercise. Notwithstanding any provisions herein to the contrary and commencing one (1) year following the Original Issue Date if (i) the Per Share Market Value of one share of Common Stock is greater than the Warrant Price (at the date of calculation as set forth below) and (ii) a registration statement under the Securities Act providing for the resale of the Warrant Stock is not then in effect by the date such registration statement is required to be effective pursuant to the Registration Rights Agreement (as defined in the Purchase Agreement) or not effective at any time during the Effectiveness Period (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement, in lieu of exercising this Warrant by payment of cash, the Holder may exercise this Warrant by a cashless exercise and shall receive the number of shares of Common Stock equal to an amount (as determined below) by surrender of this Warrant at the principal office of the Issuer together with the properly endorsed Notice of Exercise in which event the Issuer shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y - (A)(Y) the number of shares of Common Stock to be issued to the Holder. Y = the number of shares of Common Stock purchasable upon exercise of all of the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised. the Warrant Price. the Per Share Market Value of one share of Common Stock. (d) Issuance of Stock Certificates. In the event of any exercise of this Warrant in accordance with and subject to the terms and conditions hereof, (i) certificates for the shares of Warrant Stock so purchased shall be delivered to the Holder hereof within a reasonable time, not exceeding three (3) Trading Days after such exercise (the “Delivery Date”) or, at the request of the Holder (provided that a registration statement under the Securities Act providing for the resale of the Warrant Stock is then in effect), issued and delivered to the Depository Trust Company (“DTC”) account on the Holder’s behalf via the Deposit Withdrawal Agent Commission System (“DWAC”) within a reasonable time, not exceeding three (3) Trading Days after such exercise (provided, however that the Issuer or its transfer agent shall only be obligated to issue and deliver the shares to the DTC on the Holder’s behalf via DWAC or certificates free of restrictive legends if such exercise is in connection with a sale (as evidenced by documentation furnished to and reasonably satisfactory to the Issuer) and the registration statement providing for the resale of the Warrant Stock is effective, and the Holder hereof shall be deemed for all purposes to be the holder of the shares of Warrant Stock so purchased as of the date of such exercise and (ii) unless this Warrant has expired, a new Warrant representing the number of shares of Warrant Stock, if any, with respect to which this Warrant shall not then have been exercised (less any amount thereof which shall have been canceled in payment or partial payment of the Warrant Price as hereinabove provided) shall also be issued to the Holder hereof at the Issuer's expense within such time. (e) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise. In addition to any other rights available to the Holder, if the Issuer fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Stock pursuant to an exercise on or before the Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Stock which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Issuer shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of shares of Warrant Stock that the Issuer was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of shares of Warrant Stock for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Issuer timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Issuer shall be required to pay the Holder $1,000. The Holder shall provide the Issuer written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Issuer. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Issuer’s failure to timely deliver certificates representing shares of Common Stock upon exercise of this Warrant as required pursuant to the terms hereof. (g) Continuing Rights of Holder. The Issuer will, at the time of or at any time after each exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing the extent, if any, of its continuing obligation to afford to such Holder all rights to which such Holder shall continue to be entitled after such exercise in accordance with the terms of thisWarrant, provided that if any such Holder shall fail to make any such request, the failure shall not affect the continuing obligation of the Issuer to afford such rights to such Holder. (iii) The Issuer agrees to reissue this Warrant or certificates representing any of the Warrant Stock, without the legend set forth above if at such time, prior to making any transfer of any such securities, the Holder shall give written notice to the Issuer describing the manner and terms of such transfer. Such proposed transfer will not be effected until: (a) either (i) the Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the effect that the registration of such securities under the Securities Act is not required in connection with such proposed transfer, (ii) a registration statement under the Securities Act covering such proposed disposition has been filed by the Issuer with the Securities and Exchange Commission and has become effective under the Securities Act, (iii) the Issuer has received other evidence reasonably satisfactory to the Issuer that such registration and qualification under the Securities Act and state securities laws are not required, or (iv) the Holder provides the Issuer with reasonable assurances that such security can be sold pursuant to Rule 144 under the Securities Act; and (b) either (i) the Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the effect that registration or qualification under the securities or "blue sky" laws of any state is not required in connection with such proposed disposition, or (ii) compliance with applicable state securities or "blue sky" laws has been effected or a valid exemption exists with respect thereto. The Issuer will respond to any such notice from a holder within three (3) business days. In the case of any proposed transfer under this Section 2(h), the Issuer will use reasonable efforts to comply with any such applicable state securities or "blue sky" laws, but shall in no event be required, (x) to qualify to do business in any state where it is not then qualified, (y) to take any action that would subject it to tax or to the general service of process in any state where it is not then subject, or (z) to comply with state securities or “blue sky” laws of any state for which registration by coordination is unavailable to the Issuer. The restrictions on transfer contained in this Section 2(h) shall be in addition to, and not by way of limitation of, any other restrictions on transfer contained in any other section of this Warrant. Whenever a certificate representing the Warrant Stock is required to be issued to a the Holder without a legend, in lieu of delivering physical certificates representing the Warrant Stock, provided the Issuer’s transfer agent is participating in the DTC Fast Automated Securities Transfer program, the Issuer shall use its reasonable best efforts to cause its transfer agent to electronically transmit the Warrant Stock to the Holder by crediting the account of the Holder's Prime Broker with DTC through its DWAC system (to the extent not inconsistent with any provisions of this Warrant or the Purchase Agreement). (j) Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Warrant Price then in effect shall have been made pursuant to Section 4(e) as the result of any issuance of Common Stock Equivalents, and (i) such Common Stock Equivalents, or the right of conversion or exchange in such Common Stock Equivalents, shall expire, and all or a portion of such or the right of conversion or exchange with respect to all or a portion of such Common Stock Equivalents, as the case may be, shall not have been exercised, or (ii) the consideration per share for which shares of Common Stock are issuable pursuant to such Common Stock Equivalents shall be increased, then such previous adjustment shall be rescinded and annulled and the Additional Shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Upon the occurrence of an event set forth in this Section 4(f), there shall be a recomputation made of the effect of such Common Stock Equivalents on the basis of: (i) treating the number of Additional Shares of Common Stock theretofore actually issued or issuable pursuant to the previous exercise of Common Stock Equivalents or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (ii) treating any such Common Stock Equivalents which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which Additional Shares of Common Stock are issuable under such Common “Notes” means the senior secured convertible promissory notesissued by the Issuer to the Purchasers pursuant to the Purchase Agreement. "Original Issue Date" means March 31, 2006. "Purchase Agreement" means the Note and Warrant Purchase Agreement dated as of February 13, 2006, among the Issuer and the Purchasers. "Purchasers" means the purchasers of the Notesand the Warrants issued by the Issuer pursuant to the Purchase Agreement. "Warrants" means the Warrants issued and sold pursuant to the Purchase Agreement, including, without limitation, this Warrant, and any other warrants of like tenor issued in substitution or exchange for any thereof pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or of any of such other Warrants. then, in each of such cases, the Issuer shall give written notice to the Holder of the date on which (i) the books of the Issuer shall close or a record shall be taken for such dividend, distribution or subscription rights or (ii) such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding-up, as the case may be, shall take place. Such notice also shall specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their certificates for Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or winding-up, as the case may be. Such notice shall be given at least twenty (20) days prior to the action in question and not less than ten (10) days prior to the record date or the date on which the Issuer's transfer books are closed in respect thereto. This Warrant entitles the Holder to receive copies of all financial and other information distributed or required to be distributed to the holders of the Common Stock. 10. Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant may be amended, or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively), by a written instrument or written instruments executed by the Issuer and the Majority Holders; provided, however, that no such amendment or waiver shall reduce the Warrant Share Number, increase the Warrant Price, shorten the period during which this Warrant may be exercised or modify any provision of this Section 10 without the consent of the Holder of this Warrant. No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of this Warrant unless the same consideration is also offered to all holders of the Warrants. 11. Governing Law; Jurisdiction. This Warrant shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Warrant shall not be interpreted or construed with any presumption against the party causing this Warrant to be drafted. The Issuer and the Holder agree that venue for any dispute arising under this Warrant will lie exclusively in the state or federal courts located in New York County, New York, and the parties irrevocably waive any right to raise forum non conveniens or any other argument that New York is not the proper venue. The Issuer and the Holder irrevocably consent to personal jurisdiction in the state and federal courts of the state of New York. The Issuer and the Holder consent to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 11 shall affect or limit any right to serve process in any other manner permitted by law. The Issuer and the Holder hereby agree that the prevailing party in any suit, action or proceeding arising out of or relating to this Warrant or the Purchase Agreement, shall be entitled to reimbursement for reasonable legal fees from the non-prevailing party. The parties hereby waive all rights to a trial by jury. 2. Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery by telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: By:_____________________________________ SERIES B WARRANT ISSUED MARCH 31, 2006 No.: W-B-06- __ (b) Method of Exercise. The Holder hereof may exercise this Warrant, in whole or in part, by the surrender of this Warrant (with the exercise form attached hereto duly executed) at the principal office of the Issuer, and by the payment to the Issuer of an amount of consideration therefor equal to the Warrant Price in effect on the date of such exercise multiplied by the number of shares of Warrant Stock with respect to which this Warrant is then being exercised, payable at such Holder's election (i) by certified or official bank check or by wire transfer to an account designated by the Issuer, (ii) by "cashless exercise" in accordance with the provisions of subsection (c) of this Section 2, but only when a registration statement under the Securities Act providing for the resale of the Warrant Stock is not then in effect, or (iii) by a combination of the foregoing methods of payment selected by the Holder of this Warrant. (iii) The Issuer agrees to reissue this Warrant or certificates representing any of the Warrant Stock, without the legend set forth above if at such time, prior to making any transfer of any such securities, the Holder shall give written notice to the Issuer describing the manner and terms of such transfer. Such proposed transfer will not be effected until: (a) either (i) the Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the effect that the registration of such securities under the Securities Act is not required in connection with such proposed transfer, (ii) a registration statement under the Securities Act covering such proposed disposition has been filed by the Issuer with the Securities and Exchange Commission and has become effective under the Securities Act, (iii) the Issuer has received other evidence reasonably satisfactory tothe Issuer that such registration and qualification under the Securities Act and state securities laws are not required, or (iv) the Holder provides the Issuer with reasonable assurances that such security can be sold pursuant to Rule 144 under the Securities Act; and (b) either (i) the Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the effect that registration or qualification under the securities or "blue sky" laws of any state is not required in connection with such proposed disposition, or (ii) compliance with applicable state securities or "blue sky" laws has been effected or a valid exemption exists with respect thereto. The Issuer will respond to any such notice from a holder within three (3) business days. In the case of any proposed transfer under this Section 2(h), the Issuer will use reasonable efforts to comply with any such applicable state securities or "blue sky" laws, but shall in no event be required, (x) to qualify to do business in any state where it is not then qualified, (y) to take any action that would subject it to tax or to the general service of process in any state where it is not then subject, or (z) to comply with state securities or “blue sky” laws of any state for which registration by coordination is unavailable to the Issuer. The restrictions on transfer contained in this Section 2(h) shall be in addition to, and not by way of limitation of, any other restrictions on transfer contained in any other section of this Warrant. Whenever a certificate representing the Warrant Stock is required to be issued to a the Holder without a legend, in lieu of delivering physical certificates representing the Warrant Stock, provided the Issuer’s transfer agent is participating in the DTC Fast Automated Securities Transfer program, the Issuer shall use its reasonable best efforts to cause its transfer agent to electronically transmit the Warrant Stock to the Holder by crediting the account of the Holder's Prime Broker with DTC through its DWAC system (to the extent not inconsistent with any provisions of this Warrant or the Purchase Agreement). (b) Reservation. If any shares of Common Stock required to be reserved for issuance upon exercise of this Warrant or as otherwise provided hereunder require registration or qualification with any governmental authority under any federal or state law before such shares may be so issued, the Issuer will in good faith use its best efforts as expeditiously as possible at its expense to cause such shares to be duly registered or qualified. If

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professional_accounting

AccountingIntermediate Accounting: Reporting And AnalysisWhat is the most likely effect of a stock split on the par value per share and the number of shares outstanding? What is the most likely effect of a stock split on the par value per share and the number of shares outstanding? Problem 10C Chapter 15, Problem 3MC Ch. 15 - What information is contained in a corporations...Ch. 15 - What is the difference between (a) a public and...Ch. 15 - What are the three components and the basic...Ch. 15 - List the various rights of a shareholder. Which do...Ch. 15 - What is the meaning of the following terms: (a)...Ch. 15 - What is a corporations legal capital, and why is...Ch. 15 - How is a corporations legal capital determined,...Ch. 15 - How does preferred stock differ from common stock?Ch. 15 - What amount of the proceeds from the issuance of...Ch. 15 - What is a stock subscription? How does a... Ch. 15 - How would you record the proceeds received from...Ch. 15 - If a corporation issues capital stock for an asset...Ch. 15 - What is a stock split? How do stock splits affect...Ch. 15 - If a French company using IFRS revalued its...Ch. 15 - What are restricted shares and share appreciation...Ch. 15 - What are the criteria for a noncompensatory share...Ch. 15 - Under the fair value method, how does a...Ch. 15 - What is the difference between a fixed...Ch. 15 - Define the following terms regarding preferred...Ch. 15 - How is a preferred stock similar to a long-term...Ch. 15 - What is treasury stock, and why might a...Ch. 15 - If a corporation uses the cost method to account...Ch. 15 - How does a corporation report the Treasury Stock...Ch. 15 - What accounting procedures are involved under the...Ch. 15 - What are the two components of a corporations...Ch. 15 - What additional disclosures about preferred and...Ch. 15 - On July 14, Peterman Corporation exchanged 1,000...Ch. 15 - Cary Corporation has 50,000 shares of 10 par...Ch. 15 - What is the most likely effect of a stock split on...Ch. 15 - Polk Corporation was organized on January 2, 2019,...Ch. 15 - During 2019, Bradley Corporation issued for 110...Ch. 15 - Amlin Corporation was incorporated on January 1,...Ch. 15 - On January 1, 2019, Stoner Corporation granted...Ch. 15 - When treasury stock is purchased for cash at more...Ch. 15 - Preferred stock that may be retired by the...Ch. 15 - When treasury stock accounted for by the cost...Ch. 15 - Brown Corporation issues 800 shares of its 5 par...Ch. 15 - Heart Corporation entered into a subscription...Ch. 15 - Blue Corporation issues 200 packages of securities...Ch. 15 - Sun Corporation issues 500 shares of 8 par common...Ch. 15 - Next Level Morgan Corporation issues 500 packages...Ch. 15 - Given the following information from Fire...Ch. 15 - On January 1, 2019, Phoenix Corporation adopts a...Ch. 15 - On January 2, 2019, Brust Corporation grants its...Ch. 15 - On January 1, 2019, Salt Lake Corporation grants...Ch. 15 - Assume Cole Corporation originally issued 300...Ch. 15 - Violet Corporation issues 1,200 shares of 150 par...Ch. 15 - Assume that Lily Corporation has outstanding 1,500...Ch. 15 - Tulip Corporation uses the cost method to account...Ch. 15 - Par Value and No-Par Stock Issuance Caswell...Ch. 15 - Combined Sale of Stock Maxville Company issues 300...Ch. 15 - Sale of Stock with Bonds Pilsen Company issues 12%...Ch. 15 - Issuance of Stock for Land Putt Company issues 500...Ch. 15 - Stock Subscription On February 3, 2019, Teel...Ch. 15 - Fixed Compensatory Share Option Plan Nadal Company...Ch. 15 - Fixed Share Option Compensation Plan On January 1,...Ch. 15 - Performance-Based Share Option Plan On January 1,...Ch. 15 - Restricted Share Units On January 2, 2019, Dekker...Ch. 15 - Share Appreciation Rights On January 1, 2019, as a...Ch. 15 - Convertible Preferred Stock On January 2, 2019,...Ch. 15 - Callable Preferred Stock On March 4, 2019, Hein...Ch. 15 - Stock Rights with Preferred Stock Nelson...Ch. 15 - Various Journal Entries Lodi Company is authorized...Ch. 15 - Treasury Stock, Cost Method On January 1, Lorain...Ch. 15 - Contributed Capital Adams Companys records provide...Ch. 15 - Treasury Stock Cost Method (and IFRS Revaluation)...Ch. 15 - Treasury Stock, Cost and Par Value Methods On...Ch. 15 - Treasury Stock, No Par Propst-Steele Production...Ch. 15 - Subscriptions On August 3, 2019, the date of...Ch. 15 - Stock Rights to Shareholders Nichols Electronics...Ch. 15 - Fixed Share Option Compensation Plan On January 1,...Ch. 15 - Performance-Based Share Option Compensation Plan...Ch. 15 - Performance-Based Share Option Compensation Plan...Ch. 15 - Share Appreciation Rights Holden Company has a...Ch. 15 - Issuances of Stock Cada Corporation is authorized...Ch. 15 - Issuances of Stock Epple Corporation is authorized...Ch. 15 - Comprehensive Young Corporation has been operating...Ch. 15 - Comprehensive The shareholders equity section of...Ch. 15 - Treasury Stock Analysis Ray Holt Corporation has...Ch. 15 - Comprehensive Byrd Companys Contributed Capital...Ch. 15 - Contributed Capital A partial list of the accounts...Ch. 15 - Contributed Capital The following is a partial...Ch. 15 - Reconstruct Journal Entries At the end of its...Ch. 15 - Treasury Stock, Cost Method Bush-Caine Company...Ch. 15 - Comprehensive Udall Corporations post-closing...Ch. 15 - Corporate Form of Organization Most large...Ch. 15 - Issuance of Security Packages Occasionally, a...Ch. 15 - Share Options A corporation has a non-compensatory...Ch. 15 - Capital Stock Capital stock is an important area...Ch. 15 - Treasury Stock A corporation sometimes engages in...Ch. 15 - Share Option Compensation Plans On November 6,...Ch. 15 - Share Appreciation Rights Instead of a fixed...Ch. 15 - Compensatory Share Option Plan Tom Twitlet,...Ch. 15 - Convertible Preferred Stock and Warrants The...Ch. 15 - Treasury Stock For numerous reasons, a corporation...Ch. 15 - Analyzing Coca-Colas Contributed Capital Obtain...Ch. 15 - Ethics and Share Options Smaller Corporation has...Ch. 15 - Researching GAAP Situation Russell International,...Ch. 15 - Researching GAAP Situation Bowsher Company had 10%... Net income and dividends The income statement for the month of February indicates a net income of 17,500. Durin... RISK IDENTIFICATION AND PLAN OF ACTIONPRE-VITS OFFICE EQUIPMENT COMPANY Two years ago, an external auditing fir... Discuss some reasons for budgeting. Susan Panera is preparing the June 30 bank reconciliation for Panera Bakery. She discovers the following items ... Housekeeping staff budget Ambassador Suites Inc. operates a downtown hotel property that has 300 rooms. On aver... Dividends per share Lightfoot Inc., a software development firm, has stock outstanding as follows: 40,000 share... On June 1, 2019, Kris Storey established an interior decorating business, Eco-Centric Designs. During the month... Payroll tax entries According to a summary of the payroll of Guthrie Co., 560,000 was subject to the 6.0% socia... If the private cost and social cost columns were reversed in exercise 3, what would be the result? Would too mu... EVALUATING LUMP SUMS AND ANNUITIES Kristina just won the lottery, and she must choose among three award options... Explain the difference between wide area networks (WANs) and local area networks (LANs). In what ways is economics a science? Discuss the external environment of marketing and explain how it affects a firm (Whats So Perfect About Perfect Competition) Use the following data to answer the questions. Quantity Marginal ... As a senior manager for a global player in automobile production and sales, Kirby Ellis had joined thousands of... List and describe six costs of inflation. Over the past century, real GDP per person in the United States has grown about _____ percent per year, which m... (Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of Si per unit... Give an example of a positive statement and an example of a normative statement that somehow relates to your da... What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer... A manager of a large corporation recommends a 10,000 raise be given to keep a valued subordinate from moving to... CURRENCY APPRECIATION Suppose that 1 Danish krone could be purchased in the foreign exchange market today for 5... YOUR TASK. Search online for a speech by a significant businessperson or well-known political figure. Consider ... Identify and describe the six steps of the marketing research process. (Limitations of National Income Accounting) Explain why each of the following should be taken into account when... The information for Titan Company, shown in the following chart, is available from Titans time records and the ... Grande Company has the following balances in its general ledger as of March 1 of this year: a. FICA Taxes Payab... Vertical analysis of income statement For 2016, Indigo Company initiated a sales promotion campaign that includ... Average rate of return, cash payback period, net present value method for a service company Bi-Coastal Railroad... On December 31, a business estimates depreciation on equipment used during the first year of operations to be 1... If the elasticity of demand for hamburgers equals 21.5 and the quantity demanded equals 40,000, predict what wi... Estimating Exxon Mobil Corporation's Intrinsic Stock Value Use online resources to work on this chapter's quest... The following data show the number of rental cars in service for three rental car companies: Hertz, Avis, and D... BASICS OF CAPITAL BUDGETING You recently went to work for Allied Components Company, a supplier of auto repair ... Brown Company also paid interest of 8,000 and income taxes of 40,000. How would this information be reported on... Why is inventory management and control important to the manufacturing and production processes? When a market is in equilibrium, the buyers are those with the _____ willingness to pay and the setters are tho... Of two corporations organized at approximately the same time and engaged in competing businesses, one issued 80... The partnership of Cox and Cohen paid the following wages during this year: In addition, the partnership owed 2... Decision to discontinue a product On the basis of the following data, the general manager of Sandals Industries... How can an effective purchasing department affect organizational performance? Explain the difference between partial and total measures of productivity. As shown in Exhibit 15, if the price is OB, the firms total cost of producing at its most profitable level of o... Correct the number usage in the following sentences taken from a letter or a report. The question was answered ... Using the following data, prove that pollution permits that can be bought and sold can reduce pollution from 12... State one criticism of average cost pricing. Explain the difference between a banks loans and its borrowings. Maude Jenkins, a 90-year-old woman, is planning to walk across the state, west to east, to gain support for a p... Joint cost allocation and performance evaluation Gigabody, Inc., a nutritional supplement manufacturer, produce... What are the most common sources of cash inflows from financing and investing activities? *“Unlike a marketplace in which pollution is profitable, government control of resources and pollution can take... Explain why its possible to temporarily achieve output levels beyond the economys long-run potential. Why cant ... Which of the following causes the demand for veggie burgers to increase? a. A decline in the price of veggie bu... As U.S. trade with low-wage countries like Mexico increases, will wages in the United States be pushed down? Wh... Who has a greater opportunity cost of enjoying leisurea janitor or a brain surgeon? Explain. Can this help expl... As shown in Exhibit 12, a family of four with no earned income receives _______from the government. a. Zero pay... How does relational coordination differ from teams and task forces? Do you think relational coordination seems ...

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professional_accounting

Title 26. Internal Revenue Chapter I. INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY Subchapter A. INCOME TAX Part 1. INCOME TAXES Subjgrp 2. Tax on Corporations Section 1.1411-4. Definition of net investment income. 26 CFR § 1.1411-4 - Definition of net investment income. § 1.1411-4 Definition of net investment income. (a)In general. For purposes of section 1411 and the regulations thereunder, net investment income means the excess (if any) of - (1) The sum of - (i)Gross income from interest, dividends, annuities, royalties, and rents, except to the extent excluded by the ordinary course of a trade or business exception described in paragraph (b) of this section; (ii) Other gross income derived from a trade or business described in § 1.1411-5; and (iii)Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property, except to the extent excluded by the exception described in paragraph (d)(4)(i)(A) of this section for gain or loss attributable to property held in a trade or business not described in § 1.1411-5; over (2) The deductions allowed by subtitle A that are properly allocable to such gross income or net gain (as determined in paragraph (f) of this section). (b)Ordinary course of a trade or business exception.Gross income described in paragraph (a)(1)(i) of this section is excluded from net investment income if it is derived in the ordinary course of a trade or business not described in § 1.1411-5. See § 1.1411-6 for rules regarding working capital. To determine whether gross income described in paragraph (a)(1)(i) of this section is derived in a trade or business, the following rules apply. (1) In the case of an individual, estate, or trust that owns or engages in a trade or business directly (or indirectly through ownership of an interest in an entity that is disregarded as an entity separate from its owner under § 301.7701-3), the determination of whether gross income described in paragraph (a)(1)(i) of this section is derived in a trade or business is made at the individual, estate, or trust level. (2) In the case of an individual, estate, or trust that owns an interest in a passthrough entity (for example, a partnership or S corporation), and that entity is engaged in a trade or business, the determination of whether gross income described in paragraph (a)(1)(i) of this section is - (i) Derived in a trade or business described in § 1.1411-5(a)(1) is made at the owner level; and (ii) Derived in a trade or business described in § 1.1411-5(a)(2) is made at the entity level. (3) The following examples illustrate the provisions of this paragraph (b). For purposes of these examples, assume that the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: Example 1. Multiple passthrough entities. A, an individual, owns an interest in UTP, a partnership, which is engaged in a trade or business. UTP owns an interest in LTP, also a partnership, which is not engaged in a trade or business. LTP receives $10,000 in dividends, $5,000 of which is allocated to A through UTP. The $5,000 of dividends is not derived in a trade or business because LTP is not engaged in a trade or business. This is true even though UTP is engaged in a trade or business. Accordingly, the ordinary course of a trade or business exception described in paragraph (b) of this section does not apply, and A's $5,000 of dividends is net investment income under paragraph (a)(1)(i) of this section. B, an individual, owns an interest in UTP2, a partnership, which is not engaged in a trade or business. UTP2 owns an interest in LTP2, also a partnership, which is engaged in a commercial lending trade or business. LTP2 is not engaged in a trade or business described in § 1.1411-5(a)(2). LTP2's trade or business is not a passive activity (within the meaning of section 469) with respect to B. LTP2 earns $10,000 of interest income from its trade or business which is allocated to B through UTP2. Although UTP2 is not engaged in a trade or business, the $10,000 of interest income is derived in the ordinary course of LTP2's lending trade or business. Because LTP2 is not engaged in a trade or business described in § 1.1411-5(a)(2) and because LTP2's trade or business is not a passive activity with respect to B (as described in § 1.1411-5(a)(1)), the ordinary course of a trade or business exception described in paragraph (b) of this section applies, and B's $10,000 of interest is not included as net investment income under paragraph (a)(1)(i) of this section. Example 3. Entity engaged in trading in financial instruments. C, an individual, owns an interest in PRS, a partnership, which is engaged in a trade or business of trading in financial instruments (as defined in § 1.1411-5(a)(2)). PRS' trade or business is not a passive activity (within the meaning of section 469) with respect to C. In addition, C is not directly engaged in a trade or business of trading in financial instruments or commodities. PRS earns interest of $50,000, and C's distributive share of the interest is $25,000. Because PRS is engaged in a trade or business described in § 1.1411-5(a)(2), the ordinary course of a trade or business exception described in paragraph (b) of this section does not apply, and C's $25,000 distributive share of the interest is net investment income under paragraph (a)(1)(i) of this section. Example 4. Application of ordinary course of a trade or business exception. D, an individual, owns stock in S corporation, S. S is engaged in a banking trade or business (that is not a trade or business of trading in financial instruments or commodities), and S's trade or business is not a passive activity (within the meaning of section 469) with respect to D because D materially participates in the activity. S earns $100,000 of interest in the ordinary course of its trade or business, of which $5,000 is D's pro rata share. For purposes of paragraph (b) of this section, the interest income is derived in the ordinary course of S's banking business because it is not working capital under section 1411(c)(3) and § 1.1411-6(a) (because it is considered to be derived in the ordinary course of a trade or business under the principles of § 1.469-2T(c)(3)(ii)(A)). Because S is not engaged in a trade or business described in § 1.1411-5(a)(2) and because S's trade or business is not a passive activity with respect to D (as described in § 1.1411-5(a)(1)), the ordinary course of a trade or business exception described in paragraph (b) of this section applies, and D's $5,000 of interest is not included under paragraph (a)(1)(i) of this section. (c)Other gross income from a trade or business described in § 1.1411-5. For a trade or business described in § 1.1411-5, paragraph (a)(1)(ii) of this section includes all other gross income (within the meaning of section 61) that is not gross income described in paragraph (a)(1)(i) of this section or net gain described in paragraph (a)(1)(iii) of this section. (d)Net gain. This paragraph (d) describes special rules for purposes of paragraph (a)(1)(iii) of this section. (1)Definition of disposition. For purposes of section 1411 and the regulations thereunder, the term disposition means a sale, exchange, transfer, conversion, cash settlement, cancellation, termination, lapse, expiration, or other disposition (including a deemed disposition, for example, under section 877A). (2)Limitation. The calculation of net gain may not be less than zero. Losses allowable under section 1211(b) are permitted to offset gain from the disposition of assets other than capital assets that are subject to section 1411. (3)Net gain attributable to the disposition of property - (i)General rule.Net gain attributable to the disposition of property is the gain described in section 61(a)(3) recognized from the disposition of property reduced, but not below zero, by losses deductible under section 165, including losses attributable to casualty, theft, and abandonment or other worthlessness. The rules in subchapter O of chapter 1 and the regulations thereunder apply. See, for example, § 1.61-6(b). For purposes of this paragraph, net gain includes, but is not limited to, gain or loss attributable to the disposition of property from the investment of working capital (as defined in § 1.1411-6); gain or loss attributable to the disposition of a life insurance contract; and gain attributable to the disposition of an annuity contract to the extent the sales price of the annuity exceeds the annuity's surrender value. (ii)Examples. The following examples illustrate the provisions of this paragraph (d)(3). For purposes of these examples, assume that the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: Example 1. Calculation of net gain. (i) In Year 1, A, an unmarried individual, realizes a capital loss of $40,000 on the sale of P stock and realizes a capital gain of $10,000 on the sale of Q stock, resulting in a net capital loss of $30,000. Both P and Q are C corporations. A has no other capital gain or capital loss in Year 1. In addition, A receives wages of $300,000 and earns $5,000 of gross income from interest. For income tax purposes, under section 1211(b), A may use $3,000 of the net capital loss against other income. Under section 1212(b)(1), the remaining $27,000 is a capital loss carryover. For purposes of determining A's Year 1 net gain under paragraph (a)(1)(iii) of this section, A's gain of $10,000 on the sale of the Q stock is reduced by A's loss of $40,000 on the sale of the P stock. In addition, A may reduce net investment income by the $3,000 of the excess of capital losses over capital gains allowed for income tax purposes under section 1211(b). (ii) In Year 2, A has a capital gain of $30,000 on the sale of Y stock. Y is a C corporation. A has no other capital gain or capital loss in Year 2. For income tax purposes, A may reduce the $30,000 gain by the Year 1 section 1212(b) $27,000 capital loss carryover. For purposes of determining A's Year 2 net gain under paragraph (a)(1)(iii) of this section, A's $30,000 gain may also be reduced by the $27,000 capital loss carryover from Year 1. Therefore, in Year 2, A has $3,000 of net gain for purposes of paragraph (a)(1)(iii) of this section. The facts are the same as in Example 1, except that in Year 1, A also realizes a gain of $20,000 on the sale of Rental Property D, all of which is treated as ordinary income under section 1250. For income tax purposes, under section 1211(b), A may use $3,000 of the net capital loss against other income. Under section 1212(b)(1) the remaining $27,000 is a capital loss carryover. For purposes of determining A's net gain under paragraph (a)(1)(iii) of this section, A's gain of $10,000 on the sale of the Q stock is reduced by A's loss of $40,000 on the sale of the P stock. A's $20,000 gain on the sale of Rental Property D is reduced to the extent of the $3,000 loss allowed under section 1211(b). Therefore, A's net gain for Year 1 is $17,000 ($20,000 gain treated as ordinary income on the sale of Rental Property D reduced by $3,000 loss allowed under section 1211). Example 3. Section 121(a) exclusion. (i) In Year 1, A, an unmarried individual, sells a house that A has owned and used as A's principal residence for the five years preceding the sale and realizes $200,000 in gain. In addition to the gain realized from the sale of A's principal residence, A also realizes $7,000 in long-term capital gain. A has a $5,000 short-term capital loss carryover from a year preceding the effective date of section 1411. (ii) For income tax purposes, under section 121(a), A excludes the $200,000 gain realized from the sale of A's principal residence from A's Year 1 gross income. In determining A's Year 1 adjusted gross income, A also reduces the $7,000 capital gain by the $5,000 capital loss carryover allowed under section 1211(b). (iii) For section 1411 purposes, under section 121(a), A excludes the $200,000 gain realized from the sale of A's principal residence from A's Year 1 gross income and, consequently, from A's net investment income. In determining A's Year 1 net gain under paragraph (a)(1)(iii) of this section, A reduces the $7,000 capital gain by the $5,000 capital loss carryover allowed under section 1211(b). Example 4. Section 1031 like-kind exchange. (i) In Year 1, A, an unmarried individual who is not a dealer in real estate, purchases Greenacre, a piece of undeveloped land, for $10,000. A intends to hold Greenacre for investment. (ii) In Year 3, A enters into an exchange in which A transfers Greenacre, now valued at $20,000, and $5,000 cash for Blackacre, another piece of undeveloped land, which has a fair market value of $25,000. The exchange is a transaction for which no gain or loss is recognized under section 1031. (iii) In Year 3, for income tax purposes, A does not recognize any gain from the exchange of Greenacre for Blackacre. A's basis in Blackacre is $15,000 ($10,000 substituted basis in Greenacre plus $5,000 additional cost of acquisition). For purposes of section 1411, A's net investment income for Year 3 does not include any realized gain from the exchange of Greenacre for Blackacre. (iv) In Year 5, A sells Blackacre to an unrelated party for $35,000 in cash. (v) In Year 5, for income tax purposes, A recognizes capital gain of $20,000 ($35,000 sale price minus $15,000 basis). For purposes of section 1411, A's net investment income includes the $20,000 gain recognized from the sale of Blackacre. (4)Gains and losses excluded from net investment income - (i)Exception for gain or loss attributable to property held in a trade or business not described in § 1.1411-5 - (A)General rule.Net gain does not include gain or loss attributable to property (other than property from the investment of working capital (as described in § 1.1411-6)) held in a trade or business not described in § 1.1411-5. (B)Special rules for determining whether property is held in a trade or business. To determine whether net gain described in paragraph (a)(1)(iii) of this section is from property held in a trade or business - (1) A partnership interest or S corporation stock generally is not property held in a trade or business. Therefore, gain from the sale of a partnership interest or S corporation stock is generally gain described in paragraph (a)(1)(iii) of this section. However, net gain does not include certain gain or loss attributable to the disposition of certain interests in partnerships and S corporations as provided in § 1.1411-7. (2) In the case of an individual, estate, or trust that owns or engages in a trade or business directly (or indirectly through ownership of an interest in an entity that is disregarded as an entity separate from its owner under § 301.7701-3), the determination of whether net gain described in paragraph (a)(1)(iii) of this section is attributable to property held in a trade or business is made at the individual, estate, or trust level. (3) In the case of an individual, estate, or trust that owns an interest in a passthrough entity (for example, a partnership or S corporation), and that entity is engaged in a trade or business, the determination of whether net gain described in paragraph (a)(1)(iii) of this section from such entity is attributable to - (i)Property held in a trade or business described in § 1.1411-5(a)(1) is made at the owner level; and (ii)Property held in a trade or business described in § 1.1411-5(a)(2) is made at the entity level. (C)Examples. The following examples illustrate the provisions of this paragraph (d)(4)(i). For purposes of these examples, assume the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: Example 1. Gain from rental activity. A, an unmarried individual, rents a boat to B for $100,000 in Year 1. A's rental activity does not involve the conduct of a section 162 trade or business, and under section 469(c)(2), A's rental activity is a passive activity. In Year 2, A sells the boat to B, and A realizes and recognizes taxable gain attributable to the disposition of the boat of $500,000. Because the exception provided in paragraph (d)(4)(i)(A) of this section requires a trade or business, this exception is inapplicable, and therefore, A's $500,000 gain will be taken into account under § 1.1411-4(a)(1)(iii). Example 2. Installment sale. (i) PRS, a partnership for Federal income tax purposes, operates an automobile dealership. B and C, unmarried individuals, each own a 40% interest in PRS and both materially participate in the activities of PRS for all relevant years. Therefore, with respect to B and C, PRS is not a trade or business described in section 1411(c)(2) and § 1.1411-5. D owns the remaining 20% of PRS. Assume, for purposes of this example, that PRS is a passive activity with respect to D, and therefore is a trade or business described in section 1411(c)(2)(A) and § 1.1411-5(a)(1). (A) In Year 0, a year preceding the effective date of section 1411, PRS relocates its dealership to a larger location. As a result of the relocation, PRS sells its old dealership facility to a real estate developer in exchange for $1,000,000 cash and a $4,500,000 promissory note, fully amortizing over the subsequent 15 years, and bearing adequate stated interest. PRS reports the sale transaction under section 453. PRS's adjusted tax basis in the old dealership facility is $1,075,000. Assume for purposes of this example that PRS has $300,000 of recapture income (within the meaning of section 453(i)); the buyer is not related to PRS, B, C, or D; and the buyer is not assuming any liabilities of PRS in the transaction. (B) For chapter 1 purposes, PRS has realized gain on the transaction of $4,425,000 ($5,500,000 less $1,075,000). Pursuant to section 453(i), PRS will take into account $300,000 of the recapture income in Year 0, and the gain in excess of the recapture income ($4,125,000) will be taken into account under the installment method. For purposes of section 453, PRS's profit percentage is 75% ($4,125,000 gain divided by $5,500,000 gross selling price). In Year 0, PRS will take into account $750,000 of capital gain attributable to the $1,000,000 cash payment. In the subsequent 15 years, PRS will receive annual payments of $300,000 (plus interest). Each payment will result in PRS recognizing $225,000 of capital gain (75% of $300,000). (A) In Year 1, PRS receives a payment of $300,000 plus the applicable amount of interest. For purposes of chapter 1, PRS recognizes $225,000 of capital gain. B and C's distributive share of the gain is $90,000 each and D's distributive share of the gain is $45,000. (B) The old dealership facility constituted property held in PRS's trade or business. In the case of section 453 installment sales, section 453 governs the timing of the gain recognition, but does not alter the character of the gain. See § 1.1411-1(a). The determination of whether the gain is attributable to the disposition of property used in a trade or business described in paragraph (d)(4)(i) of this section constitutes an element of the gain's character for Federal tax purposes. As a result, the applicability of paragraph (d)(4)(i) of this section is determined in Year 0 and applies to all gain received on the promissory note during the 15 year payment period. This result is consistent with the section 469 determination of the passive or nonpassive classification of the gain under § 1.469-2T(c)(2)(i)(A). (C) In the case of D, PRS's trade or business is described in section 1411(c)(2)(A) and § 1.1411-5(a)(1). Therefore, the exclusion in paragraph (d)(4)(i) of this section does not apply, and D must include the $45,000 of gain in D's net investment income. (D) In the case of B and C, PRS's trade or business is not described in section 1411(c)(2) or § 1.1411-5. Therefore, B and C exclude the $90,000 gain from net investment income pursuant to paragraph (d)(4)(i) of this section. (iv) In Year 2, C dies and C's 40% interest in PRS passes to Estate. (A) In Year 3, PRS receives a payment of $300,000 plus the applicable amount of interest. For purposes of chapter 1, PRS recognizes $225,000 of capital gain. B and Estate each have a distributive share of the gain equal to $90,000 and D's distributive share of the gain is $45,000. (B) The calculation of net investment income for B and D in Year 3 is the same as in (iii) for Year 1. (C) In the case of Estate, the distributive share of the $90,000 gain constitutes income in respect of a decedent (IRD) under section 691(a)(4) and subchapter K. See § 1.1411-1(a). Assume that Estate paid estate taxes of $5,000 that were attributable to the $90,000 of IRD. Pursuant to section 691(c)(4), the amount of gain taken into account in computing Estate's taxable income in Year 3 is $85,000 ($90,000 reduced by the $5,000 of allocable estate taxes). Pursuant to section 691(a)(3) and § 1.691(a)-3(a), the character of the gain to the Estate is the same character as the gain would have been if C had survived to receive it. Although the amount of taxable gain for chapter 1 has been reduced, the remaining $85,000 retains its character attributable to the disposition of property used in a trade or business described in paragraph (d)(4)(i) of this section. Therefore, Estate may exclude the $85,000 gain from net investment income pursuant to paragraph (d)(4)(i) of this section. (ii)Other gains and losses excluded from net investment income.Net gain, as determined under paragraph (d) of this section, does not include gains and losses excluded from net investment income by any other provision in §§ 1.1411-1 through 1.1411-10. For example, see § 1.1411-7 (certain gain or loss attributable to the disposition of certain interests in partnerships and S corporations) and § 1.1411-8(b)(4)(ii) (net unrealized appreciation attributable to employer securities realized on a disposition of those employer securities). (iii)Adjustment for capital loss carryforwards for previously excluded income. [Reserved] (e)Net investment income attributable to certain entities - (1)Distributions from estates and trusts - (i)In general. Net investment income includes a beneficiary's share of distributable net income, as described in sections 652(a) and 662(a), to the extent that, under sections 652(b) and 662(b), the character of such income constitutes gross income from items described in paragraphs (a)(1)(i) and (ii) of this section or net gain attributable to items described in paragraph (a)(1)(iii) of this section, with further computations consistent with the principles of this section, as provided in § 1.1411-3(e). (ii)Distributions of accumulated net investment income from foreign nongrantor trusts to United States beneficiaries. [Reserved] (2)CFCs and PFICs. For purposes of calculating net investment income, additional rules in § 1.1411-10(c) apply to an individual, an estate, or a trust that is a United States shareholder that owns an interest in a controlled foreign corporation (CFC) or that is a United States person that directly or indirectly owns an interest in a passive foreign investment company (PFIC). (3)Treatment of income from common trust funds. [Reserved] (f)Properly allocable deductions - (1)General rule - (i)In general. Unless provided elsewhere in §§ 1.1411-1 through 1.1411-10, only properly allocable deductions described in this paragraph (f) may be taken into account in determining net investment income. (ii)Limitations. Any deductions described in this paragraph (f) in excess of gross income and net gain described in section 1411(c)(1)(A) are not taken into account in determining net investment income in any other taxable year, except as allowed under chapter 1. (2)Properly allocable deductions described in section 62 - (i)Deductions allocable to gross income from rents and royalties.Deductions described in section 62(a)(4) allocable to rents and royalties described in paragraph (a)(1)(i) of this section are taken into account in determining net investment income. (ii)Deductions allocable to gross income from trades or businesses described in § 1.1411-5.Deductions described in section 62(a)(1) allocable to income from a trade or business described in § 1.1411-5 are taken into account in determining net investment income to the extent the deductions have not been taken into account in determining self-employment income within the meaning of § 1.1411-9. (iii)Penalty on early withdrawal of savings.Deductions described in section 62(a)(9) are taken into account in determining net investment income. (iv)Net operating loss. The total section 1411 NOL amount of a net operating loss deduction allowed under section 172 is allowed as a properly allocable deduction in determining net investment income for any taxable year. See paragraph (h) of this section for the calculation of the total section 1411 NOL amount of a net operating loss deduction. (v)Examples. The following examples illustrate the provisions of this paragraph (f)(2). For purposes of these examples, assume the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: Example 1. (i) A, an individual, is a 40% shareholder in SCo, an S corporation. SCo is engaged in a trade or business described in section 1411(c)(2)(A). SCo is the only passive activity owned by A. In Year 1, SCo reported a loss of $11,000 to A which was comprised of gross operating income of $29,000 and operating deductions of $40,000. A's at risk amount at the beginning of Year 1 is $7,000. There were no other events that affected A's at risk amount in Year 1. (ii) For purposes of calculating A's net investment income, A's $29,000 distributive share of SCo's gross operating income is income within the meaning of section 1411(c)(1)(A)(ii). (iii) As a result of A's at risk limitation, for chapter 1 purposes, A may only deduct $7,000 of the operating deductions in excess of the gross operating income. The remaining $4,000 deductions are suspended because A's amount at risk at the end of Year 1 is zero. (iv) For purposes of section 469, A has passive activity gross income of $29,000 and passive activity deductions of $36,000 ($40,000 of operating deductions allocable to A less $4,000 suspended under section 465). Because A has no other passive activity income from any other source, section 469 limits A's passive activity deductions to A's passive activity gross income. As a result, section 469 allows A to deduct $29,000 of SCo's operating deductionsand suspends the remaining $7,000. (v) For purposes of calculating A's net investment income, A has $29,000 of properly allocable deductions allowed by section 1411(c)(1)(B) and paragraph (f)(2)(ii) of this section. (i) Same facts as Example 1. In Year 2, SCo reported net income of $13,000 to A, which was comprised of gross operating income of $43,000 and operating deductions of $30,000. There were no other events that affected A's at risk amount in Year 2. (ii) For purposes of calculating A's net investment income, A's $43,000 distributive share of gross operating income is income within the meaning of section 1411(c)(1)(A)(ii). (iii) Pursuant to section 465(a)(2), A's deductions attributable to the gross income of SCo include the $30,000 deduction allocable to A in Year 2 plus the $4,000 loss that was suspended and carried over to Year 2 from Year 1 pursuant to section 465(a)(2). Under section 465(a)(2), the $4,000 of losses from Year 1 are treated as deductions from the activity in Year 2. As a result, A's net operating income from SCo in Year 2 is $9,000 ($43,000−$30,000−$4,000) in Year 2. A's amount at risk at the end of Year 2 is $9,000. (iv) For purposes of section 469, A has passive activity gross income of $43,000. A's passive activity deductions attributable to SCo are the sum of the Year 2 operating deductions allocable to A from S ($30,000), deductions formerly suspended by section 465 ($4,000), and passive activity losses suspended by section 469 ($7,000). Therefore, in Year 2, A has passive activity deductions of $41,000. Because A's passive activity gross income exceeds A's passive activity deductions, section 469 does not limit any of the deductions in Year 2. At the end of Year 2, A has no suspended passive activity losses. (v) Although A's distributive share of Year 2 deductions allocable to SCo's operating income was $30,000; the operative provisions of sections 465 and 469 do not change the character of the deductions when such amounts are suspended under either section. Furthermore, section 465(a)(2) and §§ 1.469-1(f)(4) and 1.469-2T(d)(1) treat amounts suspended from prior years as deductions in the current year. See § 1.1411-1(a). Therefore, for purposes of calculating A's net investment income, A has $41,000 of properly allocable deductions allowed by section 1411(c)(1)(B) and paragraph (f)(2)(ii) of this section. (3)Properly allocable deductions described in section 63(d). In determining net investment income, the following itemized deductions are taken into account: (i)Investment interest expense.Investment interest (as defined in section 163(d)(3)) to the extent allowed under section 163(d)(1). Any investment interest not allowed under section 163(d)(1) is treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year. The following example illustrates the provisions of this paragraph. For purposes of this example, assume that the taxpayer uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: (A) In Year 1, A, an unmarried individual, pays interest of $4,000 on debt incurred to purchase stock. Under § 1.163-8T, this interest is allocable to the stock and is investment interest within the meaning of section 163(d)(3). A has no investment income as defined by section 163(d)(4). A has $10,000 of income from a trade or business that is a passive activity (as defined in § 1.1411-5(a)(1)) with respect to A. For income tax purposes, under section 163(d)(1), A may not deduct the $4,000 investment interest in Year 1 because A does not have any section 163(d)(4) net investment income. Under section 163(d)(2), the $4,000 investment interest is a carryforward of disallowed interest that is treated as investment interest paid by A in the succeeding taxable year. Similarly, for purposes of determining A's Year 1 net investment income, A may not deduct the $4,000 investment interest. (B) In Year 2, A has $5,000 of section 163(d)(4) net investment income. For both income tax purposes and for determining section 1411 net investment income, A's $4,000 carryforward of interest expense disallowed in Year 1 may be deducted in Year 2. (ii)Investment expenses.Investment expenses (as defined in section 163(d)(4)(C)). (iii)Taxes described in section 164(a)(3).State, local, and foreign income, war profits, and excess profit taxes described in section 164(a)(3) that are allocable to net investment income pursuant to paragraph (g)(1) of this section. Except to the extent specifically expected from section 275(a)(4), foreign income, war profits, and excess profit taxes are not allowed as deductions under section 164(a)(3) in determining net investment income if the taxpayer claims the benefit of the foreign tax credit under section 901 with respect to the same taxable year. For rules applicable to refunds of taxes described in this paragraph, see paragraph (g)(2) of this section. (iv)Items described in section 72(b)(3). In the case of an amount allowed as a deduction to the annuitant for the annuitant's last taxable year under section 72(b)(3), such amount is allowed as a properly allocable deduction in the same taxable year if the income from the annuity (had the annuitant lived to receive such income) would have been included in net investment income under paragraph (a)(1)(i) of this section (and not excluded from net investment income by reason of § 1.1411-8). (v)Items described in section 691(c).Deductions for estate and generation-skipping taxes allowed by section 691(c) that are allocable to net investment income; provided, however, that any portion of the section 691(c) deduction described in section 691(c)(4) is taken into account instead in computing net gain under paragraph (d) and not under this paragraph (f)(3)(v). (vi)Items described in section 212(3).Amounts described in section 212(3) and § 1.212-1(l) to the extent they are allocable to net investment income pursuant to paragraph (g)(1) of this section. (vii)Amortizable bond premium. A deduction allowed under section 171(a)(1) for the amortizable bond premium on a taxable bond (for example, see § 1.171-2(a)(4)(i)(C) for the treatment of a bond premium carryforward as a deduction under section 171(a)(1)). (viii)Fiduciary expenses. In the case of an estate or trust, amounts described in § 1.212-1(i) to the extent they are allocable to net investment income pursuant to paragraph (g)(1) of this section. (4)Loss deductions - (i)General rule.Losses described in section 165, whether described in section 62 or section 63(d), are allowed as properly allocable deductions to the extent such losses exceed the amount of gain described in section 61(a)(3) and are not taken into account in computing net gain by reason ofparagraph (d) of this section. (ii)Examples. The following examples illustrate the provisions of this paragraph (f)(4). For purposes of these examples, assume the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: (i) A, an unmarried individual, owns an interest in PRS, a partnership for Federal income tax purposes. PRS is engaged in a trading business described in section 1411(c)(2)(B) and § 1.1411-5(a)(2) and has made a valid and timely election under section 475(f)(2). A's distributive share from PRS in Year 1 consists of $125,000 of interest and dividends and $60,000 of ordinary losses from the trading business. In addition to A's investment in PRS, A sold undeveloped land in Year 1 for a long-term capital gain of $50,000. A has no capital losses carried over from a preceding year. (ii) For purposes of chapter 1, A includes the $125,000 of interest and dividends, $60,000 of ordinary loss, and $50,000 of long-term capital gain in the computation of A's adjusted gross income. (iii) For purposes of calculating net investment income, A includes the $125,000 of interest and dividends. Pursuant to paragraph (d) of this section, A takes into account the $60,000 at ordinary loss from PRS and the $50,000 of long term capital gain in the computation of A's net gain. A's losses ($60,000) exceed A's gains ($50,000). Therefore, A's net gain under paragraph (d) of this section is zero. Additionally, A is allowed a deduction under paragraph (f)(4)(i) of this section for $10,000 (the amount of ordinary losses that were allowable under chapter 1 in excess of the amounts taken into account in computing net gain). A's net investment income in Year 1 is $115,000. (i) In Year 1, T, a nongrantor trust, incurs a capital loss of $5,000 on the sale of publicly traded stocks. In addition, T receives $17,000 of interest and dividend income. T has no capital losses carried over from a preceding year. (ii) For purposes of chapter 1, T includes the $17,000 of interest and dividends and only $3,000 of the capital loss in the computation of adjusted gross income. The remaining $2,000 capital loss is carried over to Year 2. (iii) For purposes of calculating net investment income, T includes the $17,000 of interest and dividends in net investment income. Pursuant to paragraph (d) of this section, T takes into account the $3,000 capital loss allowed by chapter 1. T's losses ($3,000) exceed T's gains ($0). Therefore, T's net gain under paragraph (d) of this section is zero. However, T is allowed a deduction under paragraph (f)(4)(i) of this section for $3,000 (the amount of losses that were allowable under chapter 1 in excess of the amounts taken into account in computing net gain). T's net investment income in Year 1 is $14,000. (i) In Year 1, B, an unmarried individual, incurs a short-term capital loss of $15,000 on the sale of publicly traded stocks. B also receives annuity income of $50,000. In addition, B disposes of property used in his sole proprietorship (which is not a trade or business described in section 1411(c)(2) or § 1.1411-5(a) for a gain of $21,000. Pursuant to section 1231, the gain of $21,000 is treated as a long-term capital gain for purposes of chapter 1. B has no capital losses carried over from a preceding year. (ii) For purposes of chapter 1, B includes the $50,000 of annuity income in the computation of adjusted gross income. The $21,000 long-term capital gain is offset by the $15,000 short-term capital loss, so B includes $6,000 of net long-term capital gain in the computation of adjusted gross income. (iii) For purposes of calculating net investment income, B includes the $50,000 of annuity income in net investment income. Pursuant to paragraph (d)(4)(i) of this section, B's net gain does not include the $21,000 long-term capital gain because it is attributable to property held in B's sole proprietorship (a nonpassive activity). Pursuant to paragraph (d) of this section, T takes into account the $15,000 capital loss allowed by chapter 1. B's losses ($15,000) exceed B's gains ($0). Therefore, A's net gain under paragraph (d) of this section is zero. However, B is allowed a deduction under paragraph (f)(4)(i) of this section for $15,000 (the amount of losses that were allowable under chapter 1 in excess of the amounts taken into account in computing net gain). B's net investment income in Year 1 is $35,000. (5)Ordinary loss deductions for certain debt instruments. An amount treated as an ordinary loss by a holder of a contingent payment debt instrument under § 1.1275-4(b) or an inflation-indexed debt instrument under § 1.1275-7(f)(1). (6)Other deductions. Any other deduction allowed by subtitle A that is identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter) as properly allocable to gross income or net gain under this section. (7)Application of limitations under sections 67 and 68. Any deductions described in this paragraph (f) that are subject to section 67 (the 2-percent floor on miscellaneous itemized deductions) or section 68 (the overall limitation on itemized deductions) are allowed in determining net investment income only to the extent the items are deductible for chapter 1 purposes after the application of sections 67 and 68. For this purpose, section 67 applies before section 68. The amount of deductions subject to sections 67 and 68 that may be deducted in determining net investment income after the application of sections 67 and 68 is determined as described in paragraph (f)(7)(i) and (f)(7)(ii) of this section. (i)Deductions subject to section 67. The amount of miscellaneous itemized deductions (as defined in section 67(b)) tentatively deductible in determining net investment income after applying section 67 (but before applying section 68) is the lesser of: (A) The portion of the taxpayer's miscellaneous itemized deductions (before the application of section 67) that is properly allocable to items of income or net gain included in determining net investment income, or (B) The taxpayer's total miscellaneous itemized deductions allowed after the application of section 67, but before the application of section 68. (ii)Deductions subject to section 68. The amount of itemized deductions allowed in determining net investment income after applying sections 67 and 68 is the lesser of: (A) The sum of the amount determined under paragraph (f)(7)(i) of this section and the amount of itemized deductions not subject to section 67 that are properly allocable to items of income or net gain included in determining net investment income, or (B) The total amount of itemized deductions allowed after the application of sections 67 and 68. (iii)Itemized deductions. For purposes of paragraph (f)(7)(ii), itemized deductions do not include any deduction described in section 68(c). (iv)Example. The following example illustrates the provisions of this paragraph (f)(7). For purposes of these examples, assume the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: (A) A, an unmarried individual, has adjusted gross income in Year 1 as follows: Wages $1,600,000 Interest income 400,000 Adjusted gross income 2,000,000 In addition, A has the following items of expense qualifying as itemized deductions: Investment expenses $70,000 Job-related expenses 30,000 Investment interest expense 75,000 State income taxes 120,000 A's investment expenses and job-related expenses are miscellaneous itemized deductions. In addition, A's investment interest expense and investment expenses are properly allocable to net investment income (within the meaning of this section). A's job-related expenses are not properly allocable to net investment income. Of the state income tax expense, A applied a reasonable method pursuant to paragraph (g)(1) of this section to properly allocate $20,000 to net investment income. (B) A's 2-percent floor under section 67 is $40,000 (2% of $2,000,000). For Year 1, assume the section 68 limitation starts at adjusted gross income of $200,000. The section 68 overall limitation disallows $54,000 of A's itemized deductions that are subject to section 68 (3% of the excess of the $2,000,000 adjusted gross income over the $200,000 limitation threshold). (1) A's total miscellaneous itemized deductions allowable before the application of section 67 is $100,000 ($70,000 in investment expenses plus $30,000 in job-related expenses), and the total miscellaneous deductions allowed after the application of section 67 is $60,000 ($100,000 minus $40,000). (2) The amount of the miscellaneous itemized deductions properly allocable to net investment income after the application of section 67 is $60,000 (the lesser of $70,000 in investment expenses that are deductible as a miscellaneous itemized deduction and properly allocable to net investment income or $60,000 of miscellaneous itemized deductions allocable to net investment income allowed after the application of section 67). (1) The amount of itemized deductions allocable to net investment income after applying section 67 to deductions that are also miscellaneous itemized deductions but before applying section 68 is $155,000. This amount is the sum of $60,000 of miscellaneous itemized deductions determined in (C)(2), plus $20,000 in state income tax properly allocable to net investment income, plus $75,000 of investment interest expense. However, under section 68(c)(2), the $75,000 deduction for investment interest expenses is not subject to the section 68 limitation on itemized deductions and is excluded from the computation under § 1.1411-4(f)(7). Thus, the amount of itemized deductions allocable to net investment income and subject to section 68, after applying section 67 but before applying section 68, is $80,000. (2) A's total itemized deductions allowed subject to the limitation under section 68 and after application of section 67, but before the application of section 68, are the following: Miscellaneous itemized deductions $60,000 State income tax 120,000 Deductions subject to section 68 180,000 (3) Of A's itemized deductions that are subject to the limitation under section 68, the amount allowed after the application of section 68 is $126,000 ($180,000 minus the $54,000 disallowed in (B)). (E) Under paragraph (f)(7)(ii) of this section, the amount of itemized deductions allowed in determining net investment income after applying sections 67 and 68 is the lesser of $80,000 (the sum of $60,000 determined under paragraph (C)(2) and $20,000 state income tax allocable to net investment income) or $126,000 (determined under (D)(3)). Therefore, A's itemized deductions that are properly allocable to net investment income are $155,000 ($80,000 of properly allocable itemized deductions subject to section 67 or 68 plus $75,000 of investment interest expense (which is not subject to either section 67 or section 68 limitations)). (g)Special rules - (1)Deductions allocable to both net investment income and excluded income. In the case of a properly allocable deduction described in section 1411(c)(1)(B) and paragraph (f) of this section that is allocable to both net investment income and excluded income, the portion of the deduction that is properly allocable to net investment income may be determined by taxpayers using any reasonable method. Examples of reasonable methods of allocation include, but are not limited to, an allocation of the deduction based on the ratio of the amount of a taxpayer's gross income (including net gain) described in § 1.1411-4(a)(1) to the amount of the taxpayer's adjusted gross income (as defined under section 62 (or section 67(e) in the case of an estate or trust)). In the case of an estate or trust, an allocation of a deduction pursuant to rules described in § 1.652(b)-3(b) (and § 1.641(c)-1(h) in the case of an ESBT) is also a reasonable method. (2)Recoveries of properly allocable deductions - (i)General rule. If a taxpayer is refunded, reimbursed, or otherwise recovers any portion of an amount deducted as a section 1411(c)(1)(B) properly allocable deduction in a prior year, and such amount is not otherwise included in net investment income in the year of recovery under section 1411(c)(1)(A), the amount of the recovery will reduce the taxpayer's total section 1411(c)(1)(B) properly allocable deductions in the year of recovery (but not below zero). The preceding sentence applies regardless of whether the amount of the recovery is excluded from gross income by reason of section 111. (ii)Recoveries of items allocated between net investment income and excluded income. In the case of a refund of any item that was deducted under section 1411(c)(1)(B) in a prior year and the gross amount of the deduction was allocated between items of net investment income and excluded income pursuant to paragraph (g)(1) of this section, the amount of the reduction in section 1411(c)(1)(B) properly allocable deductions in the year of receipt under this paragraph (g)(2) is the total amount of the refund multiplied by a fraction. The numerator of the fraction is the amount of the total deduction allocable to net investment income in the prior year to which the refund relates. The denominator of the fraction is the total amount of the deduction in the prior year to which the refund relates. (iii)Recoveries with no prior year benefit. For purposes of this paragraph (g)(2), section 111 applies to reduce the amount of any reduction required by paragraph (g)(2)(i) of this section to the extent that such previously deducted amount did not reduce the tax imposed by section 1411. To the extent a deduction is taken into account in computing a taxpayer's net operating loss deduction under paragraph (h) of this section, section 111(c) applies. Except as provided in the preceding sentence, for purposes of this paragraph (g)(2), no reduction of section 1411(c)(1)(B) properly allocable deductions is required in a year when such recovered item is attributable to an amount deducted in a taxable year - (A) Preceding the effective date of section 1411, or (B) In which the taxpayer was not subject to section 1411 solely because that individual's (as defined in § 1.1411-2(a)) modified adjusted gross income (as defined in § 1.1411-2(c)) does not exceed the applicable threshold in § 1.1411-2(d) or such estate's or trust's (as defined in § 1.1411-3(a)(1)(i)) adjusted gross income does not exceed the amount described in section 1411(a)(2)(B)(ii) and § 1.1411-3(a)(1)(ii)(B)(2). (iv)Examples. The following examples illustrate the provisions of this paragraph (g)(2). For purposes of these examples, assume the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: Example 1. Recovery of amount included in income. A, an individual, is a 40% limited partner in LP. LP is a passive activity to A. In Year 1, A's distributable share of section 1411(c)(1)(A)(ii) income and properly allocable deductions described in § 1.1411-4(f)(2)(ii) were $50,000 and $37,000, respectively. In Year 2, LP received a refund of a properly allocable deduction described in § 1.1411-4(f)(2)(ii). A's distributable share of the recovered deduction is $2,000. Since the $2,000 recovery constitutes gross income described in section 1411(c)(1)(A)(ii) in Year 2, A does not reduce any properly allocable deductions attributable to Year 2. Example 2. State income tax refund. In Year 1, D, an individual, allocated $15,000 of taxes out of a total of $75,000 to net investment income under paragraph (f)(3)(iii) of this section. D received no tax benefit from the deduction in Year 1 for chapter 1 purposes due to the alternative minimum tax, but it did reduce D's section 1411 tax. In Year 3, D received a refund of $5,000. For chapter 1 purposes, D excludes the $5,000 refund from gross income in Year 3 by reason of section 111. In Year 3, D allocated $30,000 of state income taxes out of a total of $90,000 to net investment income under paragraph (f)(3)(iii) of this section. Although the refund is excluded from D's gross income, D must nonetheless reduce Year 3's section 1411(c)(1)(B) properly allocable deductions by $1,000 ($5,000 × ($15,000/$75,000)). D's allocation of 33 1/3% of section 164(a)(3) taxes in Year 3 to net investment income is irrelevant to the calculation of the amount of the reduction required by this paragraph (g)(2). Example 3. State income tax refund with no prior year benefit. Same facts as Example 2, except in Year 1, D's section 1411(c)(1)(B) properly allocable deductions exceeded D's section 1411(c)(1)(A) income by $300. As a result, D was not subject to section 1411 in Year 1. Pursuant to paragraph (g)(2)(iii) of this section, D does not reduce Year 3's section 1411(c)(1)(B) properly allocable deductions for recoveries of amounts to the extent that such deductions did not reduce the tax imposed by section 1411. Therefore, D must reduce Year 3's section 1411(c)(1)(B) properly allocable deductions by $700 ($1,000 less $300). (3)Deductions described in section 691(b). For purposes of paragraph (f) of this section, properly allocable deductions include items of deduction described in section 691(b), provided that the item otherwise would have been deductible to the decedent under § 1.1411-4(f). For example, an estate may deduct the decedent's unpaid investment interest expense in computing its net investment income because section 691(b) specifically allows the deduction under section 163, and § 1.1411-4(f)(3)(i) allows those deductions as well. However, an estate or trust may not deduct a payment of real estate taxes on the decedent's principal residence that were unpaid at death in computing its net investment income because, although real estate taxes are deductible under section 164 and specifically are allowed by section 691(b), the real estate taxes would not have been a properly allocable deduction of the decedent under § 1.1411-4(f). (4)Amounts described in section 642(h). For purposes of the calculation of net investment income under this section, one or more beneficiaries succeeding to the property of the estate or trust, within the meaning of section 642(h), shall - (i) Treat excess capital losses of the estate or trust described in section 642(h)(1) as capital losses of the beneficiary in the calculation of net gain in paragraph (d) and paragraph (f)(4) of this section, as applicable, in a manner consistent with section 642(h)(1); (ii) Treat excess net operating losses of the estate or trust described in section 642(h)(1) as net operating losses of the beneficiary in the calculation of net investment income in paragraphs (f)(2)(iv) and (h) of this section in a manner consistent with section 642(h)(1); and (iii) Treat the deductions described in paragraph (f) of this section (other than those taken into account under paragraph (g)(4)(i) or (ii) of this section) that exceed the gross investment income described in paragraph (a)(1) of this section (after taking into account any modifications, adjustments, and special rules for calculating net investment income in section 1411 and the regulations thereunder) of a terminating estate or trust as a section 1411(c)(1)(B) deduction of the beneficiary in a manner consistent with section 642(h)(2). (5)Treatment of self-charged interest income.Gross income from interest (within the meaning of section 1411(c)(1)(A)(i) and paragraph (a)(1)(i) of this section) that is received by the taxpayer from a nonpassive activity of such taxpayer, solely for purposes of section 1411, is treated as derived in the ordinary course of a trade or business not described in § 1.1411-5. The amount of interest income that is treated as derived in the ordinary course of a trade or business not described in § 1.1411-5, and thus excluded from the calculation of net investment income, under this paragraph (g)(5) is limited to the amount that would have been considered passive activity gross income under the rules of § 1.469-7 if the payor was a passive activity of the taxpayer. For purposes of this rule, the term nonpassive activity does not include a trade or business described in § 1.1411-5(a)(2). However, this rule does not apply to the extent the corresponding deduction is taken into account in determining self-employment income that is subject to tax under section 1401(b). (6)Treatment of certain nonpassive rental activities - (i)Gross income from rents. To the extent that gross rental income described in paragraph (a)(1)(i) of this section is treated as not derived from a passive activity by reason of § 1.469-2(f)(6) or as a consequence of a taxpayer grouping a rental activity with a trade or business activity under § 1.469-4(d)(1), such gross rental income is deemed to be derived in the ordinary course of a trade or business within the meaning of paragraph (b) of this section. (ii)Gain or loss from the disposition of property. To the extent that gain or loss resulting from the disposition of property is treated as nonpassive gain or loss by reason of§ 1.469-2(f)(6) or as a consequence of a taxpayer grouping a rental activity with a trade or business activity under § 1.469-4(d)(1), then such gain or loss is deemed to be derived from property used in the ordinary course of a trade or business within the meaning of paragraph (d)(4)(i) of this section. (7)Treatment of certain real estate professionals - (i)Safe Harbor. In the case of a real estate professional (as defined in section 469(c)(7)(B)) that participates in a rental real estate activity for more than 500 hours during such year, or has participated in such real estate activities for more than 500 hours in any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year, then - (A) Such gross rental income from that rental activity is deemed to be derived in the ordinary course of a trade or business within the meaning of paragraph (b) of this section; and (B)Gain or loss resulting from the disposition of property used in such rental real estate activity is deemed to be derived from property used in the ordinary course of a trade or business within the meaning of paragraph (d)(4)(i) of this section. (ii)Definitions - (A)Participation. For purposes of establishing participation under this paragraph (g)(7), any participation in the activity that would count towards establishing material participation under section 469 shall be considered. (B)Rental real estate activity. The term rental real estate activity used in this paragraph (g)(7) is a rental activity within the meaning of § 1.469-1T(e)(3). An election to treat all rental real estate as a single rental activity under § 1.469-9(g) also applies for purposes of this paragraph (g)(7). However, any rental real estate that the taxpayer grouped with a trade or business activity under § 1.469-4(d)(1)(i)(A) or (d)(1)(i)(C) is not a rental real estate activity. (iii)Effect of safe harbor. The inability of a real estate professional to satisfy the safe harbor in this paragraph (g)(7) does not preclude such taxpayer from establishing that such gross rental income and gain or loss from the disposition of property, as applicable, is not included in net investment income under any other provision of section 1411. (8)Treatment of former passive activities - (i)Section 469(f)(1)(A) losses. Losses allowed in computing taxable income by reason of the rules governing former passive activities in section 469(f)(1)(A) are taken into account in computing net gain under paragraph (d) of this section or as properly allocable deductions under paragraph (f) of this section, as applicable, in the same manner as such losses are taken into account in computing taxable income (as defined in section 63). The preceding sentence applies only to the extent the net income or net gain from the former passive activity (as defined in section 469(f)(3)) is included in net investment income. (ii)Section 469(f)(1)(C) losses. Losses allowed in computing taxable income by reason of section 469(f)(1)(C) are taken into account in computing net gain under paragraph (d) of this section or as properly allocable deductions under paragraph (f) of this section, as applicable, in the same manner as such losses are taken into account in computing taxable income (as defined in section 63). (iii)Examples. The following examples illustrate the provisions of this paragraph (g)(8). For purposes of these examples, assume the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: (i) B, an individual taxpayer, owns a 50% interest in SCorp, an S corporation engaged in the trade or business of retail clothing sales. B also owns a single family rental property, a passive activity. B materially participates in the retail sales activity of SCorp, but B has $10,000 of suspended losses from prior years when the retail sales activity of SCorp was a passive activity of B. Therefore, the retail sales activity of SCorp is a former passive activity within the meaning of section 469(f)(3). (ii) In Year 1, B reports $205,000 of wages, $7,000 of nonpassive net income, $500 of interest income (attributable to working capital) from SCorp's retail sales activity, and $1,000 of net rental income from the single family rental property. B's Year 1 modified adjusted gross income (as defined in § 1.1411-2(c)) is $205,500; which includes $205,000 of wages, $500 of interest income, $7,000 of nonpassive income from SCorp, $7,000 of section 469(f)(1)(A) losses, $1,000 of passive income from the single family rental property and $1,000 of section 469(f)(1)(C) losses. (iii) For purposes of the calculation of B's Year 1 net investment income, B includes the $500 of interest income and $1,000 of net passive income from the single family rental property. The $7,000 of nonpassive income from SCorp's retail sales activity is excluded from net investment income because the income is not attributable to a trade or business described in § 1.1411-5. Therefore, pursuant to the rules of paragraph (g)(8)(i) of this section, the $7,000 of section 469(f)(1)(A) losses are not taken into account in computing B's net investment income. However, pursuant to the rules of paragraph (g)(8)(ii) of this section, the $1,000 of passive losses allowed by reason of section 469(f)(1)(C), which are allowed as a deduction in Year 1 by reason of B's $1,000 of passive income from the single family rental property are allowed in computing B's net investment income. As a result, B's net investment income is $500 ($500 of interest income plus $1,000 of passive rental income less $1,000 of section 469(f)(1)(C) losses). Although the $500 of interest income is attributable to SCorp and includable in B's net investment income, such income is not taken into account when calculating the amount of section 469(f)(1)(A) losses allowed in the current year. Therefore, such income is not taken into account in computing the amount of section 469(f)(1)(A) losses allowed by reason ofparagraph (g)(8)(i) of this section. Pursuant to section 469(b), B carries forward $2,000 of suspended passive losses attributable to SCorp's retail sales activity to Year 2. Same facts as Example 1. In Year 2, B materially participates in the retail sales activity of SCorp, and disposes of his entire interest in SCorp for a $9,000 long-term capital gain. Pursuant to § 1.469-2T(e)(3), the $9,000 gain is characterized as nonpassive income. Pursuant to section 469(f)(1)(A), the remaining $2,000 of suspended passive loss is allowed because the $9,000 gain is treated as nonpassive income. Assume that under section 1411(c)(4) and § 1.1411-7, B takes into account only $700 of the $9,000 gain in computing net investment income for Year 2. Pursuant to paragraph (g)(8)(i) of this section, B may take into account $700 of the $2,000 loss allowed by section 469(f)(1)(A) in computing net investment income for Year 2. Pursuant to paragraph (g)(8)(i) of this section, B may not deduct the remaining $1,300 passive loss allowed for chapter 1 in calculating net investment income for Year 2. (9)Treatment of section 469(g)(1) losses. Losses allowed in computing taxable income by reason of section 469(g) are taken into account in computing net gain under paragraph (d) of this section or as properly allocable deductions under paragraph (f) of this section, as applicable, in the same manner as such losses are taken into account in computing taxable income (as defined in section 63). (10)Treatment of section 707(c) guaranteed payments. [Reserved] (11)Treatment of section 736 payments. [Reserved] (12)Income and deductions from certain notional principal contracts. [Reserved] (13)Treatment of income or loss from REMIC residual interests. [Reserved] (h)Net operating loss - (1)General rule. For purposes of paragraph (f)(2)(iv) of this section, the total section 1411 NOL amount of a net operating loss deduction for a taxable year is calculated by first determining the applicable portion of the taxpayer's net operating loss for each loss year under paragraph (h)(2) of this section. Next, the applicable portion for each loss year is used to determine the section 1411 NOL amount for each net operating loss carried from a loss year and deducted in the taxable year as provided in paragraph (h)(3) of this section. The section 1411 NOL amounts of each net operating loss carried from a loss year and deducted in the taxable year are then added together as provided in paragraph (h)(4) of this section. This sum is the total section 1411 NOL amount of the net operating loss deduction for the taxable year that is allowed as a properly allocable deduction in determining net investment income for the taxable year. For purposes of this paragraph (h), both the amount of a net operating loss for a loss year and the amount of a net operating loss deduction refer to such amounts as determined for purposes of chapter 1. (2)Applicable portion of a net operating loss. In any taxable year beginning after December 31, 2012, in which a taxpayer incurs a net operating loss, the applicable portion of such loss is the lesser of: (i) The amount of the net operating loss for the loss year that the taxpayer would incur if only items of gross income that are used to determine net investment income and only properly allocable deductions are taken into account in determining the net operating loss in accordance with section 172(c) and (d); or (ii) The amount of the taxpayer's net operating loss for the loss year. (3)Section 1411 NOL amount of a net operating loss carried to and deducted in a taxable year. The section 1411 NOL amount of each net operating loss that is carried from a loss year that is allowed as a deduction is the total amount of such net operating loss carried from the loss year allowed as a deduction under section 172(a) in the taxable year multiplied by a fraction. The numerator of the fraction is the applicable portion of the net operating loss for that loss year, as determined under paragraph (h)(2) of this section. The denominator of the fraction is the total amount of the net operating loss for the same loss year. (4)Total section 1411 NOL amount of a net operating loss deduction. The section 1411 NOL amounts of each net operating loss carried to and deducted in the taxable year as determined under paragraph (h)(3) of this section are added together to determine the total section 1411 NOL amount of the net operating loss deduction for the taxable year that is properly allocable to net investment income. (5)Examples. The following examples illustrate the provisions of this paragraph (h). For purposes of these examples, assume the taxpayer is a United States citizen, uses a calendar taxable year, and Year 1 and all subsequent years are taxable years in which section 1411 is in effect: (A) In Year 1, A, an unmarried individual, has the following items of income and deduction: $200,000 in wages, $50,000 in gross income from a trade or business of trading in financial instruments or commodities (as defined in § 1.1411-5(a)(2)) (trading activity), $10,000 of dividends, $1,000,000 in loss from his sole proprietorship (which is not a trade or business described in § 1.1411-5), $12,000 of non-business investment expenses, and $250,000 in trading loss deductions. As a result, for income tax purposes A sustains a section 172(c) net operating loss of $1,000,000. A makes an election under section 172(b)(3) to waive the carryback period for this net operating loss. (B) For purposes of section 1411, A's net investment income for Year 1 is the excess (if any) of $60,000 ($50,000 trading activity gross income plus $10,000 dividend income) over $262,000 ($250,000 trading loss deductions plus $12,000 nonbusiness expenses). (C) The amount of the net operating loss for Year 1 determined under section 172 that A would incur if only items of gross income that are used to determine net investment income and only properly allocable deductions are taken into account is $200,000. This amount is the excess of $250,000 trading loss deductions, over $50,000 trading activity gross income. Under section 172(d)(4), in determining the net operating loss, the $12,000 nonbusiness expenses are allowed only to the extent of the $10,000 dividend income. The $200,000 net operating loss determined using only properly allocable deductions and gross income items used in determining net investment income is less than A's actual net operating loss for Year 1 of $1,000,000, and accordingly the applicable portion for Year 1 is $200,000. The ratio used to calculate section 1411 NOL amounts of A's Year 1 net operating loss is $200,000 (net operating loss determined using only properly allocable deductions and gross income items used in determining net investment income)/$1,000,000 (net operating loss), or 0.2. (ii) For Year 2, A has $250,000 of wages, no gross income from the trading activity, $300,000 of income from his sole proprietorship, and $10,000 in trading loss deductions. For income tax purposes, A deducts $540,000 of the net operating loss carried over from Year 1. In addition, under § 1.1411-2(c), the $540,000 net operating loss will be allowed as a deduction in computing A's Year 2 modified adjusted gross income. Because A's modified adjusted gross income is $0, A is not subject to net investment income tax. For purposes of A's net investment income calculation, the section 1411 NOL amount of the $540,000 net operating loss from Year 1 that A deducts in Year 2 is $108,000 ($540,000 multiplied by 0.2 (the fraction determined based on the applicable portion of the net operating loss in the loss year)). The amount of the Year 1 net operating loss carried over to Year 3 is $460,000. For purposes of A's net investment income calculation, this net operating loss carryover amount includes a section 1411 NOL amount of $92,000 ($460,000 multiplied by 0.2). The section 1411 NOL amount may be applied in determining A's net investment income in Year 3. (A) For Year 3, A has $400,000 of wages, $200,000 in trading gains which are gross income from the trading activity, $250,000 of income from his sole proprietorship, and $10,000 in trading loss deductions. For income tax purposes, A deducts the remaining $460,000 of the net operating loss from Year 1. In addition, under § 1.1411-2(c), the $460,000 net operating loss deduction reduces A's Year 3 modified adjusted gross income to $380,000. (B) A's section 1411 NOL amount of the net operating loss deduction for Year 3 is $92,000, which is the $460,000 net operating loss deduction for Year 3 multiplied by 0.2. (C) A's net investment income for Year 3 before the application of paragraph (f)(2)(iv) of this section is $190,000 ($200,000 in gross income from the trading activity, minus $10,000 in trading loss deductions). After the application of paragraph (f)(2)(iv) of this section, A's net investment income for Year 3 is $98,000 ($190,000 minus $92,000, the total section 1411 NOL amount of the net operating loss deduction). (i) The facts for Year 1 are the same as in Example 1. (A) For Year 2, A has $100,000 in wages, $200,000 in gross income from the trading activity, $15,000 of dividends, $250,000 in losses from the sole proprietorship, $10,000 of non-business investment expenses, and $355,000 in trading loss deductions. As a result, for income tax purposes A sustains a section 172(c) net operating loss of $300,000. A makes an election under section 172(b)(3) to waive the carryback period for the Year 2 net operating loss. (B) For purposes of section 1411, A's net investment income for Year 2 is the excess (if any) of $215,000 ($200,000 trading activity gross income plus $15,000 dividend income) over $365,000 ($355,000 trading loss deductions plus $10,000 nonbusiness expenses). (C) The amount of the net operating loss for Year 2 determined under section 172 that A would incur if only items of gross income that are used to determine net investment income and only properly allocable deductions are taken into account is $150,000. This amount is the excess of $365,000 ($355,000 trading loss deductions plus $10,000 nonbusiness expenses) over $215,000 ($200,000 trading activity gross income plus $15,000 dividend income). Under section 172(d)(4), in determining the net operating loss, the $10,000 nonbusiness expenses are allowed in full against the $15,000 dividend income. The $150,000 net operating loss determined using only properly allocable deductions and gross income items used in determining net investment income is less than A's actual net operating loss for Year 2 of $300,000, and accordingly the applicable portion is $150,000. The ratio used to calculate the section 1411 NOL amount of A's Year 2 net operating loss is $150,000 (the applicable portion)/$300,000 (net operating loss), or 0.5. (iii) For Year 3, A has $250,000 of wages, no gross income from the trading activity, $300,000 of income from his sole proprietorship, and $10,000 in trading loss deductions. For income tax purposes, A deducts $540,000 of the net operating loss from Year 1. In addition, under § 1.1411-2(c), the $540,000 net operating loss will be allowed as a deduction in computing A's Year 3 modified adjusted gross income. Because A's modified adjusted gross income is $0, A is not subject to net investment income tax. The section 1411 NOL amount of the $540,000 net operating loss from Year 1 that A deducts in Year 3 is $108,000 ($540,000 multiplied by 0.2 (the fraction used to calculate the section 1411 NOL amount of the net operating loss)), and this is also the total section 1411 NOL amount for Year 3. The amount of the Year 1 net operating loss carried over to Year 4 is $460,000. This net operating loss carryover amount includes a section 1411 NOL amount of $92,000 ($460,000 multiplied by 0.2) that may be applied in determining net investment income in Year 4. None of the Year 2 net operating loss is deducted in Year 3 so that the $300,000 Year 2 net operating loss (including the section 1411 NOL amount of $150,000) is carried to Year 4. (A) For Year 4, A has $150,000 of wages, $450,000 in trading gains which are gross income from the trading activity, $250,000 of income from his sole proprietorship, and $10,000 in trading loss deductions. For income tax purposes, A deducts the remaining $460,000 of the net operating loss carryover from Year 1 and the $300,000 net operating loss carryover from Year 2, for a total net operating loss deduction in Year 4 of $760,000. In addition, under § 1.1411-2(c), the $760,000 net operating loss deduction reduces A's Year 4 modified adjusted gross income to $80,000. (B) A's total section 1411 NOL amount of the net operating loss deduction for Year 4 is $242,000, which is the sum of the $92,000 ($460,000 net operating loss carryover from Year 1 and deducted in Year 4 multiplied by 0.2 (the ratio used to calculate the section 1411 NOL amount of the Year 1 net operating loss)) plus $150,000 ($300,000 net operating loss carryover from Year 2 and deducted in Year 4 multiplied by 0.5 (the ratio used to calculate the section 1411 NOL amount of the Year 2 net operating loss)). (C) A's net investment income for Year 4 before the application of paragraph (f)(2)(iv) of this section is $440,000 ($450,000 in gross income from the trading activity, minus $10,000 in trading loss deductions). After the application of paragraph (f)(2)(iv) of this section, A's net investment income for Year 4 is $198,000 ($440,000 minus $242,000, the total section 1411 NOL amount of the Year 4 net operating loss deduction). (i)Effective/applicability date. This section applies to taxable years beginning after December 31, 2013. However, taxpayers may apply this section to taxable years beginning after December 31, 2012, in accordance with § 1.1411-1(f). [T.D. 9644, 78 FR 72424, Dec. 2, 2013, as amended at 79 FR 18160, Apr. 1, 2014]

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professional_accounting

Financial Accounting interview questions With the start of a new academic year, we know that finance interviews are again at the forefront of many of your minds. Over the next few months, we’ll be publishing most frequently asked technical finance interview questions and answers across a variety of topics – accounting (in this issue), valuation, corporate finance – to get you prepared. Before we get to accounting questions, here are some interview best practices to keep in mind when getting ready for the big day. Be prepared for technical questions. Many students erroneously believe that if they are not finance/business majors, then technical questions do not apply to them. On the contrary, interviewers want to be assured that students going into the field are committed to the work they’ll be doing for the next few years, especially as many finance firms will devote considerable resources to mentor and develop their new employees. One recruiter we’ve spoken to said “while we do not expect liberal arts majors to have a deep mastery of highly technical concepts, we do expect them to understand the basic accounting and finance concepts as they relate to investment banking. Someone who can’t answer basic questions like ‘walk me through a DCF’ has not sufficiently prepared for the interview, in my opinion”. Another added, “Once a knowledge gap is identified, it’s typically very difficult to reverse the direction of the interview.” Keep each of your answers limited to 2 minutes. Longer answers may lose an interviewer, while giving them additional ammunition to go after you with more complicated question on the same topic. It’s ok to say “I don’t know” a few times during the interview. If interviewers think that you’re making up answers, they’ll continue probing you further, which will lead to more creative answers, which will lead to more complicated questions and a slow realization by you that interviewer knows that you don’t really know. This will be followed by uncomfortable silence. And no job offer. Now, on to Accounting Questions Accounting is the language of business, so don’t underestimate the importance of accounting questions. Some are easy, some are more challenging, but of all of them allow interviewers to gauge your knowledge level without the need to ask more complex valuation/finance questions.Below we have selected most common accounting questions you should expect to see during the recruiting process. Q: Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings? A: Capital expenditures are capitalized because of the timing of their estimated benefits – the lemonade stand will benefit the firm for many years. The employees’ work, on the other hand, benefits the period in which the wages are generated only and should be expensed then. This is what differentiates an asset from an expense. Q: Walk me through a cash flow statement. A. Start with net income, go line by line through major adjustments (depreciation, changes in working capital and deferred taxes) to arrive at cash flows from operating activities. Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of investment securities to arrive at cash flow from investing activities. Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow from financing activities. Adding cash flows from operations, cash flows from investments, and cash flows from financing gets you to total change of cash. Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash balance. Q: What is working capital? A: Working capital is defined as current assets minus current liabilities; it tells the financial statement user how much cash is tied up in the business through items such as receivables and inventories and also how much cash is going to be needed to pay off short term obligations in the next 12 months. Q: Is it possible for a company to show positive cash flows but be in grave trouble? A: Absolutely. Two examples involve unsustainable improvements in working capital (a company is selling off inventory and delaying payables), and another example involves lack of revenues going forward.in the pipeline Q: How is it possible for a company to show positive net income but go bankrupt? A: Two examples include deterioration of working capital (i.e. increasing accounts receivable, lowering accounts payable), and financial shenanigans. Q: I buy a piece of equipment, walk me through the impact on the 3 financial statements. A: Initially, there is no impact (income statement); cash goes down, while PP&E goes up (balance sheet), and the purchase of PP&E is a cash outflow (cash flow statement) Over the life of the asset: depreciation reduces net income (income statement); PP&E goes down by depreciation, while retained earnings go down (balance sheet); and depreciation is added back (because it is a non-cash expense that reduced net income) in the cash from operations section (cash flow statement). Q: Why are increases in accounts receivable a cash reduction on the cash flow statement? A: Since our cash flow statement starts with net income, an increase in accounts receivable is an adjustment to net income to reflect the fact that the company never actually received those funds. Q: How is the income statement linked to the balance sheet? A: Net income flows into retained earnings. Q: What is goodwill? A: Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business. Let’s walk through the following example: Acquirer buys Target for $500m in cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m. Acquirer records cash decline of $500 to finance acquisition Acquirer’s PP&E increases by $100m Acquirer’s debt increases by $50m Acquirer records goodwill of $450m Q: What is a deferred tax liability and why might one be created? A: Deferred tax liability is a tax expense amount reported on a company’s income statement that is not actually paid to the IRS in that time period, but is expected to be paid in the future. It arises because when a company actually pays less in taxes to the IRS than they show as an expense on their income statement in a reporting period. Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences in income between the two, which ultimately leads to differences in tax expense reported in the financial statements and taxes payable to the IRS. Q: What is a deferred tax asset and why might one be created? A: Deferred tax asset arises when a company actually pays more in taxes to the IRS than they show as an expense on their income statement in a reporting period. Financial Accounting review questions The financial accounting and reporting (FAR) test on the CPA exam has the same format as the auditing test. You have 4 hours… Financial Accounting Test questions Here is a free basic accounting test to check your understanding of the section on the basic accounting concepts. This quiz… How to Audit an account? BMW Financial Services account Login Basic Financial Accounting notes Test Bank for Financial Accounting Financial and Managerial Accounting Solutions Financial Accounting Management Joint Committee of Public Accounts and Audit

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professional_accounting

A Roth IRA (individual retirement account) plan under United States law is generally not taxed, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement plans is that rather than granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free. A Roth IRA can be an individual retirement account containing investments in securities, usually common stocks and bonds, often through mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible). A Roth IRA can also be an individual retirement annuity, which is an annuity contract or an endowment contract purchased from a life insurance company. As with all IRAs, the Internal Revenue Service mandates specific eligibility and filing status requirements. A Roth IRA's main advantages are its tax structure and the additional flexibility that this tax structure provides. Also, there are fewer restrictions on the investments that can be made in the plan than many other tax-advantaged plans, and this adds somewhat to their popularity, though the investment options available depend on the trustee (or the place where the plan is established). Originally called an "IRA Plus", the idea was proposed by Senator Bob Packwood of Oregon and Senator William Roth of Delaware in 1989. The Packwood–Roth plan would have allowed individuals to invest up to $2,000 in an account with no immediate tax deductions, but the earnings could later be withdrawn tax-free at retirement. The Roth IRA was established by the Taxpayer Relief Act of 1997 (Public Law 105-34) and named for its chief legislative sponsor, Senator William Roth of Delaware. In 2000, 46.3 million taxpayers held IRA accounts worth a total of $2.6 trillion in value according to the Internal Revenue Service (IRS). Only a little over $77 billion of that amount was held in Roth IRAs. By 2007, the number of IRA owners has jumped to over 50 million taxpayers with $3.3 trillion invested. In 1997, then Senator William Roth (R-Del) wanted to restore the traditional IRA which had been repealed in 1986, and the upfront tax deduction that goes with it. Under congressional budget rules, which work within a 10-year window, the revenue cost of giving that tax break to everyone was too high. So his staff limited deductible IRAs to people with very low income, and made Roth IRAs (initially with income limitations) available to others. That slid the revenue cost outside the 10-year window and got the legislation out from under the budget rules. Economists have warned about exploding future revenue losses associated with Roth IRAs. With these accounts, the government is "bringing in more now, but giving up much more in the future," said economist and Forbes contributor Leonard Burman. In a study for The Tax Policy Center, Burman calculated that from 2014 to 2046, the Treasury would lose a total of $14 billion as a result of IRA-related provisions in the 2006 tax law. The losses stem from both Roth conversions and the ability to make nondeductible IRA contributions and then immediately convert them to Roths. In contrast to a traditional IRA, contributions to a Roth IRA are not tax-deductible. Withdrawals are tax-free under certain conditions (for example, if the withdrawal is only on the principal portion of the account, or if the owner is at least 59½ years old). A Roth IRA has fewer withdrawal restrictions than traditional IRAs. Transactions inside a Roth IRA (including capital gains, dividends, and interest) do not incur a current tax liability. Direct contributions to a Roth IRA (principal) may be withdrawn tax and penalty-free at any time. Earnings may be withdrawn tax and penalty-free after 5 years if the condition of age 59½ (or other qualifying condition) is also met. Rollover, converted (before age 59½) contributions held in a Roth IRA may be withdrawn tax and penalty-free after 5 years. Distributions from a Roth IRA do not increase Adjusted Gross Income. This differs from a traditional IRA, where all withdrawals are taxed as ordinary income, and a penalty applies for withdrawals before age 59½. (Even capital gains on stocks or other securities held in a regular taxable account–so long as they are held for at least a year–are generally treated more advantageously than traditional IRA withdrawals, being taxed not as Ordinary Income, but at the lower Long-Term Capital Gain rate.) This potentially higher tax rate for withdrawals of capital gains from a traditional IRA is a quid pro quo for the deduction taken against ordinary income when putting money into the IRA. Up to a lifetime maximum $10,000 in earnings, withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence for the Roth IRA owner. This principal residence must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives such a distribution must not have owned a home in the previous 24 months. If a Roth IRA owner dies, and his/her spouse becomes the sole beneficiary of that Roth IRA while also owning a separate Roth IRA, the spouse is permitted to combine the two Roth IRAs into a single plan without penalty. If the Roth IRA owner expects that the tax rate applicable to withdrawals from a traditional IRA in retirement will be higher than the tax rate applicable to the funds earned to make the Roth IRA contributions before retirement, then there may be a tax advantage to making contributions to a Roth IRA over a traditional IRA or similar vehicle while working. There is no current tax deduction, but money going into the Roth IRA is taxed at the taxpayer's current marginal tax rate, and will not be taxed at the expected higher future effective tax rate when it comes out of the Roth IRA. There is always risk, however, that retirement savings will be less than anticipated, which would produce a lower tax rate for distributions in retirement. Assuming substantially equivalent tax rates, this is largely a question of age. For example, at the age of 20, one is likely to be in a low tax bracket, and if one is already saving for retirement at that age, the income in retirement is quite likely to qualify for a higher rate, but at the age of 55, one may be in peak earning years and likely to be taxed at a higher tax rate, so retirement income would tend to be lower than income at this age and therefore taxed at a lower rate. Assets in the Roth IRA can be passed on to heirs. The Roth IRA does not require distributions based on age. All other tax-deferred retirement plans, including the related Roth 401(k), require withdrawals to begin by April 1 of the calendar year after the owner reaches age 70½. If the account holder does not need the money and wants to leave it to their heirs, a Roth can be an effective way to accumulate tax-free income. Beneficiaries who inherit Roth IRAs are subject to the minimum distribution rules. Roth IRAs have a higher "effective" contribution limit than traditional IRAs, since the nominal contribution limit is the same for both traditional and Roth IRAs, but the post-tax contribution in a Roth IRA is equivalent to a larger pre-tax contribution in a traditional IRA that will be taxed upon withdrawal. For example, a contribution of the 2008 limit of $5,000 to a Roth IRA may be equivalent to a traditional IRA contribution of $6667 (assuming a 25% tax rate at both contribution and withdrawal). In 2008, one cannot contribute $6667 to a traditional IRA due to the contribution limit, so the post-tax Roth contribution may be larger. On estates large enough to be subject to estate taxes, a Roth IRA can reduce estate taxes since tax dollars have already been subtracted. A traditional IRA is valued at the pre-tax level for estate tax purposes. Most employer sponsored retirement plans tend to be pre-tax dollars and are similar, in that respect, to a traditional IRA, so if additional retirement savings are made beyond an employer-sponsored plan, a Roth IRA can diversify tax risk. Unlike distributions from a regular IRA, qualified Roth distributions do not affect the calculation of taxable social security benefits. Roth Conversions not only convert highly taxed IRA income to tax-free income, but if the IRA holds alternative assets such as REITs (Real Estate Investment Trusts), Leasing Programs, Oil and Gas Drilling Partnerships and Royalty Partnerships, a Fair Market Valuation (FMV) or "Substantially Discounted Roth-Conversion" may provide reductions in the conversion income tax by up to 75%, possibly more, depending on assets and the Fair Market Valuation. Roth Conversions using the FMV or "Substantially Discounted Roth-Conversion" may reduce the estate tax attributed to IRA's on large estates by up to 75%, or more, depending on the assets held at the time of conversion. Roth Conversions main benefit is in the conversion of highly taxed IRA income to tax-free Roth income, however Roth-Conversion income does not add to MAGI, hence reducing the taxpayers Medicare Part B Premiums (another tax). FMV or "Substantially Discounted Roth-Conversion" may allow the taxpayer to reduce RMDs by up to 75%. Funds that reside in a Roth IRA cannot be used as collateral for a loan per current IRS rules and therefore cannot be used for financial leveraging or as a cash management tool for investment purposes. Contributions to a Roth IRA are not tax deductible. By contrast, contributions to a traditional IRA are tax deductible (within income limits). Therefore, someone who contributes to a traditional IRA instead of a Roth IRA gets an immediate tax savings equal to the amount of the contribution multiplied by their marginal tax rate while someone who contributes to a Roth IRA does not realize this immediate tax reduction. Also, by contrast, contributions to most employer sponsored retirement plans (such as a 401(k), 403(b), Simple IRA or SEP IRA) are tax deductible with no income limits because they reduce a taxpayer's adjusted gross income. Eligibility to contribute to a Roth IRA phases out at certain income limits. By contrast, contributions to most tax deductible employer sponsored retirement plans have no income limit. Contributions to a Roth IRA do not reduce a taxpayer's adjusted gross income (AGI). By contrast, contributions to a traditional IRA or most employer sponsored retirement plans reduce AGI. Reducing one's AGI has a benefit (besides reducing taxable income) if it puts the AGI below some threshold to make the taxpayer eligible for tax credits or deductions that would not be available at the higher AGI with a Roth IRA. The amount of credits and deductions may increase as the taxpayer slides down the phaseout scale. Examples include the child tax credit, the earned income credit, the student loan interest deduction. A Roth IRA contribution is taxed at the taxpayer's current income tax rate, which is higher than the income tax rate during retirement for most people. This is because most people have a lower income, that falls in a lower tax bracket, during retirement than during their working years. (A lower tax rate can also occur if Congress lowers income tax rates before retirement.) By contrast, contributions to traditional IRAs or employer-sponsored tax-deductible retirement plans result in an immediate tax savings equal to the taxpayer's current marginal tax bracket multiplied by the amount of the contribution. The higher the taxpayer's current marginal tax rate, the higher the potential disadvantage. However, this issue is more complicated because withdrawals from traditional IRA or employer sponsored tax deductible retirement plans are fully taxable, up to 85% of Social Security income is taxable, personal residence mortgage interest deduction decreases as the mortgage is paid down, and there may be pension plan income, investment income and other factors. A taxpayer who pays state income taxes and who contributes to a Roth IRA (instead of a traditional IRA or a tax deductible employer sponsored retirement plan) will have to pay state income taxes on the amount contributed to the Roth IRA in the year the money is earned. However, if the taxpayer retires to a state with a lower income tax rate, or no income taxes, then the taxpayer will have given up the opportunity to avoid paying state income taxes altogether on the amount of the Roth IRA contribution by instead contributing to a traditional IRA or a tax deductible employer sponsored retirement plan, because when the contributions are withdrawn from the traditional IRA or tax deductible plan in retirement, the taxpayer will then be a resident of the low or no income tax state, and will have avoided paying the state income tax altogether as a result of moving to a different state before the income tax became due. The perceived tax benefit may never be realized. That is, one might not live to retirement or much beyond, in which case the tax structure of a Roth only serves to reduce an estate that may not have been subject to tax. To fully realize the tax benefit, one must live until one's Roth IRA contributions have been withdrawn and exhausted. By contrast, with a traditional IRA, tax might never be collected at all, such as if one dies before retirement with an estate below the tax threshold, or retires with income below the tax threshold. (To benefit from this exemption, the beneficiary must be named in the appropriate IRA beneficiary form. A beneficiary inheriting the IRA solely through a will is not eligible for the estate tax exemption. Additionally, the beneficiary will be subject to income tax unless the inheritance is a Roth IRA.) Heirs will have to pay taxes on withdrawals from traditional IRA assets they inherit, and must continue to take mandatory distributions (although they will be based on their life expectancy). It is also possible that tax laws may change by the time one reaches retirement age. Congress may change the rules that allow for tax-free withdrawal of Roth IRA contributions. Therefore, someone who contributes to a traditional IRA is guaranteed to realize an immediate tax benefit, whereas someone who contributes to a Roth IRA must wait for a number of years before realizing the tax benefit, and that person assumes the risk that the rules might be changed during the interim. On the other hand, taxing earnings on an account which were promised to be untaxed may be seen as a violation of contract and completely defeat the purpose of Roth IRAs as encouraging saving for retirement – individuals contributing to a Roth IRA now may in fact be saving themselves from new, possibly higher income tax obligations in the future. However, the federal government is not restricted by the Contract Clause of the U.S. Constitution that prohibits "Law[s] impairing the Obligation of Contracts". By its terms, this prohibition applies only to state governments. Double taxation may still occur within these tax sheltered investment plans. For example, foreign dividends may be taxed at their point of origin, and the IRS does not recognize this tax as a creditable deduction. There is some controversy over whether this violates existing Joint Tax Treaties, such as the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital. For Canadians with U.S. Roth IRAs: A new rule (2008) provides that Roth IRAs (as defined in section 408A of the U.S. Internal Revenue Code) and similar plans are considered to be pensions. Accordingly, distributions from a Roth IRA (as well as other similar plans) to a resident of Canada will generally be exempt from Canadian tax to the extent that they would have been exempt from U.S. tax if paid to a resident of the U.S. Additionally, a resident of Canada may elect to defer any taxation in Canada with respect to income accrued in a Roth IRA but not distributed by the Roth IRA, until and to the extent that a distribution is made from the Roth IRA or any plan substituted therefor. The effect of these rules is that, in most cases, no portion of the Roth IRA will be subject to taxation in Canada. However, where an individual makes a contribution to a Roth IRA while they are a resident of Canada (other than rollover contributions from another Roth IRA), the Roth IRA will lose its status as a "pension" for purposes of the Treaty with respect to the accretions from the time such contribution is made. Income accretions from such time will be subject to tax in Canada in the year of accrual. In effect, the Roth IRA will be bifurcated into a "frozen" pension that will continue to enjoy the benefit of the exemption for pensions and a non-pension (essentially a savings account) that will not. Married filing separately (if the couple lived together for any part of the year): $0 (to qualify for a full contribution); $0–$10,000 (to be eligible for a partial contribution). The lower number represents the point at which the taxpayer is no longer allowed to contribute the maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to contribute at all. People who are married and living together, but who file separately, are only allowed to contribute a relatively small amount. To be eligible, one must meet the earned income minimum requirement. In order to make a contribution, one must have taxable compensation (not taxable income from investments). If one makes only $2,000 in taxable compensation, one's maximum IRA contribution is $2,000. If a taxpayer's income exceeds the income limits, they may still be able to effectively contribute by using a "backdoor" contribution process (see #Traditional IRA conversion as a workaround to Roth IRA income limits below). Contributions to both a Roth IRA and a traditional IRA are limited to the total amount allowed for either of them. Generally, the contribution cannot exceed your earned income for the year in question. The one exception is for a "spousal IRA" where a contribution can be made for a spouse with little or no earned income provided the other spouse has sufficient earned income and the spouses file a joint tax return. The government allows people to convert Traditional IRA funds (and some other untaxed IRA funds) to Roth IRA funds by paying income tax on any account balance being converted that has not already been taxed (e.g., the Traditional IRA balance minus any non-deductible contributions). Prior to 2010, two circumstances prohibited conversions: Modified Adjusted Gross Income exceeding $100,000 or the participant's tax filing status is Married Filing Separately. These limitations were removed as part of the Tax Increase Prevention and Reconciliation Act of 2005. Regardless of income but subject to contribution limits, contributions can be made to a Traditional IRA and then converted to a Roth IRA. This allows for "backdoor" contributions where individuals are able to avoid the income limitations of the Roth IRA. One major caveat to the entire "backdoor" Roth IRA contribution process, however, is that it only works for people who do not have any pre-tax contributed money in IRA accounts at the time of the "backdoor" conversion to Roth; conversions made when other IRA money exists are subject to pro-rata calculations and may lead to tax liabilities on the part of the converter. For example, if someone has contributed $10,000 post-tax and $30,000 pre-tax to a traditional IRA and wants to convert the post tax $10,000 into a Roth, the pro-rated amount (ratio of taxable contributions to total contributions) is taxable. In this example, $7500 of the post tax contribution is considered taxable when converting it to a Roth IRA. The pro-rata calculation is made based on all traditional IRA contributions across all the individual's traditional IRA accounts (even if they are in different institutions). Returns of your regular contributions from your Roth IRA(s) are always withdrawn tax and penalty-free. Eligible (tax and penalty-free) distributions of earnings must fulfill two requirements. First, the seasoning period of five years since the opening of the Roth IRA account must have elapsed, and secondly a justification must exist such as retirement or disability. The simplest justification is reaching 59.5 years of age, at which point qualified withdrawals may be made in any amount on any schedule. Becoming disabled or being a "first time" home buyer can provide justification for limited qualified withdrawals. Finally, although one can take distributions from a Roth IRA under the substantially equal periodic payments (SEPP) rule without paying a 10% penalty, any interest[vague] earned in the IRA will be subject to tax—a substantial penalty which forfeits the primary tax benefits of the Roth IRA. income tax does not apply to distributions, if the Roth IRA was established for at least five years before the distribution occurs. In addition, the beneficiary may elect to choose from one of two methods of distribution. The first option is to receive the entire distribution by December 31 of the fifth year following the year of the IRA owner's death. The second option is to receive portions of the IRA as distributions over the life of the beneficiary, terminating upon the death of the beneficiary and passing on to a secondary beneficiary. If the beneficiary of the Roth IRA is a trust, the trust must distribute the entire assets of the Roth IRA by December 31 of the fifth year following the year of the IRA owner's death, unless there is a "Look Through" clause, in which case the distributions of the Roth IRA are based on the Single Life Expectancy table over the life of the beneficiary, terminating upon the death of the beneficiary. Subtract one (1) from the "Single Life Expectancy" for each successive year. The age of the beneficiary is determined on 12/31 of the first year after the year that the owner died. Coverdell Education Savings Account – sometimes termed the "Roth IRA for Education", describes tax-sheltered savings accounts for college. ^ "IRA FAQs - Contributions". www.irs.gov. Retrieved 2016-09-02. ^ "401(k) contribution limit increases to $19,000 for 2019; IRA limit increases to $6,000". www.irs.gov. Retrieved 2018-11-10. ^ "What Senator William Roth Envisioned For The Roth IRA". rothira.com. 2011-08-30. Retrieved 2016-09-02. ^ a b Jacobs, Deborah L. "Why--And How--Congress Should Curb Roth IRAs". Forbes. ^ a b "Publication 590-B (2014), Individual Retirement Arrangements (IRAs)". Irs.gov. Retrieved October 7, 2015. ^ See Final IRS Regulations, passed December 30, 2005 not exempting Roth 401(k) from mandatory distributions at age 70½. ^ "Status of Tax Treaty Negotiations". fin.gc.ca. Department of Finance Canada. Retrieved 2016-09-02. ^ "Amount of Roth IRA Contributions That You Can Make For 2019". irs.gov. Internal Revenue Service. Retrieved 2018-01-01. ^ "Publication 17 (2013), Your Federal Income Tax". Irs.gov. June 30, 1943. Retrieved April 15, 2014. ^ "Publication 590-A (2015), Contributions to Individual Retirement Arrangements (IRAs)". Irs.gov. Retrieved 2016-08-23. ^ a b Steinberg, Joseph (2012). "Warning About Roth IRA Conversions: Often Misunderstood IRS Rule Can Cost You Money and Aggravation". Forbes. Forbes. Retrieved December 12, 2012. ^ Bader, Mary; Schroeder, Steve (2009). "TIPRA and the Roth IRA, New Planning Opportunity for High-Income Taxpayers". The CPA Journal. The New York State Society of CPAs. Retrieved January 31, 2012. ^ IRS Publication 590, Chapter 2, "Additional Tax on Early Distributions" ^ IRS Publication 590 (2010), "What is a Qualified Distribution" Bledsoe, John D. (1998). Roth to Riches: The Ordinary to Roth IRA handbook. Dallas, TX: Legacy Press. ISBN 0-9629114-1-0. OCLC 40158081. Daryanani, Gobind (1998). Roth IRA Book: An Investor's Guide: Including a Personal Interview with Senator William V. Roth, Jr. (R-De), Chairman, U.S. Senate Finance Committee. Bernardsville, NJ: Digiqual Inc. ISBN 0-9665398-1-8. OCLC 40340829. Merritt, Steve (1998). All about the New IRA, Roth, Traditional, Educational: How to Cash in on the New Tax Law Changes. Melbourne, FL: Halyard Press. ISBN 1-887063-07-2. OCLC 39363078. Slesnick, Twila; Suttle, John C. (2007). IRAs, 401(k)s, & Other Retirement Plans: Taking Your Money Out (8th ed.). Berkeley, CA: Nolo. ISBN 978-1-4133-0696-5. OCLC 85162294. Thomas, Kaye A. (2004). Fairmark Guide to the Roth IRA: Retirement Planning in Plain Language. Lisle, IL: Fairmark Press, Inc. ISBN 0-9674981-0-4. OCLC 55048948. Trock, Gary R. (1998). The Roth IRA Made Simple. Grifith, IN: Conquest Pub. ISBN 0-9666227-0-7. OCLC 40641031. Humberto Cruz (February 13, 2010). "Traditional to Roth IRA conversions: Don't be tripped up by tax implications". The Boston Globe.

{'timestamp': '2019-04-24T10:20:00Z', 'url': 'https://en.m.wikipedia.org/wiki/Roth_ira', 'language': 'en', 'source': 'c4'}

professional_accounting

We invited responses to the consultation on the 2018/19 fee scale from opted-in bodies (a total of 484 when we issued the consultation), their representative organisations, our contracted audit firms, bodies of accountants and other relevant national stakeholders. We received 32 responses to the consultation. Replies welcomed the proposals to reduce fees by 23 per cent and to maintain fee stability if possible during the appointing period. There were no replies that fundamentally disagreed with the consultation proposals, although some did raise specific points or concerns, for example about the potential impact on audit quality of the proposed fee reduction. We have thanked those who responded and replied individually where responses requested clarification or further information. Following the consultation, PSAA has set the 2018/19 fee scale as proposed. Scale audit fees for all opted-in bodies have been reduced by 23 per cent from the fees applicable for 2017/18. This gives opted-in bodies the benefit of the cost savings achieved in the recent audit procurement, and continues the practice of averaging firms’ costs so that all bodies benefit from the same proportionate savings, irrespective of the firm appointed to a particular audited body. It also passes on the benefit of economies which PSAA is making in its own operating costs. We have set 2018/19 fees on the basis of no changes to the overall work programme required by the Code of Audit Practice published by the National Audit Office. Our consultation did highlight expected changes to financial reporting requirements after 2018/19 and the new Code of Audit Practice that will apply from 2020/21, both of which could have an impact on the fee scale for future years of the appointing period. We will be consulting on the 2019/20 fee scale in autumn 2018. Some consultation responses raised concerns about the potential impact of the 23 per cent fee reduction on the level of service auditors will be able to provide from 2018/19. These views were generally in the context of greater risk and complexity as a result of financial constraints on audited bodies, and the view that auditors should widen the scope of their work in response. The scope of auditors’ work and the level of assurance auditors provide is set by the Code of Audit Practice and professional standards. The auditor is required to give an opinion on the financial statements of an audited body and a conclusion on the arrangements for value for money. The auditor is required to use judgement to design a risk-based and proportionate audit approach which meets statutory responsibilities under the Code and the Local Audit and Accountability Act 2014. The audited body is responsible for putting in place appropriate arrangements to support the proper conduct of public business, and for ensuring that public money is safeguarded, properly accounted for and used with due regard to value for money. The statement of responsibilities of auditors and audited bodies provides more information on the different responsibilities of auditors and audited bodies. The fee reduction does not mean there will be a change in the scope, volume or quality of audit work required at opted-in bodies. Auditors must undertake sufficient work to comply with the requirements of the Code of Audit Practice and relevant professional standards, and to enable them to discharge their statutory responsibilities under the Local Audit and Accountability Act 2014 and their contractual obligations to PSAA. PSAA is very aware of the need to maintain and, where possible, strive for improvements in audit quality. Our responsibilities in this area are emphasised in the contracts we have entered into with audit firms. We are developing new arrangements for monitoring and reporting on audit quality and contract compliance, based on the International Auditing and Assurance Standards Board Framework for Audit Quality. We will be publishing regular reports on the managing audit contracts page of our website, and have also established the Local Audit Quality Forum as an important element of our arrangements. Some of the firms who responded to our fee scale consultation asked PSAA to consider not applying the proposed 23 per cent reduction to bodies with low scale audit fees, expressing concern about their ability to cover the cost of an audit compliant with the Code of Audit Practice and professional standards. The PSAA Board has considered this matter carefully and concluded that it would not be appropriate to limit the proposed fee reduction to opted-in bodies with scale audit fees greater than an arbitrary threshold. To do so would be inequitable, particularly in relation to bodies with fees close to but on either side of the threshold. Audit firms bid in the audit services procurement on the basis of the fees applicable for 2017/18, and their bids allow for the 23 per cent reduction we have consulted on for 2018/19. Firms’ remuneration has been fixed based on the bids they made, and would not change if the reduction in scale audit fees did not apply to bodies with smaller fees. A small number of consultation responses identified concerns about fee variations. The individual concerns vary, but the main issues are that audited bodies wish to avoid annual discussions about fees in addition to the scale fee, or do not think that firms discuss proposed variations with them appropriately. A fee variation is needed in cases where audit risk or complexity differ significantly from the level reflected in the previous scale fee, meaning that substantially more, or less, work is required than previously envisaged. The appointed firm must discuss the variation with the audited body and then make a variation request to PSAA using a standard process to seek approval, and cannot invoice the audited body for the additional amount requested until PSAA has approved the variation. We consider the reasonableness of the explanations provided by auditors for variations, and require the auditor to confirm that they have had an appropriate discussion with the audited body about the reasons for the additional fee before we finalise our decision on any variation to the scale fee. Work on objections is not covered by the scale fee, so the variations process also applies where the auditor accepts an objection as valid, that is, requiring investigation. We hope to be able to maintain the 2018/19 reduction of 23 per cent in scale fees for the first three years of the appointing period, based on current assumptions about inflation and the amount of work auditors are required to undertake. However, the uncertainties are such that we cannot guarantee this at this stage. We will review the position each year when we update our assumptions and estimates, and consider any further information on potential changes to the scope of auditors’ work. We will need to consider the impact of a variety of factors each year, some of which could be significant and could require a change in the fee scale. The most important variables are likely to be inflation, any changes to auditors’ work arising from the new Code of Audit Practice to be introduced from 2020/21, and possible changes in financial reporting requirements.

{'timestamp': '2019-04-25T06:34:55Z', 'url': 'https://www.psaa.co.uk/201819-work-programme-and-scales-of-fees/summary-of-responses-to-the-consultation/', 'language': 'en', 'source': 'c4'}

professional_accounting

ATHENS, GREECE--(Marketwired - Jul 21, 2015) - Costamare Inc. ("Costamare" or the "Company") (NYSE: CMRE) today reported unaudited financial results for the second quarter and six months ended June 30, 2015. Voyage revenues of $123.2 million and $244.1 million for the three and the six months ended June 30, 2015, respectively. Voyage revenues adjusted on a cash basis of $124.0 million and $245.5 million for the three and six months ended June 30, 2015, respectively. Adjusted EBITDA of $87.3 million and $173.3 million for the three and six months ended June 30, 2015, respectively. Net income of $44.3 million and $70.6 million for the three and six months ended June 30, 2015, respectively. Net income available to common stockholders of $40.0 million or $0.53 per share and $63.3 million or $0.85 per share for the three and six months ended June 30, 2015, respectively. Adjusted Net income available to common stockholders of $34.4 million or $0.46 per share and $63.0 million or $0.84 per share for the three and six months ended June 30, 2015, respectively. See "Financial Summary" and "Non-GAAP Measures" below for additional detail. In May 2015, the Company reached an agreement with York to extend the investment period under the Framework Agreement until May 2020 and extend the Framework Agreement until May 2024. Agreed to extend the charter of the 1995-built, 1,162TEU containership Zagora with MSC for a period of minimum 12 and maximum 14 months starting from May 1, 2015 at a daily rate of $7,400. Agreed to extend the charter of the 1992-built, 3,351TEU containership Marina with Evergreen for a period of minimum one and maximum two months starting from August 12, 2015 at a daily rate of $11,700. Agreed to charter the 2003-built, 5,928 TEU containership Venetiko to OOCL for a period of minimum 40 and maximum 95 days starting from July 23, 2015 at a daily rate of $15,800. Fixed the charter rate for the second year of the extension period for the charters of the vessels MSC Sierra II, MSC Namibia II and MSC Reunion at $11,200 daily, starting from July 1, 2015, August 2, 2015 and August 27, 2015 respectively. In June 2015, Costamare Partners LP (the "MLP"), a limited partnership and wholly owned subsidiary of the Company, filed an amendment to its Registration Statement on Form F-1 with the U.S. Securities and Exchange Commission (the "SEC") for the initial public offering of common units representing limited partnership interests in the MLP. The MLP is monitoring market conditions in connection with determining the schedule for its initial public offering. On May 13, 2015, the Company completed a public offering of 4.0 million shares of its 8.75% Series D Cumulative Redeemable Perpetual Preferred Stock (the "Series D Preferred Stock"). The gross proceeds from the offering before the underwriting discount and other offering expenses were $100.0 million. We plan to use the net proceeds of this offering for general corporate purposes, including vessel acquisitions or investments. On July 2, 2015, we declared a dividend of $0.476563 per share on our Series B Preferred Stock, a dividend of $0.531250 per share on our Series C Preferred Stock and a dividend of $0.376736 per share on our Series D Preferred Stock all paid on July 15, 2015, to holders of record on July 14, 2015. On July 2, 2015, we declared a dividend for the second quarter ended June 30, 2015, of $0.29 per share on our common stock, payable on August 5, 2015, to stockholders of record on July 22, 2015. This will be the Company's nineteenth consecutive quarterly dividend since it commenced trading on the New York Stock Exchange. "During the second quarter of the year, the Company continued to deliver positive results. On our joint venture with York, we have extended the investment period for five more years, starting from May of 2015. Since inception we have executed transactions of US $1.1 billion, all of which have been performing well. Regarding the market, we have recently witnessed a softening in charter rates, especially for the smaller sizes. We have no ships laid up, while the ships coming out of charter this year still provide an upside based on today's market conditions." A registration statement relating to the initial public offering of the MLP's securities has been filed with the SEC but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. (1) Accrued charter revenue represents the difference between cash received during the period and revenue recognized on a straight-line basis. In the early years of a charter with escalating charter rates, voyage revenue will exceed cash received during the period and during the last years of such charter cash received will exceed revenue recognized on a straight line basis. (2) Voyage revenue adjusted on a cash basis represents Voyage revenue after adjusting for non-cash "Accrued charter revenue" recorded under charters with escalating charter rates. However, Voyage revenue adjusted on a cash basis is not a recognized measurement under U.S. generally accepted accounting principles ("GAAP"). We believe that the presentation of Voyage revenue adjusted on a cash basis is useful to investors because it presents the charter revenue for the relevant period based on the then current daily charter rates. The increases or decreases in daily charter rates under our charter party agreements are described in the notes to the "Fleet List" below. (3) Adjusted net income available to common stockholders, adjusted earnings per share, EBITDA and adjusted EBITDA are non-GAAP measures. Refer to the reconciliation of net income to adjusted net income and net income available to common stockholders to EBITDA and adjusted EBITDA below. The Company reports its financial results in accordance with U.S. GAAP. However, management believes that certain non-GAAP financial measures used in managing the business may provide users of these financial measures additional meaningful comparisons between current results and results in prior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain items that impact the overall comparability. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company's performance. The tables below set out supplemental financial data and corresponding reconciliations to GAAP financial measures for the three-month and six-month periods ended June 30, 2015 and 2014. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, voyage revenue or net income as determined in accordance with GAAP. Non-GAAP financial measures include (i) Voyage revenue adjusted on a cash basis (reconciled above), (ii) Adjusted Net Income available to common stockholders, (iii) Adjusted Earnings per share, (iv) EBITDA and (v) Adjusted EBITDA. Adjusted Net Income available to common stockholders and Adjusted Earnings per Share represent net income after earnings allocated to preferred stock, but before non-cash "Accrued charter revenue" recorded under charters with escalating charter rates, loss on sale/disposal of vessels, realized (gain) /loss on Euro/USD forward contracts, swaps breakage costs, unrealized loss from a swap option agreement held by a jointly owned company with York, which is included in equity loss on investments, General and administrative expenses - non-cash component, amortization of prepaid lease rentals and non-cash changes in fair value of derivatives. "Accrued charter revenue" is attributed to the timing difference between the revenue recognition and the cash collection. However, Adjusted Net Income available to common stockholders and Adjusted Earnings per Share are not recognized measurements under U.S. GAAP. We believe that the presentation of Adjusted Net Income available to common stockholders and Adjusted Earnings per Share are useful to investors because they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We also believe that Adjusted Net Income available to common stockholders and Adjusted Earnings per Share are useful in evaluating our ability to service additional debt and make capital expenditures. In addition, we believe that Adjusted Net Income available to common stockholders and Adjusted Earnings per Share are useful in evaluating our operating performance and liquidity position compared to that of other companies in our industry because the calculation of Adjusted Net Income available to common stockholders and Adjusted Earnings per Share generally eliminates the effects of the accounting effects of capital expenditures and acquisitions, certain hedging instruments and other accounting treatments, items which may vary for different companies for reasons unrelated to overall operating performance and liquidity. In evaluating Adjusted Net Income available to common stockholders and Adjusted Earnings per Share, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted Net Income available to common stockholders and Adjusted Earnings per Share should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. (1) Items to consider for comparability include gains and charges. Gains positively impacting net income are reflected as deductions to adjusted net income. Charges negatively impacting net income are reflected as increases to adjusted net income. EBITDA represents net income before interest and finance costs, interest income, amortization of prepaid lease rentals, depreciation and amortization of deferred dry-docking and special survey costs. Adjusted EBITDA represents net income before interest and finance costs, interest income, amortization of prepaid lease rentals, depreciation, amortization of deferred dry-docking and special survey costs, non-cash "Accrued charter revenue" recorded under charters with escalating charter rates, loss on sale / disposal of vessels, realized gain / (loss) on Euro / USD forward contracts, swaps breakage costs, unrealized loss from swap option agreement held by a jointly owned company with York, which is included in equity loss on investments, General and administrative expenses - non-cash component and non-cash changes in fair value of derivatives. "Accrued charter revenue" is attributed to the time difference between the revenue recognition and the cash collection. However, EBITDA and Adjusted EBITDA are not recognized measurements under U.S. GAAP. We believe that the presentation of EBITDA and Adjusted EBITDA are useful to investors because they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. We also believe that EBITDA and Adjusted EBITDA are useful in evaluating our ability to service additional debt and make capital expenditures. In addition, we believe that EBITDA and Adjusted EBITDA are useful in evaluating our operating performance and liquidity position compared to that of other companies in our industry because the calculation of EBITDA and Adjusted EBITDA generally eliminates the effects of financings, income taxes and the accounting effects of capital expenditures and acquisitions, items which may vary for different companies for reasons unrelated to overall operating performance and liquidity. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. (1) Items to consider for comparability include gains and charges. Gains positively impacting net income are reflected as deductions to adjusted EBITDA. Charges negatively impacting net income are reflected as increases to adjusted EBITDA. During the three-month periods ended June 30, 2015 and 2014, we had an average of 55.0 and 55.7 vessels, respectively, in our fleet. In the three-month period ended June 30, 2014, we accepted delivery of the newbuild vessel MSC Amalfi with a TEU capacity of 9,403 and the secondhand vessels Neapolis and Areopolis with an aggregate TEU capacity of 4,119, and we sold the vessel Konstantina with TEU capacity of 3,351. In the three-month periods ended June 30, 2015 and 2014, our fleet ownership days totaled 5,005 and 5,070 days, respectively. Ownership days are the primary driver of voyage revenue and vessels' operating expenses and represent the aggregate number of days in a period during which each vessel in our fleet is owned. Voyage revenue decreased by 0.2%, or $0.3 million, to $123.2 million during the three-month period ended June 30, 2015, from $123.5 million during the three-month period ended June 30, 2014. This decrease was mainly due to (i) revenue not earned by vessels sold for demolition during the six-month period ended December 31, 2014, (ii) decreased charter rates in certain of our vessels during the three-month period ended June 30, 2015, compared to the three-month period ended June 30, 2014, and (iii) increased off-hire days, mainly due to scheduled dry-dockings during the three-month period ended June 30, 2015, compared to the three-month period ended June 30, 2014; partly offset by the revenue earned by the one newbuild and two secondhand vessels delivered to us during the six-month period ended December 31, 2014. Voyage revenue adjusted on a cash basis (which eliminates non-cash "Accrued charter revenue"), decreased by 1.6%, or $2.0 million, to $124.0 million during the three-month period ended June 30, 2015, from $126.0 million during the three-month period ended June 30, 2014. This decrease was mainly due to (i) revenue not earned by vessels sold for demolition during the six-month period ended December 31, 2014, (ii) decreased charter rates in certain of our vessels during the three-month period ended June 30, 2015, compared to the three-month period ended June 30, 2014, and (iii) increased off-hire days, mainly due to scheduled dry-dockings during the three-month period ended June 30, 2015, compared to the three-month period ended June 30, 2014; partly offset by the revenue earned by the one newbuild and two secondhand vessels delivered to us during the six-month period ended December 31, 2014. Voyage expenses were $0.4 million, during the three-month period ended June 30, 2015 and $1.1 million during the three-month period ended June 30, 2014. Voyage expenses mainly include (i) off-hire expenses of our vessels, mainly related to fuel consumption and (ii) third party commissions. Voyage expenses - related parties were $0.9 million during the three-month periods ended June 30, 2015 and 2014, and represent fees of 0.75% on voyage revenues charged to us by Costamare Shipping Company S.A. as provided under our group management agreement. Vessels' operating expenses, which include the realized gain / (loss) under derivative contracts entered into in relation to foreign currency exposure, decreased by 1.0%, or $0.3 million, to $30.2 million during the three-month period ended June 30, 2015, from $30.5 million during the three-month period ended June 30, 2014. The decrease was mainly attributable to the decreased ownership days of our vessels during the three-month period ended June 30, 2015, compared to the three-month period ended June 30, 2014. General and administrative expenses were $1.4 million during the three-month periods ended June 30, 2015, and 2014. General and administrative expenses for the three-month period ended June 30, 2015, included $0.63 million which is part of the annual fee that our manager receives based on the amended and restated group management agreement, effective as of January 1, 2015. For the three-month period ended June 30, 2014 this amount was $0.25 million. Management fees paid to our managers increased by 2.1%, or $0.1 million, to $4.9 million during the three-month period ended June 30, 2015, from $4.8 million during the three-month period ended June 30, 2014. The increase was primarily attributable to the inflation related upward adjustment by 4% of the management fee for each vessel (effective January 1, 2015), as provided under our group management agreement; partly offset by the decreased average number of vessels during the three-month period ended June 30, 2015, compared to the three-month period ended June 30, 2014. General and administrative expenses - non-cash component for the three-month period ended June 30, 2015, amounted to $2.7 million, representing the value of the shares issued to our manager on June 30, 2015, pursuant to the amended and restated group management agreement, effective as of January 1, 2015. No amounts were incurred in the 2014 period. Amortization of deferred dry-docking and special survey costs was $1.8 million for the three-month period ended June 30, 2015 and $1.9 million for the three-month period ended June 30, 2014. During the three-month period ended June 30, 2015, one vessel was in process of undergoing her special survey. During the three-month period ended June 30, 2014, one vessel underwent and completed her special survey. Depreciation expense decreased by 4.9%, or $1.3 million, to $25.3 million during the three-month period ended June 30, 2015, from $26.6 million during the three-month period ended June 30, 2014. The decrease was mainly attributable to a change in the estimated scrap value of vessels, which had a favorable effect of $1.3 million for the three-month period ended June 30, 2015. Amortization of the prepaid lease rentals were $1.2 million and $1.1 million during the three-month periods ended June 30, 2015 and 2014, respectively. During the three-month period ended June 30, 2014 we recorded a loss of $2.9 million from the sale of one vessel. Foreign exchange losses were $0.1 million during the three-month period ended June 30, 2015. Foreign exchange gains / (losses) were nil during the three-month period ended June 30, 2014. Interest income for the three-month periods ended June 30, 2015 and 2014, amounted to $0.3 million and $0.2 million, respectively. Interest and finance costs decreased by 3.5%, or $0.8 million, to $21.8 million during the three-month period ended June 30, 2015, from $22.6 million during the three-month period ended June 30, 2014. The decrease was mainly attributable to the decreased loan interest expense charged to the consolidated statement of income resulting from the decrease in the outstanding loan amount. The equity gain on investments of $0.1 million for the three-month period ended June 30, 2015, represents our share of the net gains of fifteen jointly owned companies pursuant to the Framework Agreement with York. We hold a range of 25% to 49% of the capital stock of these companies. The net gain of $0.1 million includes an unrealized loss of $0.1 million deriving from a swap option agreement entered into by a jointly-owned company. The fair value of our interest rate derivative instruments which were outstanding as of June 30, 2015, equates to the amount that would be paid by us or to us should those instruments be terminated. As of June 30, 2015, the fair value of these interest rate derivative instruments in aggregate amounted to a liability of $65.6 million. The effective portion of the change in the fair value of the interest rate derivative instruments that qualified for hedge accounting is recorded in "Other Comprehensive Income" ("OCI") while the ineffective portion is recorded in the consolidated statements of income. The change in the fair value of the interest rate derivative instruments that did not qualify for hedge accounting is recorded in the consolidated statement of income. For the three-month period ended June 30, 2015, a net gain of $1.5 million has been included in OCI and a net gain of $10.2 million has been included in Gain / (Loss) on derivative instruments in the consolidated statement of income, resulting from the fair market value change of the interest rate derivative instruments during the three-month period ended June 30, 2015. Furthermore, during the three-month period ended June 30, 2014, we terminated one interest rate derivative instrument that qualified for hedge accounting and we paid the counterparty breakage costs of $3.5 million, in aggregate and has been included in Swaps breakage cost in the 2014 consolidated statement of income. Net cash flows provided by operating activities for the three-month period ended June 30, 2015, increased by $4.2 million to $65.3 million, compared to $61.1 million for the three-month period ended June 30, 2014. The increase was primarily attributable to the favorable change in working capital position, excluding the current portion of long-term debt and the accrued charter revenue (representing the difference between cash received in that period and revenue recognized on a straight-line basis) of $3.8 million, decreased payments for interest (including swap payments) during the period of $3.0 million; partly offset by the decreased cash from operations of $2.0 million and the increased special survey costs of $0.2 million. Net cash used in investing activities was $5.7 million in the three-month period ended June 30, 2015, which mainly consisted of $4.3 million for an advance payment for the construction of one newbuild vessel, ordered pursuant to the Framework Agreement with York. Net cash used in investing activities was $57.9 million in the three-month period ended June 30, 2014, which consisted of (a) $18.4 million for capitalized costs and advance payments for the construction and delivery of one newbuild vessel (b) $19.8 million in payments for the acquisition of two secondhand vessels, (c) $26.4 million payments (net of $1.8 million we received as a dividend distribution) associated to the equity investments held pursuant to the Framework Agreement with York, which range from 25% to 49% in jointly-owned companies, and (d) a $6.7 million payment we received from the sale for demolition of one vessel. Net cash provided by financing activities was $16.1 million in the three-month period ended June 30, 2015, which mainly consisted of (a) $48.7 million of indebtedness that we repaid, (b) $3.3 million we repaid relating to our sale and leaseback agreements (c) $21.7 million we paid for dividends to holders of our common stock for the first quarter of 2015, (d) $1.0 million we paid for dividends to holders of our 7.625% Series B Cumulative Redeemable Perpetual Preferred Stock ( "Series B Preferred Stock") and $2.1 million we paid for dividends to holders of our 8.500% Series C Cumulative Redeemable Perpetual Preferred Stock ( "Series C Preferred Stock"), in both cases for the period from January 15, 2015 to April 14, 2015 and (e) $96.6 million net proceeds we received in May 2015 from our public offering, of 4.0 million shares of our Series D Preferred Stock, net of underwriting discounts and expenses incurred in the offering. Net cash used in financing activities was $39.0 million in the three-month period ended June 30, 2014, which mainly consisted of (a) $106.3 million of indebtedness that we repaid, (b) $9.0 million we drew down from one of our credit facilities, (c) $85.6 million we received regarding the sale and leaseback transaction concluded for one newbuild, (d) $2.5 million we repaid relating to our sale and leaseback agreements, (e) $20.9 million we paid for dividends to holders of our common stock for the first quarter of 2014, and (f) $0.9 million we paid for dividends to holders of our Series B Preferred Stock for the period from January 15, 2014 to April 14, 2014, and $2.0 million we paid for dividends to holders of our Series C Preferred Stock for the period from the original issuance of the Series C Preferred Stock on January 21, 2014 to April 14, 2014. During the six-month period ended June 30, 2015 and 2014, we had an average of 55.0 and 54.4 vessels, respectively in our fleet. In the six-month period ended June 30, 2014, we accepted delivery of the newbuild vessels MSC Azov, MSC Ajaccio and MSC Amalfi with an aggregate TEU capacity of 28,209 TEU and the secondhand vessels Neapolis and Areopolis with an aggregate TEU capacity of 4,119 and we sold the vessel Konstantina with a TEU capacity of 3,351. In the six-month period ended June 30, 2015 and 2014, our fleet ownership days totaled 9,955 and 9,845 days, respectively. Ownership days are the primary driver of voyage revenue and vessels operating expenses and represent the aggregate number of days in a period during which each vessel in our fleet is owned. Voyage revenue increased by 2.4%, or $5.7 million, to $244.1 million during the six-month period ended June 30, 2015, from $238.4 million during the six-month period ended June 30, 2014. This increase was mainly attributable to (i) revenue earned by the three newbuild vessels and three secondhand vessels delivered to us during the year ended December 31, 2014; partly offset by (ii) decreased charter rates in certain of our vessels during the six-month period ended June 30, 2015, compared to the six-month period ended June 30, 2014, and (iii) revenues not earned by vessels which were sold for demolition during the nine-month period ended December 31, 2014. Voyage revenue adjusted on a cash basis (which eliminates non-cash "Accrued charter revenue"), increased by 0.8%, or $2.0 million, to $245.5 million during the six-month period ended June 30, 2015, from $243.5 million during the six-month period ended June 30, 2014. This increase was mainly attributable to (i) revenue earned by the three newbuild vessels and three secondhand vessels delivered to us during the year ended December 31, 2014; partly offset by (ii) decreased charter rates in certain of our vessels during the six-month period ended June 30, 2015, compared to the six-month period ended June 30, 2014, and (iii) revenues not earned by vessels which were sold for demolition during the nine-month period ended December 31, 2014. Voyage expenses decreased by 44.4%, or $0.8 million, to $1.0 million during the six-month period ended June 30, 2015, from $1.8 million during the six-month period ended June 30, 2014. Voyage expenses mainly include (i) off-hire expenses of our vessels, mainly related to fuel consumption and (ii) third party commissions. Voyage expenses - related parties were $1.8 million during the six-month periods ended June 30, 2015 and 2014, and represent fees of 0.75% on voyage revenues charged to us by Costamare Shipping Company S.A. as provided under our group management agreement. Vessels' operating expenses, which also includes the realized gain / (loss) under derivative contracts entered into in relation to foreign currency exposure, decreased by 0.2% or $0.1 million to $59.8 million during the six-month period ended June 30, 2015, from $59.9 million during the six-month period ended June 30, 2014. General and administrative expenses increased by 8.0% or $0.2 million, to $2.7 million during the six-month period ended June 30, 2015, from $2.5 million during the six-month period ended June 30, 2014. Furthermore, General and administrative expenses for the six-month period ended June 30, 2015, included $1.3 million which is part of the annual fee that our manager receives based on the amended and restated group management agreement, effective as of January 1, 2015. For the six-month period ended June 30, 2014 this amount was $0.50 million. Management fees paid to our managers increased by 4.3%, or $0.4 million, to $9.7 million during the six-month period ended June 30, 2015, from $9.3 million during the six-month period ended June 30, 2014. The increase was primarily attributable to (i) the upward adjustment by 4% of the management fee for each vessel (effective January 1, 2015), as provided under our group management agreement, and (ii) the increased average number of vessels during the six-month period ended June 30, 2015, compared to the six-month period ended June 30, 2014. General and administrative expenses - non-cash component for the six-month period ended June 30, 2015, amounted to $5.4 million, representing the value of the shares issued to our manager on March 31, 2015 and on June 30, 2015, pursuant to the amended and restated group management agreement, effective as of January 1, 2015. No amounts were incurred in the 2014 period. Amortization of deferred dry-docking and special survey costs for the six-month periods ended June 30, 2015 and 2014, were $3.6 million and $3.8 million, respectively. During the six-month period ended June 30, 2014, three vessels, underwent and completed their special survey. During the six-month period ended June 30, 2015, two vessels, underwent and completed their special survey, while one was in process of undergoing her special survey. Depreciation expense decreased by 2.7%, or $1.4 million, to $50.4 million during the six-month period ended June 30, 2015, from $51.8 million during the six-month period ended June 30, 2014. The decrease was mainly attributable to the depreciation expense not charged for the vessels sold for demolition during the nine-month period ended December 31, 2014 and to a change in the estimated scrap value of vessels, which had a favorable effect of $2.7 million for the six-month period ended June 30, 2015; partly offset by the depreciation expense charged for the three newbuild and three secondhand vessels delivered to us during the year ended December 31, 2014. Amortization of the prepaid lease rentals were $2.5 million and $1.5 million during the six-month periods ended June 30, 2015 and 2014, respectively. During the six-month period ended June 30, 2014, we recorded a loss of $2.9 million from the sale of one vessel. During the six-month periods ended June 30, 2015 and 2014, interest income was $0.7 million and $0.4 million, respectively. Interest and finance costs increased by 2.7%, or $1.3 million, to $49.7 million during the six-month period ended June 30, 2015, from $48.4 million during the six-month period ended June 30, 2014. The increase was mainly attributable to the fact that the 2014 period benefited from the capitalization of interest associated with the delivery of vessels during that period, which did not recur during 2015; partially offset by a reduction in the write off of finance costs relating to loan refinancing in the 2015 period. During the six-month period ended June 30, 2015, the equity gain/ (loss) on investments was nil. The equity gain/ (loss) on investments, represents our share of the net losses of fifteen jointly owned companies pursuant to the Framework Agreement with York. We hold a range of 25% to 49% of the capital stock of these companies. The net gain / (loss) includes an unrealized loss of $0.4 million deriving from a swap option agreement entered into by a jointly-owned company. The fair value of our interest rate derivative instruments which were outstanding as of June 30, 2015, equates to the amount that would be paid by us or to us should those instruments be terminated. As of June 30, 2015, the fair value of these interest rate derivative instruments in aggregate amounted to a liability of $65.6 million. The effective portion of the change in the fair value of the interest rate derivative instruments that qualified for hedge accounting is recorded in OCI while the ineffective portion is recorded in the consolidated statements of income. The change in the fair value of the interest rate derivative instruments that did not qualify for hedge accounting is recorded in the consolidated statement of income. For the six-month period ended June 30, 2015, a net gain of $2.2 million has been included in OCI and a net gain of $12.7 million has been included in Gain on derivative instruments in the consolidated statement of income, resulting from the fair market value change of the interest rate derivative instruments during the six-month period ended June 30, 2015. Furthermore, during the six-month period ended June 30, 2014, we terminated three interest rate derivative instruments that qualified for hedge accounting and we paid the counterparty breakage costs of $10.2 million, in aggregate and has been included in Swaps breakage cost in the 2014 consolidated statement of income. Net cash flows provided by operating activities increased by $5.2 million to $120.2 million for the six-month period ended June 30, 2015, compared to $115.0 for the six-month period ended June 30, 2014. The increase was primarily attributable to (a) the increased cash from operations of $2.0 million generated mainly from the employment of the three newbuild vessels delivered to us during the year ended December 31, 2014 and (b) the decreased payments for interest (including swap payments) during the period of $3.1 million; partly offset by the unfavorable change in working capital position, excluding the current portion of long-term debt and the accrued charter revenue (representing the difference between cash received in that period and revenue recognized on a straight-line basis) of $1.5 million and the increased special survey costs of $0.4 million. Net cash used in investing activities was $19.1 million in the six-month period ended June 30, 2015, which mainly consisted of $17.3 million in advance payments for the construction of three newbuild vessels, ordered pursuant to the Framework Agreement with York. Net cash used in investing activities was $123.0 million in the six-month period ended June 30, 2014, which consisted of (a) $59.1 million for capitalized costs and advance payments for the construction and delivery of three newbuild vessels, (b) $19.8 million in payments for the acquisition of two secondhand vessels, (c) $50.8 million (net of $1.8 million we received as a dividend distribution) in payments, pursuant to the Framework Agreement with York, to hold an equity interest ranging from 25% to 49% in jointly-owned companies and (d) $6.7 million we received from the sale for demolition of one vessel. Net cash used in financing activities was $54.3 million in the six-month period ended June 30, 2015, which mainly consisted of (a) $98.7 million of indebtedness that we repaid, (b) $6.6 million we repaid relating to our sale and leaseback agreements (c) $42.7 million we paid for dividends to holders of our common stock for the fourth quarter of 2014 and first quarter of 2015, and (d) $1.9 million we paid for dividends to holders of our Series B Preferred Stock and $4.3 million we paid for dividends to holders of our Series C Preferred Stock, in both cases for the periods from October 15, 2014 to January 14, 2015 and January 15, 2015 to April 14, 2015 and (e) $96.6 million net proceeds we received from our public offering in May 2015, of 4.0 million shares of our Series D Preferred Stock, net of underwriting discounts and expenses incurred in the offering. Net cash provided by financing activities was $62.5 million in the six-month period ended June 30, 2014, which mainly consisted of (a) $253.8 million of indebtedness that we repaid, (b) $9.0 million we drew down from one of our credit facilities, (c) $256.7 million we received regarding the sale and leaseback transaction concluded for the three newbuild vessels, (d) $3.1 million we repaid regarding our sale and leaseback agreements, (e) $41.1 million we paid for dividends to holders of our common stock for the fourth quarter of 2013 and the first quarter of 2014, (f) $1.9 million we paid for dividends to holders of our Series B Preferred Stock for the periods from October 15, 2013 to January 14, 2014 and January 15, 2014 to April 14, 2014, and $2.0 million we paid for dividends to holders of our Series C Preferred Stock for the period from the original issuance of the Series C Preferred Stock on January 21, 2014 to April 14, 2014, and (g) $96.5 million net proceeds we received from our public offering in January 2014, of 4.0 million shares of our Series C Preferred Stock, net of underwriting discounts and expenses incurred in the offering. As of June 30, 2015, we had a total cash liquidity of $220.8 million, consisting of cash, cash equivalents and restricted cash. As of July 21, 2015, the following vessels were free of debt. (*) Does not include one secondhand vessel acquired and five newbuild vessels ordered pursuant to the Framework Agreement with York, which are also free of debt. As of July 21, 2015, we had outstanding commitments relating to our ten contracted newbuilds aggregating approximately $302.9 million payable in installments until the vessels are delivered, out of which $180.3 million will be funded through committed financing. The amounts represent our interest in the relevant jointly-owned entities with York. On Wednesday, July 22, 2015, at 8:30 a.m. ET, Costamare's management team will hold a conference call to discuss the financial results. Participants should dial into the call 10 minutes before the scheduled time using the following numbers: 1-866-524-3160 (from the US), 0808 238 9064 (from the UK) or +1-412-317-6760 (from outside the US). Please quote "Costamare". A replay of the conference call will be available until August 24, 2015. The United States replay number is +1-877-344-7529; the standard international replay number is +1-412-317-0088, and the access code required for the replay is: 10069316. Costamare Inc. is one of the world's leading owners and providers of containerships for charter. The Company has 41 years of history in the international shipping industry and a fleet of 69 containerships, with a total capacity of approximately 458,000 TEU, including ten newbuild containerships on order. Fourteen of our containerships, including ten newbuilds, have been acquired pursuant to the Framework Agreement with York Capital Management by vessel-owning joint venture entities in which we hold a minority equity interest. The Company's common stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock trade on the New York Stock Exchange under the symbols "CMRE", "CMRE PR B", "CMRE PR C" and "CMRE PR D", respectively. This earnings release contains "forward-looking statements". In some cases, you can identify these statements by forward-looking words such as "believe", "intend", "anticipate", "estimate", "project", "forecast", "plan", "potential", "may", "should", "could" and "expect" and similar expressions. These statements are not historical facts but instead represent only Costamare's belief regarding future results, many of which, by their nature, are inherently uncertain and outside of Costamare's control. It is possible that actual results may differ, possibly materially, from those anticipated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect future results, see the discussion in Costamare Inc.'s Annual Report on Form 20-F (File No. 001-34934) under the caption "Risk Factors". The tables below provide additional information, as of July 21, 2015, about our fleet of containerships, including our newbuilds on order and the vessels acquired pursuant to the Framework Agreement with York. Each vessel is a cellular containership, meaning it is a dedicated container vessel. Our newbuilds on order have an aggregate capacity in excess of 125,000 TEU. (1) Charter terms and expiration dates are based on the earliest date charters could expire. Amounts set out for current daily charter rate are the amounts contained in the charter contracts. (2) This average rate is calculated based on contracted charter rates for the days remaining between July 21, 2015 and the earliest expiration of each charter. Certain of our charter rates change until their earliest expiration dates, as indicated in the footnotes below. (3) This charter rate changes on January 13, 2016 to $26,100 per day until the earliest redelivery date. (4) This charter rate changes on April 28, 2016 to $26,100 per day until the earliest redelivery date. (5) This charter rate changes on June 11, 2016 to $26,100 per day until the earliest redelivery date. (6) The amounts in the table reflect the current charter terms, giving effect to our agreement with Zim under the 2014 restructuring plan. Based on this agreement, we have been granted charter extensions and have been issued equity securities representing 1.2% of Zim's equity and approximately $8.2 million in interest bearing notes maturing in 2023. In July the Company exercised its option to extend the charters of Zim New York and Zim Shanghai for one year pursuant to its option to extend the charter of two of the three vessels chartered to Zim for successive one year periods at market rate plus $1,100 per day per vessel while the notes remain outstanding. (7) As from December 1, 2012 until redelivery, the charter rate is to be a minimum of $13,500 per day plus 50% of the difference between the market rate and the charter rate of $13,500. The market rate is to be determined annually based on the Hamburg ConTex type 3500 TEU index published on October 1 of each year until redelivery. (8) This charter rate changes on August 12, 2015 to $11,700 per day until the earliest redelivery date. (9) This charter rate changes on August 27, 2015 to $11,200 per day until the earliest redelivery date. (10) This charter rate changes on August 2, 2015 to $11,200 per day until the earliest redelivery date. i. Assumes exercise of owner's unilateral options to extend the charter of these vessels for two one year periods at the same charter rate. The charterer also has corresponding options to unilaterally extend the charter for the same periods at the same charter rate. ii. The charterer has a unilateral option to extend the charter of the vessel for two periods of 30 months each +/-90 days on the final period performed, at a rate of $41,700 per day. (*) Denotes vessels acquired pursuant to the Framework Agreement with York. The Company holds an equity interest ranging between 25% and 49% in each of the vessel-owning entities.

{'timestamp': '2019-04-18T13:39:49Z', 'url': 'http://www.marketwired.com/press-release/costamare-inc-reports-results-second-quarter-six-month-period-ended-june-30-2015-nyse-cmre-2040504.htm', 'language': 'en', 'source': 'c4'}

professional_accounting

RICHMOND, Va.--(BUSINESS WIRE)--Tredegar Corporation (NYSE:TG, also the “Company” or “Tredegar”) today reported second quarter financial results for the three and six month periods ended June 30, 2016. See Notes to the Financial Tables in this press release for further details regarding the special items that reconcile net income to net income from ongoing operations and earnings per share to earnings per share from ongoing operations. The unfavorable impact from the change in the U.S. dollar value of currencies for operations outside of the U.S. ($1.1 million). Net sales associated with known lost business and product transitions that have yet to be fully eliminated were $2.9 million and $9.3 million in the second quarters of 2016 and 2015, respectively. The surface protection operating segment of the PE Films reporting segment supports manufacturers of optical and other specialty substrates used in flat panel display products. These films are primarily used by customers to protect components of displays in the manufacturing and transportation process and then discarded. In the first half of 2016, the Company believes that the decline in sales volume for surface protection films was largely due to a decline in consumer demand for products using displays, including LCD TVs, notebooks, tablets and smartphones, which we expect to continue to the end of this year. The Company believes that, over the next few years, there is an increased risk that a portion of its film used in surface protection applications will be made obsolete by possible future customer product transitions to less costly alternative processes or materials. The Company estimates on a preliminary basis that the annual adverse impact on ongoing operating profit from customer shifts to alternative processes or materials in surface protection is in the range of up to $5 to $10 million. Given the technological and commercial complexity involved in bringing these alternative processes and materials to market, the Company is very uncertain as to the timing and ultimate amount of the possible transitions, although the Company expects to see certain impacts in the second half of this year. In response, the Company is aggressively pursuing new surface protection products, applications and customers. The Company’s previously announced anticipated product transition in its personal care business, which was expected to occur after 2017, is now projected to occur after 2018. The estimated annual adverse impact on ongoing operating profit from this additional product transition remains unchanged at $10 million. Amounts estimated for the expected impact on future profits of lost business and product transitions are provided on a stand-alone basis and do not include any potential offsets such as sales growth and cost reductions. The Company expects to increase R&D spending in 2016 in PE Films by approximately $5 million compared with 2015, with a focus on developing materials that improve cost and performance for customers. The unfavorable impact from the change in the U.S. dollar value of currencies for operations outside of the U.S. ($3.8 million). Net sales associated with known lost business and product transitions that have yet to be fully eliminated were $7.6 million and $23.7 million in the first six months of 2016 and 2015, respectively. Higher research and development expenses of $2.4 million to support new product opportunities offset by lower general, sales and administrative expenses of $1.4 million. Capital expenditures in PE Films were $13.9 million in the first six months of 2016 compared to $7.7 million in the first six months of 2015. PE Films currently estimates that total capital expenditures in 2016 will be $30 million, including approximately $10 million for routine capital expenditures required to support operations. Capital spending for strategic projects in 2016 includes expansion of elastics capacity in Europe, expansion of surface protection films capacity in China, the North American facility consolidation and added capacity for the production of a new topsheet for feminine hygiene products. Depreciation expense was $6.6 million in the first six months of 2016 and $7.8 million in the first six months of 2015. Depreciation expense is projected to be $14 million in 2016. Amortization expense was $57,000 in the first six months of 2016 and $69,000 in the first six months of 2015, and is projected to be $0.1 million in 2016. Sales volume improved by 25.5% from the second quarter of 2015 to the second quarter of 2016 primarily due to improved market conditions in 2016 versus 2015. Net sales in the second quarter of 2016 increased 16.6% versus the second quarter of 2015 primarily due to the increase in sales volume offset by lower pricing as a result of lower raw material prices and an unfavorable mix. Foreign currency transaction losses of $1.6 million in the second quarter of 2016 versus $0.4 million in the second quarter of 2015, associated with U.S. dollar denominated export sales in Brazil. The Company expects Terphane’s future operating results to continue to be volatile until the Brazilian business environment in which it operates improves. Sales volume improved by 14.8% from the first six months of 2015 to the first six months of 2016 primarily due to improved market conditions in the second quarter of 2016 versus 2015. Net sales in the first six months of 2016 increased 6.8% versus the first six months of 2015 primarily due to the increase in sales volume offset by lower pricing as a result of lower raw material prices and an unfavorable mix. Foreign currency transaction losses of $3.3 million in the first six months of 2016 versus foreign currency transaction gains of $1.4 million in the first six months of 2015, associated with U.S. dollar denominated export sales in Brazil. Capital expenditures in Terphane were $1.2 million in the first six months of 2016 compared to $1.4 million in the first six months of 2015. Terphane currently estimates that total capital expenditures in 2016 will be $5 million, including $3 million for routine capital expenditures required to support operations. Depreciation expense was $3.1 million in the first six months of 2016 and $3.7 million in the first six months of 2015. Depreciation expense is projected to be $6 million in 2016. Amortization expense was $1.4 million in the first six months of 2016 and $1.5 million in the first six months of 2015, and is projected to be $3 million in 2016. Net sales in the second quarter of 2016 decreased versus 2015 primarily due to a decrease in average selling prices, partially offset by higher sales volume. Higher sales volume, primarily in the nonresidential building and construction and automotive markets, had a favorable impact of $4.0 million in the second quarter of 2016 versus the second quarter of 2015. Lower average selling prices, which had an unfavorable impact on net sales of $8.1 million, can be primarily attributed to a decrease in aluminum market prices, which dropped from an average of $0.98/lb during the second quarter of 2015 to $0.79/lb in the second quarter of 2016. Lower project expenses versus second quarter of 2015 related to anodizing capacity expansion ($0.2 million). Net sales in the first six months of 2016 decreased versus 2015 primarily due to a decrease in average selling prices, partially offset by higher sales volume. Higher sales volume, primarily in the nonresidential building and construction and automotive markets, had a favorable impact of $7.6 million in the first six months of 2016 versus the first six months of 2015. Lower average selling prices, which had an unfavorable impact on net sales of $20.1 million, can be primarily attributed to a decrease in average aluminum market prices. Lower project expenses versus first six months of 2015 related to anodizing capacity expansion ($0.7 million). On June 29, 2016, the Bonnell Aluminum plant in Newnan, Georgia suffered an explosion in the casting department resulting in injuries to five employees, one seriously. The explosion caused significant damage to the cast house and equipment. After assuring the health and safety of employees, production in the extrusion and finishing areas of the plant resumed on June 30, 2016. The cause of the incident is still under investigation. The Company is evaluating various options for the repairs and/or replacement of the building and casting equipment and the timing for that work. The Newnan plant is now sourcing raw materials for its extrusion process from other Bonnell plants and from third party vendors. Bonnell Aluminum has various forms of insurance to cover losses in the event of such incidents. These policies cover damage to buildings and equipment, third party claims as well as business interruption and additional expenses incurred as a result of the explosion. The Company is currently assessing the potential future liability related to this incident but, due to the timing of the incident at the end of the second quarter of 2016, uncertainties remain regarding the impairment of assets and future liabilities. The Company assessed the range of possible future liabilities and recorded its current best estimate. No receivable has been recorded for insurance recoveries and no asset impairments have been recorded, but an accrual of $0.6 million was recorded as of June 30, 2016 (included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the Condensed Consolidated Statement of Income). Capital expenditures for Bonnell Aluminum were $3.6 million in the first six months of 2016 compared to $5.3 million in the first six months of 2015. Capital expenditures are projected to total $22 million in 2016, which includes $5 million for routine capital expenditures required to support operations and $14 million of a total $18 million expected to add extrusions capacity at the Niles, Michigan, facility. At this point projections of capital expenditures for Bonnell Aluminum assume that the damage caused by the cast house explosion will be repaired and replaced on a like-kind basis covered by insurance and not requiring additional capital expenditures. Capital expenditure projections related to this matter will be revised if necessary once an option has been selected. Bonnell Aluminum’s average capacity utilization remains in excess of 90% due to the increased demand, primarily from the nonresidential building and construction sector. Depreciation expense was $4.1 million in the first six months of 2016 compared to $4.3 million in the first six months of 2015, and is projected to be $8 million in 2016. Amortization expense was $0.5 million in the first six months of 2016 and $0.5 million in the first six months of 2015, and is projected to be $1 million in 2016. Pension expense was $5.7 million in the first six months of 2016, a favorable change of $0.5 million from the first six months of 2015. Most of the impact on earnings from pension expense is reflected in “Corporate expenses, net” in the Net Sales and Operating Profit by Segment table. Pension expense is projected to be $11.3 million in 2016. Corporate expenses, net, decreased in 2016 versus 2015. Expenses in the prior year included severance and other employee-related charges of $3.9 million associated with the resignations of the Company’s former chief executive and chief financial officers in the second quarter of 2015. Higher business development costs of $0.4 million in 2016 were offset by the lower pension expense. Interest expense was $2.0 million in the first six months of 2016 in comparison to $1.8 million in the first six months of 2015. Interest expense in 2016 included the write off of $0.2 million in unamortized loan fees from the credit facility that was refinanced in the first quarter of 2016. The effective tax rate used to compute income taxes from continuing operations in the first six months of 2016 was 29.8% compared to 35.2% in the first six months of 2015. The effective tax rate from ongoing operations comparable to the introductory earnings reconciliation table was 32.1% for the first six months of 2016 versus 36.9% in 2015. An explanation of significant differences between the estimated effective tax rate for income from continuing operations and the U.S. federal statutory rate for 2016 and 2015 will be provided in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (the “Form 10-Q”). Total debt was $94.0 million at June 30, 2016, compared to $104.0 million at December 31, 2015. Net debt (debt in excess of cash and cash equivalents) was $66.5 million at June 30, 2016, compared to $59.8 million at December 31, 2015. Net debt is a financial measure that is not calculated or presented in accordance with GAAP. See Note (d) in the Notes to the Financial Tables for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure. Some of the information contained in this press release may constitute “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. When we use the words “believe,” “estimate,” “anticipate,” “expect,” “project,” “likely,” “may” and similar expressions, we do so to identify forward-looking statements. Such statements are based on our then current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. Factors that could cause actual results to differ from expectations include, without limitation, the following: we have an underfunded defined benefit (pension) plan to which we will be required to make contributions; our performance is influenced by costs incurred by our operating companies, including, for example, the cost of raw materials and energy; our substantial international operations subject us to risks of doing business in countries outside the U.S., which could adversely affect our consolidated financial condition, results of operations and cash flows; we may not be able to successfully identify, complete or integrate strategic acquisitions; acquired businesses, may not achieve the levels of revenue, profit, productivity, or otherwise perform as we expect; acquisitions involve special risks, including without limitation, diversion of management’s time and attention from our existing businesses, the potential assumption of unanticipated liabilities and contingencies and potential difficulties in integrating acquired businesses and achieving anticipated operational improvements; PE Films is highly dependent on sales associated with its top five customers, the largest of which is The Procter & Gamble Company, and the loss or significant reduction of sales associated with one or more of these customers could have a material adverse effect on our business; growth of PE Films depends on its ability to develop and deliver new products at competitive prices; the failure of PE Films’ customers, who are subject to cyclical downturns, to achieve success or maintain market share could adversely impact its sales and operating margins; uncertain economic conditions in Brazil could adversely impact the financial condition, results of operations and cash flows of Flexible Packaging Films; and the other factors discussed in the reports Tredegar files with or furnishes to the SEC from time to time, including the risks and important factors set forth in additional detail in “Risk Factors” in Part I, Item 1A of Tredegar’s 2015 Annual Report on Form 10-K/A (the “2015 Form 10-K”) filed with the SEC. Readers are urged to review and consider carefully the disclosures Tredegar makes in its filings with the SEC, including the 2015 Form 10-K. (a) Losses associated with plant shutdowns, asset impairments, restructurings and other charges for continuing operations in the second quarter and first six months of 2016 and 2015 are shown below and, unless otherwise noted, are included in “Asset impairments and costs associated with exit and disposal activities, net of adjustments” in the condensed consolidated statements of income. Pretax charges of $8,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana. Pretax charges of $0.6 million related to an explosion that occurred in the second quarter of 2016 at Aluminum Extrusions’ Newnan cast house (included in “Selling, R&D and general expenses” in the consolidated statements of income). Pretax charges of $15,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana. Pretax charges of $18,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana. Pretax charges of $33,000 associated with the shutdown of the aluminum extrusions manufacturing facility in Kentland, Indiana. (b) An unrealized gain on the Company’s investment in kaleo, Inc. (“kaléo”) of $0.3 million and $1.1 million was recognized in the second quarter and first six months of 2016 (no unrealized gain (loss) in the first six months of 2015). The change in the estimated fair value of the Company’s holding in kaléo in the second quarter and first six months of 2016 was primarily associated with the negotiated terms of the termination of sanofi-aventis U.S. LLC’s exclusive rights license for Auvi-Q in North America and the return of such rights to kaléo. Projected future cash flows associated with relaunching the epinephrine auto-injector and reaching other product development and commercialization milestones are discounted at 45% for their high degree of risk. (c) Income taxes in the first six months of 2016 and 2015 included the partial reversal of a valuation allowance of $0.1 million and $0.3 million, respectively, related to the expected limitations on the utilization of assumed capital losses on certain investments that were recognized in prior years. Net debt is not intended to represent total debt as defined by GAAP. Net debt is utilized by management in evaluating the Company ’s financial leverage and equity valuation, and management believes that investors also may find net debt to be helpful for the same purposes.

{'timestamp': '2019-04-20T06:14:19Z', 'url': 'https://www.businesswire.com/news/home/20160802006858/en/', 'language': 'en', 'source': 'c4'}

professional_accounting

Are you frustrated with having poor finances and bad credit? Do wish that you were able to make better financial choices that can help you profit more and lose less? If this is something that you relate to, then you need to Find the best accountants in Bixby by coming to us here at Hood & Associates CPAs. We are one of the most qualified and highly certified accountants and Associates in the industry who can give you the financial advice that you need to improve your financial circumstances and make better decisions. Absolutely essential that you are able to seek out the best Associates and said accountants available in the industry. This is why you need to Find the best accountants in Bixby by coming to us at Hood & Associates CPAs to give you the advice that you need. To do this, our accountants are able to personally it review your financial circumstances and generate a course of action that you can easily implement in your financial decision-making in everyday life. You can trust our highly qualified associates because they are well certified in a wide range of financial services that can only benefit you and your finances. For us here at Hood & Associates CPAs, it is our highest goal to give you the tailored and individualized service and financial planning. To do this, we assess and evaluate your personal financial circumstances to give. The personalized advice and financial planning and support that can benefit your situation. This is why if you are looking to Find the best accountants in Bixby, then look no further than here at our accounting firm with our fantastic accountants and Associates. We are more than qualified to give you the expert advice that you need to benefit your financial situation today. Some of the choices of financial services that we can provide field include the estate and retirement planning, accounting services, auditing services, and federal and state tax support. 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We want to give you the tax support and financial planning that you need to have a profitable future which is why we will personally assess and evaluate your situation in finances and give you the advice that you need to immediately improve. We find it to be extremely important for our customers to be able to have a profitable futures finances which is why we give you the advice that you need to make better financial decisions. So if you want to be able to make highly informed and well advised financial decisions, then you need to Find the best accountants in Bixby by coming to us here at Hood & Associates CPAs. Our associates are highly qualified in a wide range of financial services which is why you can trust us with your financial decision. We will do everything in our power to ensure that you are making a high profit and low-risk choices that will benefit your financial future. We want to be able to make financial decisions that are sustainable so that you can have a profitable future. Some of the tax to services that we can provide to you whether you are an individual or corporation includes estate and retirement planning, federal and state tax support, auditing services, accounting services and systems, and more. No matter what your situation might be, you can trust that our associates are highly qualified to give you the advice necessary to improve their financial circumstances. Don’t reach out to less qualified and that was helpful accountants and instead come to us at Hood & Associates CPAs to ensure that you are receiving the top informative advice needed to advance your financial situation. If you want to learn more about the ways in which we can personally help your financial situation say, then you should go to our website at www.HoodCPAs.com to see our selection of financial services. 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professional_accounting

Time to take a step back from external audit? In my view it is now time to finally take a step back from external (financial statements) auditing. We need to, internationally, think about what this process was meant to achieve. In my view I think the current process needs to be abolished, or significantly reformed, based upon a basic re-imagining the underlying point of the process. Well, what is it that auditing financial statements is required to achieve? First the logic goes that financial statements are used by ‘users’, a euphemistic term for, broadly, stakeholders of the business, and by stakeholders I do mean those with a genuine ‘stake’ in the business: shareholders; creditors; suppliers; customers; bankers; employees and regulators. These users require financial statements that meet their needs and allow them to have confidence in the statements of the business. This confidence and these statements then allow this multiplicity of needs to be met: for bankers to assess the creditworthiness of the business; suppliers and creditors the same; employees to decide whether the business meets their security needs and aspirations; shareholders to see whether their dividends and future cash flows deriving from the business are right and appropriate and to hold the management team to account. So let’s analyse these claims for the usefulness of accounts. Take those parties that want to know how credit-worthy a business is. Modern financial statements are meaningless to the majority and confusing to the few. Financial accounts have been changed (certainly since the last time I audited a set) to new international reporting standards, the rules about format, classification and presentation of accounts. This means that the old rules by which an auditor or any party understood accounts has changed. It used to the case that accounts contained three things: a balance sheet; profit and loss account; and cash-flow statement. The balance sheet showed assets shown at historic cost, written off or valued up according to the length of time the asset was held and major shifts in value. Similarly liabilities were generally held at historic cost, the value when created unless it made obvious sense to change these. The profit and loss contained the summary of transactions for the period, usually a year, adjusted to match income to costs. The cash-flow statement let you know the different of effect between the accounting and cash values of these transactions. Between them auditing and interpreting the accounts was simple. The assets and liabilities could be evidenced by the historic transactions, revaluations were provided by professional parties and were infrequent and large in scale (typically buildings or large equipment), debtors and creditors were easily evidenced to the arm’s length transaction that created them. The profit and loss account could be checked to cut off, to check the income and expenses were in the correct period, sample tests of transactions and verification in the context of the business. The cashflow statement was a maths exercise derived from the statements themselves. Modern IFRS financial statements use judgements throughout, both to value assets and to recognise income. There is, no longer, a lodestone of common sense, a fixed point, by which these things can be understood. They are a negotiated settlement based in 1000s of judgements between managers and their auditors. Very few people understand them and they provide no real narrative over business performance and fixed point of reference. Well-prepared and assessed financial statements are only available to the very big companies with deep pockets for their finance and audit teams. In short, I suggest that very few credit decisions are even partly based, and even fewer primarily based, on financial statements data. Add to this that most companies (by number) do not have audited financial statements I would say that this is pointless. What about shareholders? Do they use the financial statements? Perhaps, a little. They will probably be interested in the ‘profit’ number, which is now more of a judgement than it has ever been. Most shareholders, I suggest do not. Most own shares as part of a fund and thus those decisions will be made by others. What about the credit worthiness argument? Well given assets are valued according to third party assets in many cases (derivatives) and are not held at historic cost in a number of cases, I would suggest that assessing creditworthiness of a business is a matter of sentiment than calculated risk. In an age where personalities at the top make 20 percent plus difference to the valuation of businesses (reference the value of Stephen Hestor at RBS, or Steve Jobs at Apple, or the chief executives at Tesco and other major businesses, credit lines are more an act of faith than judgement. You will have noticed that the one set of users conspicuously absent so far in my analysis are the ‘markets’. The logic I was taught at audit school was that share price was a product of the valuation of the future cash flows of a business. Thus a shareholder bought shares for two things. First the value of the current and future years’ dividends the share entitled them to, and second, the discounted present value of these cash flows to affect the valuation. Thus the dot.com shares were highly valued about assets held by these companies because of the large future value these companies would generate. The markets now seem to ‘trade’ and gamble on these shares. The ‘chips’ have no real value above the bets placed daily, hourly, monthly. Thus it is incongruous to me that the value of a company, say Tesco, can drop 5-10% in one day for having a 1-2% fall in their Christmas business. Or a company can be worth less because one chief executive changes role. The underlying businesses and their models do not change dramatically. Instead it is gambling on market sentiment. A slightly immoral approach to making money in my view that plays with all of our lives, through pension funds, and those in the businesses affected. The final point I wish to make is that financial statements are a poor predictor of anything in the business, they do not hold the business to account. So very few accounts are qualified by auditors (based upon the rule that auditors need to certify that the business is a going concern i.e. will continue, for the next twelve months). Even when they are it is obvious to all, financially trained or not, that the business will fail. Credit has normally been withdrawn months before or worthiness downgraded before the accounts are qualified. Audit normally points out the obvious and the occurred. They deal in financial issues, not risks, if you will looking out of the back window of the car and pointing out the car’s crashed and stopped. Why is this? Financial statements contain no future data about the business, the operating and financial review is only audited by exception (i.e. if it lies based upon the numbers), the accounts are not risk-based, they contain no real performance review data. Most auditors (in my experience) have only a superficial understanding of the businesses they audit and the real risks they face. Thus, to me it appears as if financial statements auditing and financial statements themselves perform a marginal role to the users they are meant to serve. I would suggest therefore that the deference to the external or financial statements auditors compared to the internal and risk based auditors, proffered by most audit committee members is misplaced. Perhaps it is time that we recognised that what business needs is an independent business risk assessment that is published. A counter (or independent) performance narrative around the real risks faced by businesses. Of course there would be challenges in this: internal auditors would need, as a profession, to get much better (which will be the subject of a future post); the publication of real risk data would present competition issues; and governance would need to markedly improve and be more independent and objective. None of this is impossible and, given the current resources invested in financial statements auditing, perhaps it is not even new money needed. A useful point in the austere global world we live in.

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professional_accounting

Invest for Good with IQ Dual Impact ETFs Our suite of ESG ETFs seek to impact your portfolio's potential and the world. Longevity & Growth Tax Efficient Investing Combating Inflation Generating Income Managing Volatility IndexIQ ETFs Variable Portfolios Gain From Our Insights Our investment managers offer unparalleled domain expertise and diversity of thought, generating deeper insights alongside strong conviction to deliver better outcomes. Access to our extensive library of product and market insights and materials. Product Prospectuses and Reports Our Portfolio Managers Global Boutiques Click here for more complete Morningstar ratings information. MainStay WMC Value Fund seeks long-term appreciation of capital. A fundamental value strategy Bottom-up, fundamental research-based approach seeking a compelling combination of value, quality and capital return characteristics. Wellington's boutique approach Investment team has autonomy to set the portfolio's philosophy and process, while leveraging the resources of a large, global firm. Focus on quality at a discount Seeks financially sound, temporarily out-of-favor companies that provide above-average total return potential at below average valuation. Class A & INV: 5.5% maximum initial sales charge; a 1% CDSC may be imposed on certain redemptions made within 18 months of the date of purchase on shares that were purchased without an initial sales charge. Class B: CDSC up to 5% if redeemed within six years. Class C: 1% CDSC if redeemed within one year. Class I: No initial sales charge or CDSC. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. No initial sales charge applies on investments of $1 million or more (and certain other qualified purchases). However, a contingent deferred sales charge of 1.00% may be imposed on certain redemptions made within 18 months of the date of purchase on shares that were purchased without an initial sales charge. Expenses stated are as of the fund's most recent prospectus. Effective April 26, 2021, the Fund replaced both of its subadvisors and modified its principal investment strategies. The past performance prior to that date reflects the Fund’s prior subadvisors and principal investment strategies. Performance reflects a contractual fee waiver and/or expense limitation agreement for Class I shares in effect through 2/28/23, without which total returns may have been lower. This agreement renews automatically for one-year terms unless written notice is provided before the start of the next term or upon approval of the Board. Rotate your phone for full Morningstar Tools Experience Does not reflect the effect of any sales charge, which would reduce performance shown. Performance for other sales charges will differ based on differences in sales charges and expense structure. View all Holdings Top Sectors (%) Distribution & Yields Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the fund. Because the distribution rate and the 12-month rate may include a ROC, they should not be confused with yield or income. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January. Distribution Rate: The distribution rate measures the percentage return in the form of dividends. It is calculated daily by annualizing the most recent dividend distribution and dividing by the daily share price (NAV or POP). If the Fund did not make a distribution as of the latest scheduled distribution date, "N/A" will be displayed. 12-month Rate: The 12-month rate measures the percentage return in the form of dividends. It is calculated monthly by taking the sum of the trailing 12-month dividend payments divided by the last month's ending share price (NAV or POP) plus any capital gains distributed over previous 12 months. If the Fund did not make any distributions over the previous 12 months, "N/A" will be displayed. The 30 Day SEC Yield is calculated by dividing the net investment income per share for the first 30 days of the month by the offering price per share at the end of that period. The yield reflects the dividends and interest earned during the period, after the deduction of the Fund's expenses. Yield reflects a fee waiver and/or expense limitation agreement without which the 30 Day SEC Yield would have been lower. Dividend distributions are the distribution of a dividend to mutual fund shareholders as of a certain date. The following Funds declare daily dividends: MainStay MacKay California Tax Free Opportunities, MainStay Floating Rate, MainStay MacKay High Yield Municipal Bond, MainStay MacKay Infrastructure Bond, MainStay Money Market, MainStay MacKay New York Tax Free Opportunities, MainStay MacKay Tax Advantaged ShortTerm Bond and MainStay MacKay Tax Free Bond. Click here for MainStay Funds sales charge and breakpoint information. Fees & Expenses A global asset manager with expertise and solutions across equity, fixed income, multi-asset and alternatives. One of the world’s largest independent investment management firms, offering comprehensive investment capabilities built on rigorous, proprietary research spanning nearly all segments of the global capital markets, including equity, fixed income, multi-asset and alternative strategies. Adam Illfelder Please enter one email address. Sender Name * Sender Email * Your email address is used only to identify you to the recipient and in case of transmission errors. Neither your address nor the recipient's address will be sold or used for any purpose other than transmission of this message. MainStay WMC Value Fund Class A: MAPAX | Class B: MAPBX | Class C: MMPCX | Class I: MUBFX | Class INV: MSMIX | Class R1: MAPRX | Class R2: MPRRX | Class R3: MMAPX | Class R6: MMPDX BEFORE YOU INVEST Before considering an investment in the Fund, you should understand that you could lose money. Growth-oriented common stocks and other equity type securities (such as preferred stocks, convertible preferred stocks and convertible bonds) may involve larger price swings and greater potential for loss than other types of investments. The principal risk of investing in value funds is that the price of the security may not approach its anticipated value. Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. Issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and are more vulnerable to economic changes. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. These risks may be greater for emerging markets. Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating. Russell 1000® Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000® Index companies with lower price-to-book ratios and lower expected growth values. An investment cannot be made directly into an index. Standard Deviation measures how widely dispersed a fund's returns have been over a specified period of time. A high standard deviation indicates that the range is wide, implying greater potential for volatility. Alpha measures a fund's risk-adjusted performance and is expressed as an annualized percentage. Beta is a measure of historical volatility relative to an appropriate index (benchmark) based on its investment objective. A beta greater than 1.00 indicates volatility greater than the benchmark's. R-Squared measures the percentage of a fund's movements that result from movements in the index. Sharpe Ratio shown is calculated for the past 36-month period by dividing annualized excess returns by annualized standard deviation. Annual Turnover Rate is as of the most recent annual shareholder report. The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance (this does not include the effects of sales charges, loads, and redemption fees). The top 10% of products in each product category receive 5stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. GLOBAL BOUTIQUES GLOBAL BOUTIQUES Candriam GoldPoint Partners IndexIQ Kartesia MacKay Shields Madison Capital Funding NYL Investors PA Capital Tristan Capital Partners Sign up to get the latest on ideas and insights that matter most to you. Consider the Funds' investment objectives, risks, charges, and expenses carefully before investing. The prospectus, or summary prospectus, and the statement of additional information include this and other relevant information about the Funds and are available by calling (888) 474-7725 for IndexIQ ETFs and 800-624-6782 for MainStay Funds®. Read the prospectus carefully before investing. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The MainStay Funds® are managed by New York Life Investment Management LLC and distributed through NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member of FINRA/SIPC. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC. “New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. The mutual funds may be offered and sold only to persons in the United States. The products and services of New York Life Investments' boutiques are not available in all jurisdictions or regions where such provision would be contrary to local laws or regulations. AUM: As of September 30, 2021. Assets under management includes the assets of the investment advisors affiliated with New York Life Insurance Company. AUM beginning in 2012 excludes Assets under Administration. AUM is reported in USD. AUM that are not denominated in USD are converted using spot rates as of the reporting date. ©2021 New York Life Investment Management LLC. All rights reserved. You are now leaving the New York Life Investments Web Site. You assume total responsibility and risk for your use of the site(s) to which you are linking. The information being provided is strictly as a courtesy. When you link to any of the web sites provided herewith, you are leaving this site. Neither the Company, New York Life nor any of its subsidiaries, make any representations as to the completeness or accuracy of information that is provided at these sites. Nor are they liable for any direct or indirect technical or systems issues or any consequences arising out of your access to or your use of third-party technologies, sites, information and programs made available through this site. Retirement Specialist New York Life Investments uses cookies to personalize and improve your site experience and provide you with information about products and services tailored to your interests. When selecting ‘Accept and Continue’ you accept all categories of cookies. For more information about the types of cookies we use and how you can disable certain cookies, please visit our “Online Privacy Policy” which can be found under “Privacy and Other Policies". Please be aware that certain types of cookies are necessary to browse our website and therefore cannot be disabled. These necessary cookies do not collect any personal information about you. Please select your role so we can personalize the site to meet your needs Almost There ! Please enter your email to download:

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professional_accounting

Australian National Audit Office (ANAO) Work program Browse our range of publications including performance and financial statement audit reports, assurance review reports, information reports and annual reports. View publications Major projects report Assurance review ANAO Corporate Plan 2020–21 Audit insights Parliamentary briefings Auditor-General's expenses ANAO Audit Manual Other corporate publications The ANAO work program outlines potential and in-progress work across financial statement and performance audit. View the work program View by portfolio Annual performance statements audits pilot program In-progress Financial statement audit reports Open for contribution Assurance reviews Requests for audit Auditor-General's responses to requests for audit Our staff add value to public sector effectiveness and the independent assurance of public sector administration and accountability, applying our professional and technical leadership to have a real impact on real issues. Assurance Audit Services Group Performance Audit Services Group Systems Assurance and Data Analytics Group Assurance Projects Branch Professional Services and Relationships Group Working at the ANAO The ANAO Graduate Program Learning, development & training APS employee census Vacancies and applications Contact ANAO careers The Australian National Audit Office (ANAO) is a specialist public sector practice providing a range of audit and assurance services to the Parliament and Commonwealth entities. The Auditor-General Australian National Audit Office Publications, seminars, events & briefings ANAO Corporate Plan 2020-21 External audits and reviews, and procurement External audits and reviews Statement of legal service expenditure Senate Order on Entity Contracts Gifts and benefits register Publications › The Auditor-General Act 1997 establishes the mandate for the Auditor-General to undertake financial statement audits of all Australian Government entities, including those of non-corporate and corporate Commonwealth entities, and Commonwealth companies. (-) Remove 2014-15 filter 2014–15 Financial statement audit (Auditor-General Report No. 44 of 2014–15) Published: Friday 5 June 2015 Interim Phase of the Audits of the Financial Statements of Major General Government Sector Entities for the year ending 30 June 2015 This report outlines the ANAO’s assessment of the internal controls of major entities, including governance arrangements, information systems and control procedures. The findings summarised in this report are the results of the interim phase of the financial statement audits of 23 major General Government Sector entities that represent some 95 per cent of total General Government Sector revenues and expenses. Across Entities Please direct enquiries relating to reports through our contact page. Cross Government Read published report Published: Thursday 18 December 2014 Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2014 This report complements the interim phase report published in June 2014 (Audit Report No.44 2013–14), and provides a summary of the final audit results of the audits of the financial statements of 251 Australian Government entities, including the Consolidated Financial Statements for the Australian Government. Published: Thursday 24 June 2010 Interim Phase of the Audit of Financial Statements of Major General Government Sector Agencies This report presents the results of the interim phase of the 2009–10 financial statement audits of all portfolio departments and other major General Government Sector (GGS) agencies that collectively represent some 95 per cent of total GGS revenues and expenses. Across Agencies Financial statement audits are an independent examination of the financial accounting and reporting of public sector entities. The results of the examination are presented in an audit report, which expresses the auditor's opinion on whether the financial statements as a whole and the information contained therein fairly present each entity's financial position and the results of its operations and cash flows. The accounting treatments and disclosures reflected in the financial statements by the entity are assessed against relevant accounting standards and legislative reporting requirements. NO-DEPTS-LISTED Published: Monday 22 June 2009 Interim Phase of the Audit of Financial Statements of General Government Sector Agencies for the Year ending 30 June 2009 Under section 57 of the Financial Management and Accountability Act 1997 (FMA Act) the Auditor-General is required to report each year to the relevant Minister, on whether the financial statements of agencies have been prepared in accordance with the Finance Minister's Orders (FMOs) and whether they give a true and fair view of the matters required by those Orders. Our interim audits of agencies encompass a review of governance arrangements related to agencies' financial reporting responsibilities, and an examination of relevant internal controls, including information technology system controls. An examination of such issues is designed to assess the reliance that can be placed on internal controls to produce complete and accurate information for financial reporting purposes. Published: Wednesday 17 December 2008 The Auditor-General Act 1997 establishes the mandate for the Auditor General to undertake financial statement audits of all Commonwealth entities including those of government agencies, statutory authorities and government business enterprises. Published: Wednesday 25 June 2008 This report presents the results of the interim phase of the 2007-08 financial statement audits of all portfolio departments and other major General Government Sector (GGS) agencies that collectively represent some 95 per cent of total GGS revenues and expenses. The results of the final audits of these departments and agencies will be included in a second report to be tabled in the Parliament in December 2008 following completion of the financial statement audits of all entities for 2007-08. This report complements the interim phase report, Audit Report No.51 2006–07 Interim Phase of the Audit of Financial Statements of General Government Sector Entities for the Year Ending 30 June 2007, and provides a summary of the final audit results of the audits of the financial statements of all Australian Government entities, including the Consolidated Financial Statements for the Australian Government. This report presents the results of the interim phase of the 2006–07 financial statement audits of all portfolio departments and other major General Government Sector (GGS) agencies that collectively represent 95 per cent of total GGS revenues and expenses. Published: Tuesday 19 December 2006 Audits of Financial Statements of Australian Government Entities for the Period Ended 30 June 2006 The focus of this report is on the year end results of the financial statement audits of all general purpose reporting entities for the 2005–06 financial year. Financial management issues (where relevant) arising out of the audits and their relationship to internal control structures are also included in this report. Interim Phase of the Audit of Financial Statements of General Government Sector Entities for the Year Ending 30 June 2006 Across agency Audit of Financial Statements of Australian Government Entities for the Period Ended 30 June 2005 Published: Friday 15 December 2000 Audits of the Financial Statements of Commonwealth Entities for the Period Ended 30 June 2000 This report summarises the final results of the audits of the financial statements of Commonwealth entities, forming the second report this year on financial statement audits for the period ended 30 June 2000. It complements Audit Report No.52 1999-2000 Control Structures as Part of the Audits of Financial Statements of Major Commonwealth Agencies for the Period Ended 30 June 2000. The report is in three parts: Part One of the report is a commentary on the structure and status of the new financial framework, focusing on the quality and timeliness of the preparation of the annual financial statements; Part Two discusses the summary final results of the audits of the financial statements, providing details regarding qualifications and any matters emphasised in audit reports; and Part Three provides the results of the individual financial statement audits and any additional significant control issues identified since Audit Report No.52. Better practice guides Auditor-General Grant Hehir Graduate Program facebook Public Interest Disclosure Scheme

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professional_accounting

NATIONAL AUTO CREDIT INC /DE Form PRE 14A NATIONAL AUTO CREDIT, INC. 555 MADISON AVENUE, 29TH FLOOR December [12], 2005 Dear Fellow Stockholder: You are cordially invited to attend the Annual Meeting of Stockholders of National Auto Credit, Inc. to be held on January 31, 2005 at the Angelika Film Center,18W Houston Street New York, New York 10012 at 10:00 A.M. (EST). The attached Notice of Annual Meeting and Proxy Statement describe the formal business to be transacted at the Annual Meeting. During the meeting, we will also report on the operations of your Company and directors and officers will be present to respond to your questions. YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WE URGE YOU TO SIGN, DATE AND MAIL THE ENCLOSED WHITE PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE ANNUAL MEETING. This will not prevent you from voting in person, but will assure that your vote is counted if you are unable to attend the meeting. It is always a pleasure for me and the other members of your Board of Directors to meet with our stockholders. We look forward to greeting as many of you as possible at the meeting. On behalf of your Board of Directors, thank you for your continued interest and support. /s/ James McNamara James McNamara Chairman of the Board and YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. AS SUCH, PLEASE SIGN, DATE AND MAIL YOUR WHITE PROXY CARD AT YOUR EARLIEST CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. IF YOU OWN YOUR SHARES THROUGH BANK OR BROKERAGE ACCOUNTS, YOU SHOULD BRING A WRITTEN STATEMENT FROM THE BANK OR BROKER VERIFYING THAT YOU ARE THE BENEFICIAL OWNER OF YOUR SHARES OR OTHER APPROPRIATE PROOF OF YOUR OWNERSHIP IF YOU WISH TO ATTEND THE MEETING. TO BE HELD ON JANUARY 31, 2006 To the Holders of Common Stock: NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of National Auto Credit, Inc. (the "Company") will be held at 10:00 A.M., at the ANGELIKA FILM CENTER,18W HOUSTON STREET NEW YORK, NEW YORK 10012, for the following purposes: (1) To elect all directors of the Company to hold office until the next Annual Meeting of Stockholders and until their respective successors are duly elected and qualified; (2) To ratify the appointment of Grant Thornton LLP as independent public accountants for the fiscal year ending January 31, 2006; (3) To consider and act upon a proposal to amend and restate the Company's Certificate of Incorporation, including a proposed change of the Company's name to [Insert Pending]; (4) To consider and act upon a proposal to ratify an equity compensation plan (the 2005 Equity Compensation Plan), under which performance-related incentives will be granted to designated employees, certain consultants and advisors and non-employee directors of the Company; and (5) To transact such other business as may properly come before the meeting or adjournments thereof. The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice. The Board of Directors has fixed the close of business on December 12, 2005 as the Record Date for the determination of shareholders entitled to notice of, and to vote at, the Annual Meeting or any adjournments thereof. Representation of at least a majority of all outstanding shares of Common Stock is required to constitute a quorum. Accordingly, it is important that your stock be represented at the meeting. The Company will admit to the Annual Meeting stockholders of record, persons holding proof of beneficial ownership or who have been granted proxies and any other person that the Company, in its sole discretion, may elect to admit. If you plan to attend the Annual Meeting, please check the appropriate box on your proxy card. By Order of the Board of Directors, /s/ Robert V. Cuddihy, Jr. Robert V. Cuddihy, Jr. Chief Financial Officer, YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE ANNUAL MEETING, PLEASE SIGN, DATE, AND MAIL THE ENCLOSED WHITE PROXY CARD. A PREPAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. PLEASE ACT AT YOUR FIRST CONVENIENCE. PRELIMINARY PROXY STATEMENT The enclosed proxy is being solicited by the Board of Directors of National Auto Credit, Inc. ("NAC" or the "Company") for use in connection with the Annual Meeting of Stockholders to be held on January 31, 2006. This proxy statement and enclosed proxy are first being sent to stockholders on or about December 12, 2005. The mailing address of the principal executive office of the Company is 555 Madison Avenue, 29th Floor, New York, New York 10022. The cost of preparing, printing and mailing the notice of meeting, form of proxy, proxy statement and annual report will be borne by the Company. Banks, brokerage houses, custodians, nominees and fiduciaries are being requested to forward the soliciting material to their principals and to obtain authorization for the execution of proxies, and may be reimbursed for their out-of-pocket expenses incurred in connection therewith. Your vote is important. SHARES REPRESENTED BY PROXIES WILL BE VOTED IN ACCORDANCE WITH INSTRUCTIONS ON THE PROXY CARDS OR, IF NO INSTRUCTIONS ARE PROVIDED, SUCH PROXIES WILL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATION OF THE BOARD OF DIRECTORS "FOR" PROPOSALS NUMBERED 1 THROUGH 4. THE PROXIES ARE ALSO AUTHORIZED TO VOTE IN THEIR DISCRETION ON ANY OTHER MATTER WHICH MAY PROPERLY COME BEFORE THE ANNUAL MEETING. Any stockholder giving the enclosed proxy has the right to revoke it at any time before it is voted. To revoke a proxy, the stockholder must file with the Secretary of the Company either a written revocation or a duly executed proxy bearing a later date. If you decide to attend the meeting, you may revoke your proxy and vote your shares in person. The record of stockholders entitled to notice of, and to vote at, the Annual Meeting was taken at the close of business on December 12, 2005. At that date the Company had outstanding [8,540,114] shares of Common Stock ($.05 par value) of the Company ("Common Stock"). Each share of Common Stock is entitled to one vote. No other class of securities is entitled to vote at this meeting. Under Section 216 of the Delaware General Corporation Law and the Company's Second Amended and Restated By-Laws, a majority of the shares of the Common Stock, present in person or represented by proxy, shall constitute a quorum for purposes of the Annual Meeting. In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the Annual Meeting and entitled to vote on the subject matter shall be the act of the stockholders. Directors shall be elected by a plurality of the votes present in person or represented by proxy at the Annual Meeting and entitled to vote on the election of directors. Abstentions will have the effect of votes against a proposal, and broker non-votes (that is, proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owner or other persons entitled to vote shares on a particular matter with respect to which the brokers or nominees do not have discretionary power) will have no effect on the vote. AVAILABLE INFORMATION AND SOURCES OF INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). The reports, proxy statements and other information filed by the Company with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at 233 Broadway, New York, New York 10279, and 175 W. Jackson Boulevard, Suite 900, Chicago, Illinois 60604. Copies of such material also may be obtained by mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You are being furnished with a copy of the annual report of the Company on Form 10-K along with this proxy statement, in satisfaction of the informational requirements of the Exchange Act. It is not to be regarded as proxy-solicitation material. Statements contained in this Proxy Statement or in any document incorporated by reference in this Proxy Statement as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed or incorporated by reference as an exhibit to the registration statement or such other document, each such statement being qualified in all respects by such reference. No persons have been authorized to give any information or to make any representation other than those contained in this Proxy Statement in connection with the solicitations of proxies made hereby and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any other person. The delivery of this Proxy Statement shall not under any circumstances create an implication that there has been no change in the affairs of the Company since the date hereof or that the information herein is correct as of any time subsequent to its date. SECURITY OWNERSHIP OF OFFICERS, DIRECTORS AND 5% OWNERS The following table lists the number of shares of Common Stock beneficially owned as of October 31, 2005, by those known by the Company to own beneficially 5% or more of the Common Stock, all the directors, each executive officer listed in the table under the caption "Executive Compensation" and all directors and executive officers of the Company as a group. As of October 31, 2005, 8,540,114 shares of Common Stock, $.05 par value, of the Registrant were outstanding. Amount and Nature Beneficial Percent of Name and Address Ownership+ Class* --------------------------------------- ----------------- ---------- James McNamara 2,510,075(1) 28.2% John A. Gleason 210,000(2) 2.4% Henry Y. L. Toh 210,000(2) 2.4% Robert V. Cuddihy, Jr. 200,000 2.3% James M. Augur -- -- Donald Shek -- -- All executive officers and directors as a group (six persons) 3,130,075(3) 33.5% Campus Family 2000 Trust 1,883,333(4) 19.0% 42 Oak Avenue Tuckahoe, NY 10707 + The number of shares beneficially owned is deemed to include shares of the Company's Common Stock as to which the beneficial owner has or shares either investment or voting power. Unless otherwise stated, and except for voting powers held jointly with a person's spouse, the persons and entities named in the table have voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Each such person's percentage ownership is determined by assuming that the options or convertible securities that are held by such person, and which are exercisable within 60 days from the date hereof, have been exercised or converted, as the case may be. All information with respect to beneficial ownership is based on filings made by the respective beneficial owners with the Securities and Exchange Commission (the "SEC") or information provided to the Company by such beneficial owners. * Based on 8,540,114 shares outstanding as of October 31, 2005 (1) Includes 2,135,075 shares of Common Stock and 375,000 shares currently issuable upon exercise of options. (2) Includes 210,000 shares currently issuable upon exercise of options. (3) Includes 2,335,075 shares outstanding and 795,000 shares issuable upon exercise of options. (4) Pursuant to the terms of the $2.8 million Convertible Promissory Note outstanding at October 31, 2005, the holder has the option to convert the note into Common Stock at the rate of $1.50 per share for an aggregate of 1,883,333 shares of Common Stock if fully converted. PROPOSAL 1 ELECTION OF DIRECTORS The Board of Directors of the Company consists of five members. Pursuant to the terms of the Company's Second Amended and Restated By-Laws, adopted by the Board of Directors as of November 3, 2005, the directors of the Company shall no longer be divided into three classes that are elected on a staggered basis at annual meetings of stockholders. Instead, each director shall now be subject to election on an annual basis -- at the annual meeting of stockholders -- for a one year term. Four of the Company's five directors are not affiliated with the Company in any capacity (except, in the cases of Mr. Gleason and Mr. Toh, by virtue of their directorship and stock ownership) and should therefore be considered "independent." The Board of Directors has nominated James J. McNamara, John A. Gleason, James M. Augur, Donald Shek, and Henry Y.L. Toh to serve as directors of the Company for a one-year term, until the Annual Meeting of Stockholders in 2006 and until their successors are duly elected and qualified. Each nominee has consented to be a nominee and to serve as a director if elected. Except as otherwise directed on the proxy card, the persons named as proxies will vote for the election of the designated nominees. In the event that a nominee should become unavailable for election as a director, the persons named as proxies will vote for any substitute nominees that the Board of Directors may select. Set forth below is biographical information for the directors of the Company, each of whom has been nominated by the Board of Directors for election at this year's Annual Meeting of Stockholders. Information concerning the current directors and executive officers of the Company is set forth as follows: Name Age Position ---------------------- --- ------------------------------------------------- James J. McNamara 56 Chairman of the Board and Chief Executive Officer Robert V. Cuddihy, Jr. 46 Chief Financial Officer, Secretary and Treasurer James M. Augur 70 Director John A. Gleason 56 Director Donald Shek 56 Director Henry Y. L. Toh 48 Director NOMINEES TO SERVE A ONE YEAR TERM UNTIL THE 2006 ANNUAL MEETING OF STOCKHOLDERS: JAMES J. MCNAMARA Director Since 1998 Currently Serving until 2005 Annual Meeting of Stockholders Mr. McNamara has been Chairman of the Board and Chief Executive Officer since November 2000. Mr. McNamara has been a Director of NAC since February 1998 and previously served as its Chairman from April 1998 to November 1999. Mr. McNamara has also been President of Film Management Corporation (a film company) since 1995, and he has been President and Chief Executive Officer of Celebrity Entertainment, Inc. (an entertainment company) since 1992. Mr. McNamara was Chairman of the Board and Chief Executive Officer of Princeton Media Group, Inc. (a magazine publisher) from 1994 to 1998. A subsidiary of Princeton Media Group, Inc. and Celebrity Entertainment, Inc. each effected an assignment of their respective assets for the benefit of creditors in 1998. JAMES M. AUGUR Director Since 2004 Mr. Augur has been a Director of NAC since May 2004. Mr. Augur has been a commercial and residential architect for over 30 years. Mr. Augur currently serves as a consultant to owners and developers for land planning and architectural services and is the Chairman and President of JMA and Associates. JOHN A. GLEASON Director Since 2000 Mr. Gleason has been a Director of NAC since April 2000. Mr. Gleason previously served as Director of NAC from February 1998 to September 1999. From 1995 to 1998, Mr. Gleason served on NAC's Dealer Advisory Board, serving as Chairman of such panel from 1996 to 1998. Mr. Gleason has been the President and principal of Automax, Inc., an independent car dealership since 1987. Mr. Gleason has been the President of New Franklin, Inc., an automobile finance consulting firm, since 1992 and has been a partner in Coslar Properties LLC, a real estate firm, DONALD SHEK Director Since 2003 Mr. Shek has been a Director of NAC since December 2003. Mr. Shek has been a financial consultant in private practice since January 1998. From 1993 to 2002, Mr. Shek was a Registered Representative for the Financial West Group, an NASD broker/dealer. HENRY Y. L. TOH Director Since 1998 Mr. Toh has been a Director of NAC since December 1998. Mr. Toh is also a Director of two other public companies, Acceris Communications, Inc., formerly I-Link Incorporated (an Internet telephone company), since 1992 and Teletouch Communications, Inc. (a paging and telecom services provider) since December 2001. Mr. Toh has been the principal officer of Four M. International, Inc. (a private investment entity) since 1992. Mr. Toh is also a director of Crown Financial Group, Inc., an NASD Broker/Dealer, since March 2004. Mr. Toh was also a Director of Bigmar, Inc, a pharmaceutical company, from 2002 to February 2004. STOCKHOLDER VOTE REQUIRED FOR PROPOSAL 1 AND BOARD RECOMMENDATION: The election of the nominees for director requires the affirmative vote of the holders of a plurality of the votes of the shares of Common Stock present in person or represented by proxy at the meeting. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE NOMINEES. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's officers, directors and beneficial owners of more than ten percent of any class of equity securities of the Company to file initial reports of ownership and reports of changes in ownership with the SEC and each exchange on which its securities are traded. Officers and directors are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company, all requisite filings were made in the Company's fiscal year ended January 31, 2005. The Company has adopted a Code of Business Conduct, Ethics and Corporate Governance ("Code of Ethics") that applies to its directors, officers and employees. A copy of the Company's Code of Ethics will be provided free of charge, upon written request to the following address: National Auto Credit, Inc., 555 Madison Avenue, 29th Floor, New York, NY 10022, Attention: Robert V. Cuddihy, Jr. Meetings and Attendance During the fiscal year ended January 31, 2005, there were four (4) meetings of the Board of Directors. All directors attended all of the board meetings and the meetings of the committees on which they serve. The Board of Directors has established various committees to assist it in discharging its duties. The three standing Committees of the Board of Directors are the Audit Committee, the Corporate Governance and Nominating Committee and the Compensation and Stock Option Committee. Consisting entirely of independent directors, the Audit Committee's function is to evaluate the adequacy of the Company's internal accounting controls, review the scope of the audit by the independent auditors and related matters pertaining to the examination of the financial statements, review the year-end and the quarterly financial statements, review the nature and extent of any non-audit services provided by the Company's independent auditors and make recommendations to the Board of Directors with respect to the foregoing matters as well as with respect to the appointment of the Company's independent auditors. The Audit Committee had four meetings in the fiscal year ended January 31, 2005. The Audit Committee is responsible for overseeing the Company's compliance with the Sarbanes Oxley Act of 2002 and all rules promulgated thereunder by the SEC and the National Association of Securities Dealers, Inc. ("NASD"). The members of the Audit Committee are independent, as independence is defined by Rule 4200(a)(15) of the NASD listing standards, as applicable and as may be modified or supplemented. The Audit Committee is governed by a written charter that was adopted by the Company in November 2005 and that was included as an exhibit to a Form 8-K filed by the Company on November 8, 2005. Copies of such charter are available to the shareholders upon request to the Secretary of the Company. The Audit Committee is responsible for approving the engagement of, and has engaged, Grant Thornton LLP to perform audit services for the Company and its subsidiaries. Audit Committee Financial Expert The Board of Directors has determined that Henry Y. L. Toh and Donald Shek each qualify as an "audit committee financial expert" within the meaning of the rules of the SEC and as financially sophisticated audit committee members under the Nasdaq National Market Rules. REPORT OF AUDIT COMMITTEE Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended or the Exchange Act that might incorporate this proxy statement, in whole or in part, the following report of the Audit Committee shall not be deemed to be incorporated by reference into any such filings and shall not otherwise be deemed filed under such Acts. The Audit Committee has: o Reviewed and discussed the audited financial statements with o Discussed with the independent auditors the matters required to be discussed by SAS 61, as it may be modified or supplemented. o Received the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1, as may be modified or supplemented, and has discussed with the independent auditors the auditors' independence. o Based on the review and discussions above, recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K for the last fiscal year for filing with the Securities and Exchange Respectfully submitted by the members of the Audit Committee: Henry Y. L. Toh Donald Shek JOHN GLEASON Corporate Governance and Nominating Committee The Corporate Governance and Nominating Committee's functions are to (1) identify qualified individuals to become members of the Board of Directors, (2) select the director nominees to be presented for election at each annual meeting of shareholders, (3) regularly develop, review and recommend to the Board of Directors a set of corporate governance policies applicable to the Company, and (4) provide oversight for the evaluation of the performance of the Board of Directors. The Corporate Governance and Nominating Committee will consider recommendations for the position of director submitted by stockholders in writing in accordance with the Company's By-Laws to the Secretary of the Company, 555 Madison Avenue, 29th Floor, New York, NY 10022. The members of the Corporate Governance and Nominating Committee are independent, as independence is defined by Rule 4200(a)(15) of the NASD listing standards, as applicable and as may be modified or supplemented. The Corporate Governance and Nominating Committee is governed by a written charter that was adopted by the Company in November 2005 and that was included as an exhibit to a Form 8-K filed by the Company on November 8, 2005. Copies of such charter are available to the shareholders upon request to the Secretary of the Company. The Company's By-Laws provide that stockholders may nominate one or more persons for election as director or directors at the 2006 Annual Meeting of Stockholders only if written notice to make such nomination or nominations has been given either by personal delivery or by mail, postage prepaid, to the Secretary of the Company not less than fourteen (14) nor more than fifty (50) days prior to any meeting of the stockholders called for the election of directors. The Corporate Governance and Nominating Committee has not yet met, given that it was recently formed, already after the Board of Directors' selection of the director nominees to be presented for election at this year's Annual Meeting of Stockholders. The members of the Corporate Governance and Nominating Committee, none of whom is an employee of the Company or its affiliates, are: James M. Augur Compensation and Stock Option Committee The Compensation and Stock Option Committee (formerly the Compensation Committee), which consists entirely of independent directors, did not hold any meetings in the fiscal year ended January 31, 2005. The Compensation and Stock Option Committee administers the Company's 1993 Equity Incentive Plan, 2003 Restricted Stock Plan and would also administer the 2005 Equity Compensation Plan if approved by the stockholders of the Company at the upcoming Annual Meeting of Stockholders. The Compensation and Stock Option Committee is generally empowered to review the performance and development of the management of the Company in achieving corporate goals and objectives and to assure that senior executives of the Company are compensated effectively in a manner consistent with the strategy of the Company, competitive practice, and the requirements of the appropriate regulatory bodies. Toward that end, the Committee oversees, reviews and administers all compensation, equity and employee benefit plans and programs. The Compensation and Stock Option Committee is governed by a written charter that was adopted by the Company in November 2005 and that was included as an exhibit to a Form 8-K filed by the Company on November 8, 2005. Members of the Compensation and Stock Option Committee, none of whom are employees of the Company or its affiliates, are: John A. Gleason EXECUTIVE OFFICERS OF THE COMPANY The current Executive Officers of the Company are Mr. McNamara and Robert V. Cuddihy, Jr., whose biography is set forth below. Mr. McNamara's biography is set forth above under Proposal 1: "Election of Directors." ROBERT V. CUDDIHY, JR. Chief Financial Officer, Secretary and Treasurer Mr. Cuddihy has been the Company's Chief Financial Officer and Treasurer since September 2001. Mr. Cuddihy has been the Company's Secretary since January 2003. Mr. Cuddihy was an independent financial consultant to the Company from May 2001 to August 2001. From July 1987 to March 2001, Mr. Cuddihy was the Chief Financial Officer of HMG Worldwide Corporation, a company engaged in in-store marketing and retail store fixturing design and manufacture, and also served as a Director from February 1998 to May 2001. HMG Worldwide Corporation effected an assignment of their assets for the benefit of creditors in 2002. From July 1981 to July 1987, Mr. Cuddihy was with KPMG Peat Marwick, Certified Public Accountants, where he last served as a senior audit manager. The following table sets forth information as to compensation paid by the Company and its subsidiaries for the fiscal years ended January 31, 2003, 2004 and 2005 to each of the directors and executive officers of the Company: SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards Payouts ----------------------------------- ----------------------- ------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Securities All Annual Restricted Underlying LTIP Other Name and Principal Compensation Stock Options/ Payouts Compensation Position Year Salary($) Bonus($) ($) Award(s) SARs (#) ($) ($) --------------------- ---- --------- -------- ------------ ---------- ---------- ------- ------------ James J. McNamara, 2005 500,000 250,000 91,740 Chairman of the Board 2004 500,000 250,000 87,740 and Chief Executive 2003 500,000 250,000 89,913 Robert V. Cuddihy, 2005 265,000 30,250 37,900 Jr., Chief Financial 2004 265,000 27,500 54,400 200,000 22,045 Officer, Secretary & 2003 265,000 15,000 13,662 OPTION GRANTS IN FISCAL YEAR ENDED JANUARY 31, 2005 AND FISCAL YEAR-END OPTION VALUES Option/SAR Grants in Last Fiscal Year % of Total Options Number of Shares Granted to Employees Exercise Underlying Options in year ended or Base Expiration Grant Date Name Granted 1/31/2005 Price Date Fair Value ---- ------------------ -------------------- -------- ---------- ---------- AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES (a) (b) (c) (d) (e) Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at Shares 1/31/2005 (#) 1/31/2005 ($) Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized ($) Unexercisable Unexercisable --------------------------- ------------ ------------ --------------- --------------- James J. McNamara, -- -- 750,000 --/-- and Chief Executive Officer Robert V. Cuddihy, Jr., -- -- -- --/-- Secretary & Treasurer Board of Directors Interlocks and Insider Participation: The Board of Directors consists of Messrs. McNamara, Augur, Gleason, Shek and Toh. Mr. McNamara is an employee of the Company. The non-employee directors participated in all deliberations and actions of the Company's Board of Directors concerning executive officer compensation. There are no interlocks between the Company and other entities involving the Company's executive officers and Board members who serve as executive officers or Board members of such other entities. Remuneration of Directors and Related Matters Each non-employee member of the Board of Directors receives compensation of $15,000 per annum for serving thereon. Non-employee directors who also serve on the Audit Committee of the Board of Directors are entitled to additional compensation of $10,000 per annum. The non-employee members of Board of Directors are also entitled to reimbursement for all reasonable fees and expenses incurred in connection with the performance of services on behalf of the Company. Fees and expenses are reimbursed upon submission of appropriate documentation for such fees and expenses to the Company in accordance with the then-current NAC policy. Amounts paid to directors in the fiscal year ended January 31, 2005 aggregated $75,000 for services rendered during the period as follows: Director Amount -------------------- ------- James J. McNamara(1) $ -- James M. Augur(2) $10,000 John A. Gleason $15,000 Donald Shek $25,000 Henry Y.L. Toh $25,000 (1) Directors who are also employees of NAC do not receive any additional compensation for serving on the Board of Directors. (2) Mr. Augur joined the NAC Board of Director in May 2005 and received a pro-rata payment of the director fee for the period served on the Board. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS All current transactions between the Company, and its officers, directors and principal stockholders or any affiliates thereof are, and in the future such transactions will be, on terms no less favorable to the Company than could be obtained from unaffiliated third parties. EMPLOYMENT CONTRACTS AND OTHER ARRANGEMENTS WITH EXECUTIVE OFFICERS Employment Agreement with James J. McNamara On December 15, 2000, NAC's Board of Directors approved an Employment Agreement, effective as of November 3, 2000, with James J. McNamara. Under the terms of that agreement, Mr. McNamara was to be employed as Chief Executive Officer for an initial term of three years, until December 31, 2003, with a base salary of $500,000 per year. In the event that NAC achieves certain performance objectives established by the Board of Directors, Mr. McNamara also receives a target cash bonus of $250,000, which may also be increased by the Board if the Board believes it appropriate to reward his performance for that year. During the fiscal year ended January 31, 2005, because of Mr. McNamara's successful efforts on several fronts, the bonus was approved by the Board. Following the initial three-year term, the Employment Agreement was automatically extended on a month-to-month basis and may be cancelled with 90 days prior notice given by either party. NAC may terminate the Employment Agreement at any time for cause, and Mr. McNamara may terminate it at any time in his discretion. The Employment Agreement also granted Mr. McNamara options to purchase an additional 750,000 shares of NAC Common Stock with an exercise price equal to the average of the closing bid prices of the Common Stock on the OTCBB for the five trading days preceding December 16, 2000 or $.664, which also may be exercised by means of cashless exercise. In June 2005, subject to an agreement with shareholders, NAC and Mr. McNamara cancelled 375,000 of the above options. The remaining 375,000 options continue to have a term of 10 years from the date of grant, December 15, 2000, and are fully vested and exercisable. From time to time, the Board may, in its discretion, increase Mr. McNamara's base salary and grant additional options to Mr. McNamara, on such terms as the Board determines, subject to the approval of the Compensation and Stock Option Committee. The Employment Agreement also provides for certain payments in the event of a termination without cause by NAC or a termination for good reason by Mr. McNamara as follows: NAC will pay to Mr. McNamara one dollar ($1) less than the amount that would constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code. NAC shall pay to Mr. McNamara such amount in lump sum cash payment as soon as practicable following the effective date of such termination. NAC shall also continue to provide Mr. McNamara with all employee benefits and perquisites in which he was participating or which he was receiving at the effective date of termination (or if greater, at the end of the prior year) for two years following termination. If it is determined by reason of any payment, or the occurrence of an option vesting, pursuant to the terms of the Employment Agreement (or upon any other plan, agreement or program) upon a Change in Control, as defined in the Employment Agreement (collectively the "Payment"), the Executive would be subject to the excise tax imposed by Code Section 4999 (the "Parachute Tax"), then Mr. McNamara shall be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Mr. McNamara of all taxes (including any Parachute Tax) imposed upon the Gross-Up Payment, Mr. McNamara will retain an amount of the Gross-Up Payment equal to the Parachute Tax imposed upon the Payment. Employment Agreement with Robert V. Cuddihy, Jr. Effective December 31, 2001, NAC consummated an employment agreement with Robert V. Cuddihy, Jr. Under the terms of the agreement, Mr. Cuddihy was to be employed as Chief Financial Officer and Treasurer for an initial term of three years, until December 31, 2004, with a base salary of $240,000 per year and a minimum annual bonus of $25,000 per year. Mr. Cuddihy is also entitled to NAC employee benefits of health insurance, 401-K plan and related programs. Following the initial three year term, the agreement has been renewed on a month-to-month basis, and is terminable upon 90 days prior written notice by either party. In the event that the agreement is terminated by NAC without cause, Mr. Cuddihy shall receive one year's worth of compensation in the form of severance compensation. As a consequence of Mr. Cuddihy's successful performance in the fiscal year ended January 31, 2005 on several fronts, including his management of day-to-day finance and administration activities of NAC and its newly acquired businesses, Mr. Cuddihy was awarded a bonus of $30,250 in cash. REPORT OF COMPENSATION AND STOCK OPTION COMMITTEE The principal goal of the Company's compensation program is to help the Company attract, motivate and retain the executive talent required to develop and achieve the Company's strategic and operating goals with a view to maximizing stockholder value. The key elements of this program and the objectives of each element are as follows: Base Salary: o Establish base salaries that are competitive with those payable to executives holding comparable positions at similar-sized strategic resource companies. o Provide periodic base salary increases as appropriate, consistent with the Company's overall operating and financial performance, with a view to rewarding successful individual performance and keeping pace with competitive practices. Long-term Incentive: o Facilitate the alignment of executives' interests with those of the Company's shareholders by providing opportunities for meaningful stock ownership. Bonuses, Salary Increases and Option Grants: o Executive officers are eligible to receive option grants, cash bonuses and increases in salary based upon the performance of the Company and their individual progress during the preceding year. Such grants, if any, are determined by the Compensation and Stock Option Committee or Board of Directors from time to time during each fiscal year with the input and recommendation of the Company's Chief Executive Officer. Although the Board does not have an established policy for measuring performance and establishing salary, bonuses and option grants, the Compensation and Stock Option Committee and the Board are influenced by the Company's financial performance and the contributions made by individual executives to that performance. The Board of Directors believes that such a retrospective analysis is most appropriate and practicable for an acquisition-oriented company specializing in development-stage enterprises like the Company, which operates in an uncertain environment and without the same sorts of standard measures of performance as are available to more seasoned companies. In addition, options may be granted to attract new executives or directors. The Company does not consider the amount and terms of options and stock already held by executive officers in its deliberations to determine awards. Compensation of Chief Executive Officer: o The base salary of the Chief Executive Officer is determined according to the same principles described above as applicable to compensation of the Company's other executive officers. When determining base salaries, the Board of Directors considers salary, bonus and long-term incentive compensation for other comparable companies in the corporate communications, entertainment, corporate events services and movie exhibition industry sectors, in similar geographic areas and at similar stages of growth and development, as reported in public filings of such comparable companies. The Board of Directors also has discussions with other industry executives and financial advisors. The Chief Executive Officer has a great deal of experience in acquiring and building emerging companies, and the Board views his leadership as a critical factor in the successes the Company has achieved to date and as very important to realization of the Company's near-term goals. Summary of Actions Taken Generally once a year, and at more frequent periodic intervals when deemed necessary in individual cases, the Board of Directors reviews the performance of the Company's executive officers. In the fiscal year ended January 31, 2005, the Board of Directors took no action concerning the performance or compensation of its executive officers. Respectfully submitted by the members of the Compensation and Stock Option The following table compares the yearly change in NAC's cumulative total shareholder return on its Common Stock (based on the market price of NAC's common stock) with the cumulative total return of the S&P 600 Small Cap Index, the Russell 2000 Index, and Reading International, Inc. (a theatre and real estate concern). 2/1/00 1/31/01 1/31/02 1/31/03 1/31/04 1/31/05 National Auto Credit, Inc. 100 27 13 13 57 30 S&P 600 Small Cap Index 100 119 122 99 145 167 Russell 2000 Index 100 102 97 75 117 125 Reading International, Inc. 100 77 69 145 224 288 For purposes of the above table, NAC is compared to Reading International Inc. as such company is engaged principally in the operations of various film theatres. NAC's current operations are comprised principally of its investment in the Angelika Film Center LLC and corporate communications. RATIFICATION OF THE COMPANY'S SELECTION OF ITS AUDITORS The Board of Directors recommends to the stockholders that they ratify the selection of Grant Thornton LLP, independent auditors, to audit the accounts of the Company for the fiscal year ending January 31, 2006. Grant Thornton LLP served as the Company's auditors for the fiscal year ended January 31, 2005. If the stockholders do not ratify this selection, the Board of Directors will reconsider its selection of Grant Thornton LLP and may appoint new auditors upon recommendation of the Audit Committee. A representative of Grant Thornton LLP will have the opportunity to make a statement at the Annual Meeting if he or she desires to do so and will be available to respond to appropriate questions. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table presents fees, including reimbursements for expenses, for professional audit services rendered by Grant Thornton LLP for the audit of the Company's annual financial statements for the years ended January 31, 2005 and January 31, 2004 and fees billed for other services rendered by Grant Thornton LLP during those periods. FISCAL YEAR ENDED 1/31/04 FISCAL YEAR ENDED 1/31/05 Audit Fees (1) $150,000 $155,000 Audit Related Fees (2) $ 7,000 $ 10,000 Tax Fees (3) $103,000 $138,000 All Other Fees (4) $ -- $ -- Total $270,000 $303,000 (1) Audit Fees consist of fees billed for professional services rendered for the audit of the Company's consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Grant Thornton LLP in connection with statutory and regulatory filings or engagements. (2) Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company's consolidated financial statements and are not reported under "Audit Fees." (3) Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning, including preparation of tax returns, review of restrictions on net operating loss carry-forwards and other general tax services. (4) All Other Fees consist of fees for products and services other than the services reported above. There were no such fees incurred by the Company during the last two fiscal years ended January 31, 2004 and January 31, 2005, respectively. POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, the Audit Committee has adopted an informal approval policy that it believes will result in an effective and efficient procedure for the pre-approval of services performed by the independent auditor. Audit Services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed by the independent auditor in order to render an opinion on our financial statements. The Audit Committee may pre-approve specified annual audit services engagement terms and fees and other specified audit fees. All other audit services must be specifically pre-approved by the Audit Committee. The Audit Committee monitors the audit services engagement and may approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope or other items. Audit-Related Services Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements which historically have been provided to us by the independent auditor and are consistent with the SEC's rules on auditor independence. The Audit Committee may pre-approve specified audit-related services within pre-approved fee levels. All other audit-related services must be pre-approved by the Audit Committee. The Audit Committee may pre-approve specified tax services that the Audit Committee believes would not impair the independence of the auditor and that are consistent with SEC rules and guidance. All other tax services must be specifically approved by the Audit Committee. Other services are services provided by the independent auditor that do not fall within the established audit, audit-related and tax services categories. The Audit Committee may pre-approve specific other services that do not fall within any of the specified prohibited categories of services. All requests for services to be provided by the independent auditor, which must include a detailed description of the services to be rendered and the amount of corresponding fees, are submitted to the Chief Financial Officer. The Chief Financial Officer authorizes services that have been pre-approved by the Audit Committee. If there is any question as to whether a proposed service fits within a pre-approved service, the Audit Committee chair is consulted for a determination. The Chief Financial Officer submits requests or applications to provide services that have not been pre-approved by the Audit Committee, which must include an affirmation by the Chief Financial Officer and the independent auditor that the request or application is consistent with the SEC's rules on auditor independence, to the Audit Committee (or its chair or any of its other members pursuant to delegated authority) for approval. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF GRANT THORNTON LLP TO AUDIT THE ACCOUNTS OF THE COMPANY FOR THE FISCAL YEAR ENDING APPROVAL OF THE COMPANY'S SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, INCLUDING NAME CHANGE AND INCREASE IN AUTHORIZED CAPITAL The Board of Directors is proposing the second amendment and restatement of our Certificate of Incorporation, as amended heretofore (the "Certificate of Incorporation"), (i) to change our corporate name from "National Auto Credit, Inc." to "[Insert_Pending]," with a concomitant change in our stated corporate purpose, (ii) to increase our authorized capital from 40,000,000 million shares of common stock and 2,000,000 shares of preferred stock to 50,000,000 shares of common stock and 5,000,000 shares of preferred stock, (iii) to delineate the size of the Board of Directors to be within a range of between five (5) and nine (9) members and (iv) to make other changes that will bring the Certificate of Incorporation into conformity with the basic provisions of Delaware General Corporation Law that have evolved since the times at which the Company's original Certificate of Incorporation and Amended and Restated Certificate of Incorporation were adopted (in October 1995 and December 1995), respectively. As of November 3, 2005, the Board of Directors adopted resolutions approving the proposed second amendment and restatement of our Certificate of Incorporation and recommending that the shareholders ratify such amendment and restatement. Proposed Name Change and Accompanying Change in Stated Corporate Purpose The proposal to change the Company's name is made in light of the transformation of the Company's business and operations from the acquisition of, leasing, selling, and generally dealing in, all types of new and used motor vehicles and accessories into the realms of corporate communications, entertainment and movie exhibition. The name change is necessary to align our name to the nature of our business and operations. The Board of Directors believes that it will be in the Company's best interest to use [Insert Pending] as the Company's new name. Concomitant with such name change, the stated purposes for which the Company was formed--as described in Article III of our Certificate of Incorporation-- will also be revised to reflect the actual nature of our current business and operations. Proposed Increase in Authorized Capital The Board of Directors proposes to increase the total number of shares of common stock, par value $0.05 per share, that we are authorized to issue from 40,000,000 to 50,000,000, with a concomitant increase in the number of preferred shares, par value $0.05 per share, that we are authorized to issue from 2,000,000 to 5,000,000. As of October 31, 2005, there were 8,540,114 shares of common stock issued and outstanding, constituting approximately 21.4% of our current authorized common stock, and no shares of preferred stock outstanding. Furthermore, the Company is currently committed to issue additional stock under certain circumstances, including (i) 1,883,333 shares of common stock to be issued upon the exercise of conversion rights by the holder of a $2.8 million convertible promissory note issued by the Company in connection with the Company's acquisition of The Campus Group effective July 31, 2003, (ii) up to 1,000,000 shares of common stock to be issued upon the exercise of warrants to be granted to shareholders of the Company who held NAC shares continuously from December 14, 2000 through December 24, 2002, pursuant to the Amended Stipulation of Settlement, dated November 15, 2004, entered into by the Company, which settled the derivative and class action lawsuit entitled Robert Zadra, et al v. James A. McNamara, et al. (Index No. 01-604859) (the "Settlement Agreement") and (ii) 1,063,352 shares of our authorized common stock that have been reserved for future issuance to directors, officers, employees and consultants of the Company under our equity incentive plans (including our existing equity plans and the proposed 2005 Equity Compensation Plan). The Board of Directors has determined that the above-described increase in authorized capital would be desirable in that it would enable the Company to meet needs that may arise from time to time in the future, including, for example, the issuance of shares in connection with acquisitions of new entities that would expand or complement our current operational strengths. At the present time, we have no specific plans, arrangements or understandings for the issuance of additional shares of our common stock (other than shares to be issued upon conversion of the convertible promissory note and under our equity incentive plans, as described above). Under our Certificate of Incorporation, as amended (and under the proposed Second Amended and Restated Certificate of Incorporation as well), our shareholders do not have preemptive rights and thus will have no rights to purchase any of the additional shares of common stock that may be issued in the future by the Board of Directors. Proposed Reduction of Size of Board of Directors to Between Five and Nine Under the Settlement Agreement, we are required to reduce the prescribed size of our Board of Directors, as set forth in our Certificate of Incorporation, as amended, from thirteen (13) to no less than five (5) nor more than nine (9) members, provided that upon the certification of the independent directors of the Company that an increase to greater than nine (9) members is required to accommodate exceptional circumstances, such an increase may approved by the Board of Directors, but not prior to January 1, 2007. Currently, our Board is comprised of five members, Mr. McNamara, Mr. Augur, Mr. Gleason, Mr. Shek and Mr. Toh, which complies with the required size of the Board under the Settlement Agreement. Therefore, the proposed amendment and restatement to our certificate of incorporation to reduce the size of the Board to between five and nine members merely implements the terms of the Settlement Agreement, thereby ensuring our adherence to efficient principles of corporate governance and allows our Board to continue to function at its current size, while not disrupting the management of the Company. Proposed Other Changes to Conform with Current Delaware Law The Company is subject to Section 203 of the Delaware General Corporation Law and other statutory provisions that could discourage potential takeover attempts. Such provisions prohibit us from engaging in specified business combinations with "interested stockholders," including beneficial owners of 15% or more of the voting power of our outstanding shares. After a stockholder acquires 15% or more of the voting power of our outstanding shares, combinations may be permissible only if specified conditions are satisfied. Such conditions include the approval of the business combination by the directors of the Company, thereby allowing the directors to resist a change or potential change in control of the Company if they determine that such change is opposed to, or not in the best interest of, the stockholders of the Company. The existing Certificate of Incorporation contains provisions that restrict business combinations with "interested stockholders" but which are partially inconsistent with the corresponding provisions of Section 203 of the Delaware General Corporation Law, due to revisions in that statutory section since the original adoption of the Company's Certificate of Incorporation and the first amendment and restatement thereof. The proposed Second Amended and Restated Certificate of Incorporation will modernize the Company's charter and bring it into conformity with current Delaware law on this subject. The Company has always afforded its officers, directors and employees the maximum indemnification permitted under Delaware law, under the theory that such protection enables our officers, directors and employees to function at their optimum level of performance on behalf of the Company, without the distraction of potential personal liability for matters involving the Company's operations, except where any such individual has acted improperly. The proposed restatement of our Certificate of Incorporation implements this concept more clearly than it is currently stated therein, subject to the important exceptions in which an individual has either (a) breached his or her duty of loyalty, (b) acted or failed to act in a manner involving intentional misconduct or knowing violation of the law, or (c) derived improper personal benefit. Furthermore, the revised indemnification provisions of our proposed amended and restated charter will automatically update themselves to provide for the maximum indemnification protection afforded under Delaware law to the extent that Delaware law is hereafter amended to allow for even broader indemnification protection. These updates to our charter will keep it in-step with future revisions to Delaware law that may arise, without necessitating constant revision of our charter. The Board therefore recommends its adoption. There are various other minor proposed changes to the Certificate of Incorporation reflected in the Second Amended and Restated Certificate of Incorporation, none of which will effect substantial changes to the Company's charter or to the rights of stockholders or other parties arising thereunder, but which will rather merely modernize its terminology and language. The Board of Directors encourages you to review the complete text of the proposed amended and restated charter, attached hereto as Appendix A. Vote Required for Amendment and Restatement of Certificate of Incorporation The affirmative vote of a majority of the outstanding shares of our common stock is necessary for the approval of the proposed Second Amended and Restated Certificate of Incorporation. The full text of the Second Amended and Restated Certificate of Incorporation-- if approved as proposed-- will be substantially in the form attached hereto as Appendix A. Upon approval at the Annual Meeting, the Second Amended and Restated Certificate of Incorporation will be promptly filed by the Company with the Secretary of State of the State of Delaware. The Second Amended and Restated Certificate of Incorporation will be effective on the effective date of its filing with the Secretary of State. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE COMPANY'S SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION. RATIFICATION OF THE 2005 EQUITY COMPENSATION PLAN The 2005 Equity Compensation Plan, or the 2005 Plan, was approved by the Board of Directors on November 3, 2005, subject to the approval of the stockholders. If approved by the stockholders, the 2005 Plan will be effective as of November 3, 2005 (although no grants thereunder will be effectuated prior to such approval by the stockholders). A description of the 2005 Plan is included below. It is not a complete statement of the 2005 Plan. The full text of the 2005 Plan has been attached as Appendix B to the electronic copy of this proxy statement, which is available at the Securities and Exchange Commission's website located at www.sec.gov. The 2005 Plan provides our employees, non-employee directors, consultants and advisors with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock awards, and stock appreciation rights related to our stock. Unless terminated earlier by our Board of Directors or extended with stockholder approval, the Plan will terminate on October 31, The purpose of the 2005 Plan is to give participants an ownership interest in the Company and to create an incentive for them to contribute to our growth, thereby benefiting our stockholders, and aligning the economic interests of the participants with those of our stockholders. On October 31, 2005, the closing price of our common stock was $0.52 per share. The 2005 Plan will be administered by the Compensation and Stock Option Committee of our Board of Directors or its delegate. The Compensation and Stock Option Committee consists of at least two or more directors who are not our employees. The Compensation and Stock Option Committee members serve until their resignation or removal by the Board of Directors. The Compensation and Stock Option Committee has the authority to determine the individuals to whom grants will be made under the 2005 Plan, to determine the type, size, and terms of any grants made, to determine when grants will be made and the duration of any applicable exercise or restriction period, and to deal with any other matters arising under the 2005 Plan. The Compensation and Stock Option Committee also has the power and authority to administer and interpret the 2005 Plan. The Compensation and Stock Option Committee's determinations relating to the interpretation and operation of the 2005 Plan will be conclusive and binding. In no event may the Compensation and Stock Option Committee (i) amend a stock option to reduce the exercise price; (ii) substitute a stock option for another stock option with a lower exercise price; (iii) cancel a stock option and issue a new stock option with a lower exercise price to the same holder within six months following the date of the cancellation; or (iv) cancel an outstanding stock option with an exercise price below our stock's fair market value for the purpose of granting a replacement equity award of a different type within six months following the date of the cancellation. The following persons are eligible to receive grants under the 2005 o All of our employees and the employees of any subsidiary we may have during the duration of the plan; o Non-employee directors; and o Consultants and advisors. As of October 31, 2005, we had five (5) directors and approximately sixty-five (65) employees, which included two executive officers. In addition, we routinely utilize varying levels of consultants and advisors to conduct our normal business operations. SHARES SUBJECT TO THE 2005 PLAN The 2005 Plan authorizes the issuance of 2,000,000 shares of our common stock pursuant to any form of grant. Of such shares, a maximum of 2,000,000 shares may be issued under stock awards. The maximum number of shares that may be subject to grants made to any individual under the 2005 Plan during any calendar year is 2,000,000 shares. If any grant of shares under the 2005 Plan shall for any reason expire or otherwise terminate, in whole or part, without having been exercised in full, the stock not acquired shall revert to and again become available for issuance under the 2005 Plan. These limits will be adjusted by the Compensation and Stock Option Committee for stock splits, stock dividends, recapitalizations, merger or reorganization in which we are the surviving corporation, a reclassification or change in the par value of our stock, or other similar transactions affecting our stock. Shares used to make grants may be issued directly by us or purchased on the open market and then transferred to participants by us. TYPES OF GRANTS AVAILABLE UNDER THE 2005 PLAN The following types of grants are available under the 2005 Plan: Incentive stock options; Nonqualified stock options; Stock appreciation rights; Stock Awards; and Restricted Stock Units. The 2005 Plan provides for the award of incentive stock options and nonqualified stock options, which provide the option holder with the right to purchase shares of our common stock at a specified exercise price during a specified period of time. Nonqualified stock options may be awarded to anyone eligible to participate in the 2005 Plan. Only our employees or the employees of any subsidiaries are eligible to receive incentive stock options. Under the 2005 Plan, the exercise price of nonqualified and incentive stock options must be equal to or greater than the fair market value of a share of our stock on the date of grant. Only $100,000 of any incentive stock options (based on the fair market value of the stock on the date(s) of grant) may first become exercisable by an employee during any calendar year. In other words, the aggregate amount of all incentive stock options granted under all of our plans that first become exercisable by an employee in any calendar year may not exceed $100,000. Any options that exceed this limit must be nonqualified stock options. In addition, if an employee who receives an incentive stock option owns more than 10% of the voting power of our stock or the stock of a subsidiary, the exercise price must be at least equal to 110% of the fair market value of our stock on the date of grant, and the option term may not be longer than five years. See "Federal Income Tax Consequences" below, which includes a discussion regarding the tax differences between a nonqualified stock option and an incentive stock option. OPTION TERMS. Each grant under the 2005 Plan will be accompanied by a grant instrument. The grant instrument will describe the type and number of grants that the option holder has been awarded and the terms and restrictions applicable to the grant. The grant instrument for an option will describe when the option will become exercisable. The exercise term of each option will be determined by the Compensation and Stock Option Committee and set forth in the applicable grant instrument. The term of an option may not exceed ten years; provided, however, if an option holder owns more than 10% of the voting power of our stock or the stock of a subsidiary, an incentive stock option may not have a term that exceeds five years from the date of grant. The Compensation and Stock Option Committee may accelerate the exercisability of options awarded under the 2005 Plan at any time for any reason. An option holder may pay the exercise price, as specified in the applicable grant instrument (i) in cash, (ii) through a broker by having a broker sell our stock simultaneously with the exercise of the option, or (iii) by such other method of payment as the Compensation and Stock Option Committee may approve. TERMINATION. Unless the Compensation and Stock Option Committee determines otherwise or an option expires by its terms within a shorter period, if an option holder ceases to be employed by, or provide service to, the Company for any reason other than death, disability or termination for misconduct, the option holder will have 90 days from the date of termination to exercise any vested options. If an option holder is terminated for misconduct, the option holder will have 30 days from the date of termination to exercise any vested options. Unless the Compensation and Stock Option Committee determines otherwise or an option expires by its terms within a shorter period, if an option holder ceases to be employed by, or provide services to, us on account of (i) disability, or (ii) death (during the term of service or within 90 days thereafter for reasons other than termination for misconduct), the option holder will have one year from the termination date to exercise any vested options. If an option holder dies while employed by, or providing services to, the Company, all of the unexercised outstanding options of the person shall become immediately exercisable. Unless the Compensation and Stock Option Committee determines otherwise, all options that have not become exercisable on the date on which an option holder ceases to be employed by, or provide service to, us will terminate. To the extent a company sponsored plan, policy or agreement provides for a longer exercise period, that exercise period shall apply in lieu of the exercise periods summarized in this paragraph. STOCK APPRECIATION RIGHTS (SARS) SARs give the recipient the right to receive the appreciation in the value of our stock over a specified period of time. SARs which shall be settled in shares of our stock shall be counted in full against the number of shares available for award under the 2005 Plan, regardless of the number of shares of stock issued upon the exercise and settlement of the SAR. The Compensation and Stock Option Committee may grant SARs separately or in tandem with any option. Tandem SARs may be granted either at the time the option is granted or at any time while the option remains outstanding; however, with respect to incentive stock options, tandem SARs may be granted only at the time of grant. When an option is exercised, any SARs relating to the stock covered by such option will terminate. When a tandem SAR is exercised, the related option will terminate to the extent of an equal number of shares of our stock. Value. When a SAR is exercised, the holder will receive an amount of our stock equal to the amount by which the fair market value of the underlying stock on the date of exercise exceeds the base amount of the SAR. Unless the Compensation and Stock Option Committee determines otherwise, the base amount of each SAR will be equal to the per share exercise price of the related option, or, if there is no related option, the fair market value of a share of our stock as of the date of grant of the SAR. Terms. SARs are exercisable and are subject to vesting and other restrictions as specified in the applicable grant instrument. The Compensation and Stock Option Committee may accelerate the exercisability of all or any outstanding SARs at any time for any reason. otherwise or a SAR expires by its terms within a shorter period, SARs will terminate on the same terms as discussed above with respect to options. Stock awards are a grant of our stock that is subject to restrictions or no restrictions, as set forth in the grant instrument. The Compensation and Stock Option Committee will determine whether stock awards will be granted, the type of award (including without limitation, stock grants and restricted stock units), the number of shares that will be awarded, any restrictions applicable to the stock awards and when and how the restrictions will lapse. Until the restrictions lapse, stock awards cannot be sold, assigned, transferred, pledged or otherwise disposed of. Unless the Compensation and Stock Option Committee determines otherwise, if employment or service terminates while stock awards are subject to restrictions, any shares whose restrictions have not yet lapsed will be forfeited and returned to us. QUALIFIED PERFORMANCE-BASED COMPENSATION. The Compensation and Stock Option Committee may determine that stock awards will be granted as qualified performance-based compensation for tax purposes. The Internal Revenue Code limits a company's ability to deduct compensation for each of its five highest paid executives in excess of $1 million per year. The Internal Revenue Code provides an exception to this limit if the compensation is designated as qualified performance-based compensation. If the Compensation and Stock Option Committee grants stock awards that are intended to be qualified performance-based compensation, the Company must meet specified performance goals, designated by the Compensation and Stock Option Committee, in order for the qualified performance-based compensation to be payable. The Compensation and Stock Option Committee will establish the performance goals for qualified performance-based compensation, the performance period during which the goals must be met, the threshold, target and maximum amounts that may be paid if the performance goals are met, and any other conditions deemed appropriate and consistent with the 2005 Plan and legal requirements. The Compensation and Stock Option Committee will establish the performance goals for qualified performance-based compensation in writing at the beginning of the performance period, or during a period that is no later than the earlier of either 90 days after the beginning of the performance period, or the date on which 25% of the performance period has been completed, or such other date that is permitted under the Internal Revenue Code. The performance goals will be based on objective criteria such as stock price, earnings per share, net earnings, operating earnings, return on assets, stockholder return, return on equity, growth in assets, unit volume, sales, market share, or strategic business criteria based on our meeting specific revenue goals, market penetration goals, geographic business expansion goals, cost targets, or goals relating to acquisitions or divestitures. The performance goal results will be announced for each performance period immediately following the announcement of our financial results for the performance period. If the performance goals for a performance period are not met, the grants subject to the performance goals will be forfeited. Restricted stock units provides a grant that represents the right of the holder to receive an amount of cash or Company stock based upon a value of the restricted stock unit, if performance goals are met or upon a vesting schedule. A restricted stock unit shall be based upon the fair market value of a share of Company stock or such other measurement base as the Compensation and Stock Option Committee deems appropriate. CHANGE IN CONTROL If a change of control (as defined in the 2005 Plan) occurs, where the Company is not the survivor corporation, unless the Company determines otherwise, (i) all outstanding options and SARs that are not exercised shall be assumed by, or replaced by the surviving corporation, and outstanding stock awards and restricted stock units shall be converted to stock awards and restricted stock units of the surviving corporation. In addition, any of the following actions may occur (i) outstanding options and SARs shall accelerate and become exercisable in whole or in part, (ii) the restrictions and conditions on all outstanding stock awards and restricted stock units shall lapse, in whole or in part, (iii) option holders shall be required to surrender their outstanding options and SARs in exchange for a payment in cash or stock, in an amount equal to the amount by which the fair market value of the shares of Company stock subject to the option exceeds the exercise price of the options or the base amount exceeds the unexercised SAR, (iv) after giving option holders an opportunity to exercise their outstanding options and SARs all outstanding options and SARs shall terminate as of the date of the change of control or such other date as specified. Generally, grants are not transferable except upon death. Grants may only be exercised during the lifetime of the recipient and may not be transferred except by will, through the laws of descent and distribution or, in the case of grants other than incentive stock options, pursuant to a domestic relations order, if permitted by the Compensation and Stock Option Committee. However, the Compensation and Stock Option Committee may permit the transfer of nonqualified stock options to family members or a trust or other entity established for the benefit of family members. The Plan may be amended by our Board of Directors at any time. However, the stockholders must approve any amendment for which stockholder approval is required under applicable provisions of the Internal Revenue Code or under applicable exchange requirements. FEDERAL INCOME TAX CONSEQUENCES The current United States federal income tax treatment of options and stock awards under the 2005 Plan is generally described below. This description of tax consequences is not a complete description. There may be different income tax consequences under certain circumstances, and there may be gift and estate tax consequences. Local, state and other taxing authorities may also tax grants under the 2005 Plan. Tax laws are subject to change. Each award holder should consult with their personal tax advisor concerning the application of the general principles discussed below to their own situation and the application of other tax laws. The 2005 Plan is not subject to the Employee Retirement Income Security Act of 1974 and is not a tax-qualified plan under Section 401 of the Internal Revenue Code. NONQUALIFIED STOCK OPTIONS. There generally are no federal income tax consequences upon the grant of a nonqualified stock option. Upon the exercise of a nonqualified stock option, the recipient will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value on the date of exercise. Any gain or loss realized on disposition of shares purchased upon the exercise of a nonqualified stock option will be treated as a capital gain or loss for federal income tax purposes. The capital gain tax rate will depend on the length of time the participant holds the shares and other factors. We generally will be entitled to a corresponding federal income tax deduction. If a participant surrenders shares underlying a nonqualified stock option to pay the exercise price, such person will recognize no gain or loss on the surrendered shares, and the basis and holding period for the surrendered shares will continue to apply to that number of new shares equal to the surrendered shares. To the extent that the number of shares received upon the exercise of the option exceeds the number surrendered, the fair market value of the excess shares on the date of exercise, reduced by any cash paid by participant upon exercise, will be includible in gross income. The basis in the excess shares will equal the sum of the cash paid upon the exercise of the stock option plus any amount included in the exercising person's gross income as a result of the exercise. INCENTIVE STOCK OPTIONS. of an incentive stock option. A recipient will not recognize income for purposes of the regular federal income tax upon the exercise of an incentive stock option. However, for purposes of the alternative minimum tax, in the year in which an incentive stock option is exercised, the amount by which the fair market value of the shares acquired upon exercise exceeds the exercise price will be included in alternative minimum taxable income. Income will be recognized upon the sale of stock acquired upon exercise of an incentive stock option. If the shares acquired upon exercise of an incentive stock option are disposed after two years from the date the option was granted and after one year from the date the shares were transferred upon the exercise of the option, the person will recognize long-term capital gain or loss in the amount of the difference between the amount realized on the sale and the exercise price. We will not be entitled to any corresponding tax deduction. If a participant disposes of shares acquired upon exercise of an incentive stock option before satisfying both holding period requirements (a disqualifying disposition), the gain recognized on the disposition will be taxed as ordinary income to the extent of the difference between the fair market value of the shares on the date of exercise (or the amount realized on the disposition, if less) and the exercise price, and generally, we will be entitled to a deduction in that amount. The gain, if any, in excess of the amount recognized as ordinary income will be long-term or short-term capital gain, depending upon the length of time the participant held the shares before the disposition. If a participant surrenders shares received upon the exercise of a prior incentive stock option to pay the exercise price of any option within either the two-year or one-year holding periods described above, the disqualifying disposition of the shares used to pay the exercise price will result in income (or loss) to the participant and, to the extent of recognized income, a tax deduction to us. If a participant surrenders the shares after the holding period requirements are met, or if a participant surrender shares that were not received upon the exercise of an incentive stock option, the participant will recognize no gain or loss on the surrendered shares, and the basis and the holding period for the surrendered shares will continue to apply to that number of new shares that is equal to the surrendered shares. The holding period for purposes of determining whether a participant has a disqualifying disposition for the new shares when they sell the shares will begin on the date the shares were exercised. To the extent that the number of shares received exceeds the number of shares surrendered, the basis in the excess shares will equal the amount of cash, if any, paid for such excess shares and the holding period with respect to the excess shares will begin on the date the shares were exercised. STOCK APPRECIATION RIGHTS. of a SAR. Upon exercise of a SAR, the participant will recognize ordinary income equal to the fair market value of any shares received. We generally will be entitled to a corresponding federal income tax deduction at the time of exercise of the SAR. When a participant sells any shares acquired by the exercise of a SAR, he or she will have capital gain or loss in an amount equal to the difference between the amount realized upon the sale and the adjusted tax basis in the shares (the amount of ordinary income recognized at the time of exercise of the SAR). STOCK AWARDS. If a participant receives restricted stock awards, he or she generally will not recognize taxable income, and we will not be entitled to a deduction, until the stock is transferable or no longer subject to a substantial risk of forfeiture for federal tax purposes, whichever occurs earlier. When the stock is either transferable or is no longer subject to a substantial risk of forfeiture, the participant will recognize ordinary income in an amount equal to the fair market value of the shares (less any amounts paid for the shares) at that time, and generally, we will be entitled to a deduction in the same amount. However, a participant may elect to recognize ordinary income in the year when the restricted stock awards are granted in an amount equal to the fair market value of the shares subject to the award (less any amounts paid for such shares) at that time, determined without regard to any restrictions. In that event, we generally will be entitled to a corresponding deduction in the same year. Any gain or loss recognized by a participant upon a later disposition of the shares will be capital gain or loss. If a participant receives stock awards that are not subject to a substantial risk of forfeiture or are transferable at grant, the participant will recognize ordinary income on the value of the shares at the date of grant. We will generally be entitled to a corresponding tax deduction. TAX WITHHOLDING. We have the right to deduct from all grants or other compensation payable to a participant any taxes required to be withheld with respect to grants under the 2005 Plan. We may require that a participant pay to us the amount of any required withholding. The Compensation and Stock Option Committee may permit a participant to satisfy our tax withholding obligation with respect to a grant by having shares withheld. However, the value of shares withheld may not exceed the minimum required tax withholding amount. TRANSFER OF STOCK OPTIONS. A participant may be permitted to transfer nonqualified stock options to family members or a trust or other entity established for the benefit of family members, consistent with applicable law. The tax consequences of stock option transfers are complex and should be carefully evaluated by a participant with the advice of their tax advisor. Generally, a participant will not recognize income at the time such participant makes a gift of a nonqualified stock option to a family member or a trust or other entity. When the transferee later exercises the option, the transferor (and not the transferee) must recognize ordinary income on the difference between the fair market value of the stock and the exercise price. For federal gift tax purposes, if an option is transferred before the option has become exercisable, the transfer will not be considered by the Internal Revenue Service to be a completed gift until the option becomes exercisable. The value of the gift will be determined when the option becomes exercisable. Gifts of options may qualify for the $10,000 gift tax annual exclusion. If a participant dies after transferring an option in a completed gift transaction, the transferred option may be excluded from the participant's estate for estate tax purposes if the applicable estate tax requirements have been met. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE RATIFICATION OF THE 2005 EQUITY COMPENSATION PLAN. SOLICITATION OF PROXIES This proxy solicitation is being made by the Board of Directors of NAC for use at the Annual Meeting. The cost of this proxy solicitation will be borne by NAC. In addition to solicitation by mail, solicitations also may be made by advertisement, telephone, telegram, facsimile transmission or other electronic media, or personal contacts. Proxies may be solicited by NAC and its directors, officers and employees (who will receive no compensation therefor in addition to their regular salaries). Arrangements will also be made with brokerage houses and other custodians, nominees and fiduciaries to forward solicitation materials to the beneficial owners of the common stock of NAC, and such persons will be reimbursed for their expenses. Management does not know of any business to be transacted at the meeting other than as indicated herein. However, certain stockholders may present topics for discussion from the floor. Should any such matter properly come before the meeting for a vote, the persons designated as proxies will vote thereon in accordance with their best judgment. You are urged to sign, date and mail the enclosed proxy in the prepaid envelope provided for such purpose. For planning purposes, it is hoped that registered stockholders will give us advance notice of their plans to attend the meeting by marking the box provided on the proxy card. A list of the Company's stockholders of record at the close of business on December 12, 2005, will be available at the Annual Meeting and during the ten days prior thereto, at the office of the Company, 555 Madison Avenue, 29th Floor, New York, New York, 10022. If you will need special assistance at the Annual Meeting because of a disability or if you require directions to the Annual Meeting, please contact Robert V. Cuddihy, Jr., the Secretary of the Company, at (212) 644-1400. Deadline for submitting proposals for next year's meeting. Stockholders who intend to present proposals in connection with the Company's 2006 Annual Meeting of Stockholders must submit their proposals to the Secretary of the Company in accordance with the Company's By-Laws not less than not less than fourteen (14) nor more than fifty (50) days prior to the meeting of stockholders at which directors may be elected. YOUR VOTE IS IMPORTANT! YOU ARE URGED TO SIGN, DATE, AND MAIL YOUR PROXY PROMPTLY. PRELIMINARY PROXY CARD PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 31, 2005 The undersigned hereby: (a) acknowledges receipt of the Notice of Annual Meeting of Stockholders of National Auto Credit, Inc. (the "Company") to be held on January 31, 2006 and the Proxy Statement in connection therewith, each dated December 14, 2005; (b) appoints James J. McNamara and Robert V. Cuddihy, Jr., and each of them with power of substitution, as Proxies; (c) authorizes the Proxies to represent and vote, as designated hereon, all the shares of Common Stock of the Company, held of record by the undersigned on December 12, 2005, at such Annual Meeting and at any adjournment(s) thereof; and (d) revokes any proxies heretofore given. PLEASE SIGN AND DATE ON THE REVERSE SIDE AND MAIL THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE SEE REVERSE SIDE THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF PROPOSALS 1, 2, 3 AND 4. 1. ELECTION OF DIRECTORS DIRECTOR- NOMINEES: James J. McNamara [_] FOR ALL NOMINEES [_] WITHHOLD AUTHORITY TO VOTE FOR ALL NOMINEES (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK THE "FOR ALL NOMINEES" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED IMMEDIATELY BELOW.) 2. RATIFICATION OF GRANT THORNTON LLP AS THE COMPANY'S INDEPENDENT AUDITORS [_] FOR [_] AGAINST [_] ABSTAIN 3. ADOPTION OF THE COMPANY'S SECOND AMENDED AND RESTATED CERTIFICATE OF 4. RATIFICATION OF THE 2005 EQUITY COMPENSATION PLAN THIS PROXY WILL BE VOTED AS DIRECTED, OR, IF NO CONTRARY DIRECTION IS INDICATED, WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4 AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. [_] Check here if you plan to attend SIGNATURE(S) NOTE: Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION SECOND AMENDED AND RESTATED National Auto Credit, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "GCL"), does hereby certify that: 1. The name of the corporation is National Auto Credit, Inc. 2. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on October 27, 1995. 3. This Second Amended and Restated Certificate of Incorporation, which amends and restates the Corporation's Certificate of Incorporation in its entirety, has been duly adopted in accordance with the provisions of Sections 242 and 245 of the GCL, and the stockholders of the Corporation have voted in favor thereof at an annual meeting of the stockholders held in accordance with the provisions of the GCL. The provisions of the Second Amended and Restated Certificate of Incorporation are as follows: The name of this corporation is [Pending Approval By Shareholders] (the "Corporation"). The address of the Corporation's registered office in the State of Delaware is 1209 West Orange Street, City of Wilmington, County of New Castle. The name of the registered agent at such address is The Corporation Trust The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the "GCL"). Without limiting the generality of the foregoing, the purpose or purposes for which the Corporation is formed are to engage in the business of the full service design, creative development, production, post production editing and transmission, via broadcast satellite videoconferencing, webcasting and traditional on-site presentations of corporate education and training video and other services for use at corporate events and to operate in the movie exhibition industry. In general, to do everything incidental or conducive to the full accomplishment of the foregoing objects; and to do any and everything necessary and proper to carry on any business authorized hereby, and to any other legitimate business not expressly mentioned herein which is not prohibited by the laws of the State of Delaware or the laws of any other state or jurisdiction in which the Corporation does or may do business; and to exercise all the powers conferred upon a corporation by the laws of the State of Delaware, the above enumerated powers being merely descriptive and not limiting as to any and all powers which the Corporation may be authorized to do and perform under the laws of the State of Delaware. The Corporation is authorized to issue two classes of capital stock to be designated, respectively, "Common Stock" and "Preferred Stock". The total number of shares that the Corporation is authorized to issue is fifty-five million (55,000,000). Fifty million (50,000,000) shares shall be Common Stock, par value $0.05 per share, and five million (5,000,000) shares shall be Preferred Stock, par value $0.05 per share. Section 4A. Common Stock. 4A.1. General. Subject to the powers, preferences and rights of any Preferred Stock having any preference priority over, or rights superior to, the Common Stock and except as otherwise provided by law and this Article, the holders of the Common Stock shall have and possess all powers and voting and other rights pertaining to the stock of the Corporation and each share of Common Stock shall be entitled to one vote. Except as otherwise provided by the GCL or this Certificate of Incorporation, the holders of record of Common Stock shall share ratably in all dividends payable in cash, stock or otherwise and other distributions, whether in respect of liquidation or dissolution (voluntary or involuntary) or otherwise. 4A.2. Voting. The holders of the Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders (including without limitation in the election of directors of the Corporation). There shall be no cumulative voting. 4A.3 Number. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the GCL. 4A.4 Dividends. Dividends may be declared and paid on the Common Stock from funds lawfully available therefor as and when determined by the Board of Directors of the Corporation (the "Board of Directors"), subject to any preferential dividend rights of any then outstanding Preferred Stock. 4A.5 Liquidation. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to participate ratably in all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock. Section 4B. Preferred Stock. 4B.1. General; Fixing of Preferences, Rights and Number of a Series. The shares of Preferred Stock may be issued as a class without series, or if so determined from time to time by the Board of Directors, either in whole or in part in one or more series, each series to be expressly designated by distinguishing number, letter, or title prior to the issue of any shares thereof. The shares of Preferred Stock, and each series thereof, may have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, liquidation, optional, or other special rights and qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue of such stock adopted by the Board of Directors. There is hereby expressly granted to the Board of Directors the authority to fix or alter the dividend rights, dividend rates, dividend preferences and participations, conversion rights, voting rights, rights, and terms of redemption (including sinking fund provisions), the redemption price or prices, the rights and preferences in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation or upon any distribution of assets by the Corporation and any other special rights, qualifications, limitations on and restrictions of, any wholly unissued class or series of shares of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any of them, and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. Subject to the prior and superior rights of the Preferred Stock set forth in any resolution or resolutions of the Board of Directors providing for the initial issuance of any particular series of Preferred Stock, the holders of Preferred Stock shall not be entitled to participate in dividends (payable in cash, stock, or otherwise) as may be declared by the Board of Directors of the Corporation to be payable on the Common Stock. 4B.2. Voting. Except to the extent otherwise provided in the resolution or resolutions of the Board of Directors providing for the initial issue of shares of Preferred Stock or a particular series thereof, Preferred Stock shall be entitled to vote for each share thereof so held share for share with the holders of the Common Stock without distinction as to class, and shall not be entitled to vote separately as a class or series of a class. 4B.3. Number. The number of shares of Preferred Stock authorized to be issued may be increased or decreased from time to time (but not below the number of shares of Preferred Stock then outstanding) by the affirmative vote of the holders of a majority of the stock of the corporation entitled to vote, and the holders of the Preferred Stock shall not be entitled to vote separately as a class or series of a class on any such increase or decrease. NO PREEMPTIVE RIGHTS Except to the extent otherwise provided in the resolution or resolutions of the Board of Directors providing for the initial issue of shares of a particular series of Preferred Stock, no holder of stock of the Corporation of any class shall have any preferential, preemptive or other right to subscribe for or to purchase from the Corporation any stock of the Corporation of any class, whether or not now authorized, or to purchase any bonds, certificates of indebtedness, debentures, notes, obligations or other issue whether or not the same shall be convertible into stock of the Corporation of any class, or shall entitle the owner or holder to purchase stock of the Corporation of any class. SECTION 203 OF GCL Section 6A. General. Any merger or consolidation of the Corporation with or into any other corporation, or any sale, lease, exchange or other disposition of all or substantially all of the property and assets of the Corporation to or with any other corporation, person or other entity, with respect to which any stockholder vote or consent is required under the GCL, shall require the affirmative vote of the holders of [at least two-thirds (2/3)] of each class of stock outstanding and entitled to vote at any meeting of the stockholders. Such affirmative vote shall be required notwithstanding the fact that some lesser percentage may be specified by the GCL or otherwise. This Article VI may not be altered, added to, amended or repealed except by the affirmative vote the holders of [two-thirds (2/3)] in interest of each class of stock outstanding entitled to vote at a meeting called for said purpose, provided notice of the proposed alteration, addition, amendment or repeal shall have been given in the notice of such meeting of stockholders. Section 6B. Business Combinations with Interested Stockholders. The Corporation hereby elects to be governed by Section 203 of the GCL. STOCKHOLDER ACTION; CORPORATION'S BOOKS Stockholders of the Corporation shall take action by (i) meetings held pursuant to this Certificate of Incorporation and the By-Laws or (ii) written consent in lieu a meeting pursuant to the provisions of Section 228 of the GCL and Article II, Section 10 of the Corporation's By-Laws. Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. Special meetings of the stockholders, for any purpose or purposes, may be called by the Chairman of the Board of Directors or such other officers of the Corporation as the By-Laws shall provide, and shall be called upon the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote. The books of the Corporation may be kept (subject to any provision contained in the GCL) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation. PERPETUAL EXISTENCE The Corporation is to have a perpetual existence. MANAGEMENT OF BUSINESS OF THE CORPORATION The management of the business and the conduct of the affairs of the Corporation shall be vested in the Board of Directors, of which there shall be not less than five (5) nor more than nine (9) members, as may be determined from time to time by resolution of the Board of Directors and in accordance with the provisions of the Corporation's By-Laws. AMENDMENT OF BY-LAWS In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, amend, alter or repeal the By-Laws of the Corporation. Such power of the Board of Directors shall not divest the stockholders of the power, nor limit their power to adopt, amend, alter or repeal the By-Laws of the Corporation. Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under Section 291 of the GCL or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under Section 279 of the GCL order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths (3/4) in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. REDEMPTION OF SHARES The Corporation may purchase, from time to time, and to the extent permitted by the GCL, shares of any class of stock issued by it. Such purchases may be made either in the open market or at private or public sale, and in such manner and amounts, from such holder or holders of outstanding shares of the Corporation and at such prices as the Board of Directors shall from time to time determine, and the Board of Directors is hereby empowered to authorize such purchases from time to time without any vote of the holders of any class of shares now or hereafter authorized and outstanding at the time of any such purchase, subject to the provisions of the By-Laws of the Corporation. ARTICLE XIII Any director or officer of the Corporation shall not be disqualified by his office from dealing or contracting with the Corporation as a vendor, purchaser, employee, agent, lessor, lessee or otherwise. No transaction contract or other act of the Corporation shall be void or voidable or in any way affected or invalidated by reason of the fact that any director or officer, or any firm or corporation in which such director or officer is a member or is a shareholder, director or officer, is in any way interested in such transaction, contract or other act provided (i) the fact that such director, officer, firm or corporation is so interested shall be disclosed or shall be known to the Board of Directors or such members thereof as shall be present at any meeting of the Board of Directors at which action upon any such transaction, contract or other act shall be taken; and (ii) no other approval for such transaction is required under the Corporation's By-Laws; nor shall any such director or officer be accountable or responsible to the Corporation for or in respect of any such transaction, contract or other act of the Corporation or for any gains or profits realized by him by reason of the fact that he or any firm of which he is a member or any corporation of which is a shareholder, director or officer is interested in such transaction, contract or other act; and any such director may be counted in determining the existence of a quorum at any meeting of the Board of Directors which shall authorize or take action in respect of any such transaction, contract or other act, and may vote thereat to authorize, ratify or approve any such transaction, contract or other act with like force and effect as if he or any firm of which he is a member or any corporation of which is a shareholder, director or officer were not interested in such transaction, contract or other act. LIMITATION OF DIRECTOR AND OFFICER LIABILITY To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers, employees and agents (and any other persons to which Delaware law permits the Corporation to provide indemnification) through By-Law provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the GCL, subject only to limits created by applicable Delaware law (statutory or non-statutory). To the fullest extent permitted by applicable law, the directors of the Corporation shall not be personally liable to the Corporation or any stockholder for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director shall be liable under Section 174 of the GCL or any amendment thereto or shall be liable by reason that, in addition to any and all other requirements for such liability, such director (1) shall have breached the director's duty of loyalty to the Corporation or its stockholders, (2) shall have acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law, or (3) shall have derived an improper personal benefit. If the GCL is hereafter amended to authorize the further elimination or limitation of the liability of a director, the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the GCL, as so amended. To the fullest extent permitted by applicable law, each person who was or is made a party or is threatened to be made a party to or is in any way involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), including any appeal therefrom, by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or a direct or indirect Subsidiary, or is or was serving at the request of the Corporation as a director or officer of another entity or enterprise, shall be indemnified and held harmless by the Corporation, and the Corporation shall advance all expenses incurred by any such person in defense of any such proceeding prior to its final determination, to the fullest extent authorized by the GCL. In any proceeding against the Corporation to enforce these rights, such person shall be presumed to be entitled to indemnification and the Corporation shall have the burden of proving that such person has not met the standards of conduct for permissible indemnification set forth in the GCL. The rights to indemnification and advancement of expenses conferred by this Article XIV shall be presumed to have been relied upon by the directors and officers of the Corporation in serving or continuing to serve the Corporation and shall be enforceable as contract rights. Said rights shall not be exclusive of any other rights to which those seeking indemnification may otherwise be entitled. The Corporation may, upon written demand presented by a director or officer of the Corporation or of a direct or indirect Subsidiary, or by a person serving at the request of the Corporation as a director or officer of another entity or enterprise, enter into contracts to provide such persons with specified rights to indemnification, which contracts may confer rights and protections to the maximum extent permitted by the GCL, as amended and in effect from time to time. If a claim under this Article XIV is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce the right to be advanced expenses incurred in defending any proceeding prior to its final disposition where the required undertaking, if any, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the GCL for the Corporation to indemnify the claimant for the amount claimed, but the claimant shall be presumed to be entitled to indemnification and the Corporation shall have the burden of proving that the claimant has not met the standards of conduct for permissible indemnification set forth in the If the GCL is hereafter amended to permit the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment, the indemnification rights conferred by this Article XIV shall be broadened to the fullest extent permitted by the GCL, as so amended. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss under the GCL. IN WITNESS WHEREOF, the undersigned, being the Chief Financial Officer, Secretary and Treasurer of the Corporation, hereby certifies that the facts hereinafter stated are truly set forth, and accordingly executes this Second Amended and Restated Certificate of Incorporation this ___ day of [January], 2006. (Signature) Robert V. Cuddihy, Jr., 2005 EQUITY COMPENSATION PLAN The purpose of the National Auto Credit, Inc. 2005 Equity Compensation Plan (the "Plan") is to provide (i) designated employees of National Auto Credit, Inc. (the "Company") and its parents and subsidiaries, (ii) certain consultants and advisors who perform services for the Company or its parents or subsidiaries, and (iii) non-employee members of the Board of Directors of the Company (the "Board") with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock awards, and stock appreciation rights. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefiting the Company's stockholders, and will align the economic interests of the participants with those of the stockholders. 1. ADMINISTRATION (a) Committee. The Plan shall be administered and interpreted by the members of the Compensation and Stock Option Committee of the Board (the "Committee"), which consists of "outside directors" as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and related Treasury regulations, and "non-employee directors" as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). However, the Board may ratify or approve any grants as it deems appropriate, and the Board shall approve and administer all grants made to non-employee directors. The Committee may delegate authority to one (1) or more delegates as it deems appropriate. (b) Committee Authority. The Committee or its delegate shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan; (ii) determine the type, size, and terms of the grants to be made to each such individual; (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability; (iv) amend the terms of any previously issued grant; and (v) deal with any other matters arising under the Plan. Notwithstanding anything in this Plan to the contrary, but subject to adjustments as described in Section 3(b) below, in no event may the Board, the Committee or its or their delegate (A) amend or modify an Option (as defined below) in a manner that would reduce the Exercise Price (as defined below) of such Option; (B) substitute an Option for another Option with a lower Exercise Price; (C) cancel an Option and issue a new Option with a lower Exercise Price to the holder of the cancelled Option within six (6) months following the date of the cancellation of the cancelled Option; or (D) cancel an outstanding Option that is under water (i.e., for which the Fair Market Value, as defined below, of the underlying Shares are less than the Option's Exercise Price) for the purpose of granting a replacement Grant (as defined below) of a different type within six (6) months following the date of cancellation of the cancelled Option. (c) Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements, and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2. GRANTS (a) Awards under the Plan may consist of grants of incentive stock options as described in Section 5 below ("Incentive Stock Options"), nonqualified stock options as described in Section 5 below ("Nonqualified Stock Options") (Incentive Stock Options and Nonqualified Stock Options are collectively referred to as "Options"), stock awards as described in Section 6 below ("Stock Awards"), restricted stock units as described Section 6 below ("Restricted Units") and stock appreciation rights described in Section 7 below ("SARs") (hereinafter collectively referred to as "Grants"). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan and as specified in the individual grant instrument or an amendment to the grant instrument (the "Grant Instrument"). All Grants shall be made conditional upon the Grantee's (as defined below) acknowledgement, in writing or by acceptance of the Grant, that all decisions and determination of the Company shall be final and binding on the Grantee, his or her beneficiaries and any other person having or claiming an interest under such Grant. Grants under a particular Section of the Plan need not be uniform as among the Grantees. 3. SHARES SUBJECT TO THE PLAN (a) Shares Authorized. Subject to adjustment as described below, (i) the maximum aggregate number of shares of common stock of the Company ("Company Stock") that may be issued or transferred under any forms of Grants under the Plan is 2,000,000 shares, (ii) the maximum aggregate number of shares of Company Stock that may be issued under the Plan under Incentive Stock Options is , and (iii) the maximum aggregate number of shares of Company Stock that may be issued under the Plan under awards other than Options and SARs is 2,000,000 shares. For purposes of this Section 3(a), SARs to be settled in shares of Company Stock shall be counted in full against the number of shares of Company Stock available for award under the Plan, regardless of the number of exercise gain shares issued upon the settlement of the SAR. The maximum aggregate number of shares of Company Stock that shall be subject to Grants made under the Plan to any individual during any calendar year shall be 2,000,000 shares, subject to adjustment as described below. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Options granted under the Plan terminate, expire, or are canceled, forfeited, exchanged, or surrendered without having been exercised or if any Stock Awards (including restricted Stock Awards received upon the exercise of Options) are forfeited, the shares subject to such Grants shall again be available for purposes of the Plan. (b) Adjustments. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spin-off, recapitalization, stock split, or combination or exchange of shares; (ii) by reason of a merger, reorganization, or consolidation; (iii) by reason of a reclassification or change in par value; or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spin-off or the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that any individual participating in the Plan may be granted in any year, the number of shares covered by outstanding Grants, the kind of shares issued under the Plan, and the price per share of such Grants shall be appropriately adjusted by the Company to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude the enlargement or dilution of rights and benefits under such Grants; provided, however, that any fractional shares resulting from such adjustment shall be rounded down to the nearest whole share. Any adjustments determined by the Company shall be final, binding, and conclusive. 4. ELIGIBILITY FOR PARTICIPATION (a) Eligible Persons. All employees of the Company and its parents or subsidiaries ("Employees"), including Employees who are officers or members of the Board, and members of the Board who are not Employees ("Non-Employee Directors") shall be eligible to participate in the Plan. Consultants and advisors who perform services for the Company or any of its parents or subsidiaries ("Key Advisors") shall be eligible to participate in the Plan if the Key Advisors render bona fide services to the Company or its parents or subsidiaries, the services are not in connection with the offer and sale of securities in a capital-raising transaction, and the Key Advisors do not directly or indirectly promote or maintain a market for the Company's securities. (b) Selection of Grantees. The Company shall select the Employees, Non-Employee Directors, and Key Advisors to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant. Employees, Non-Employee Directors, and Key Advisors who receive Grants under this Plan shall hereinafter be referred to as "Grantees." 5. GRANTING OF OPTIONS The Company may grant an Option to an Employee, Non-Employee Director, or Key Advisor. The following provisions are applicable to Options. (a) Number of Shares. The Company shall determine the number of shares of Company Stock that will be subject to each Grant of Options to Employees, Non-Employee Directors, and Key Advisors. (b) Type of Option and Price. (i) Incentive Stock Options are intended to satisfy the requirements of Section 422 of the Code. Nonqualified Stock Options are not intended to so qualify. Incentive Stock Options may be granted only to employees of the Company or its parents or subsidiaries, as defined in Section 424 of the Code. Nonqualified Stock Options may be granted to Employees, Non-Employee Directors, and Key Advisors. (ii) The purchase price (the "Exercise Price") of Company Stock subject to an Option may be equal to or greater than the Fair Market Value of a share of Company Stock on the date the Option is granted; provided, however, that (A) the Exercise Price of an Incentive Stock Option shall be equal to, or greater than, the Fair Market Value of a share of Company Stock on the date the Incentive Stock Option is granted and (B) an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns or beneficially owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than one hundred ten percent (110%) of the Fair Market Value of Company Stock on the date of grant. (iii) So long as the Company Stock is publicly traded, the Fair Market Value per share shall be determined as follows: (A) if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or (if there were no trades on that date) the latest preceding date upon which a sale was reported, or (B) if the Company Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices of Company Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Company determines. If the Company Stock is not publicly traded or, if publicly traded, is not subject to reported transactions or "bid" or "asked" quotations as set forth above, the Fair Market Value per share shall be as determined by the Company. (c) Option Term. The term of any Option shall not exceed ten (10) years from the date of grant. However, an Incentive Stock Option that is granted to an Employee who, at the time of grant, owns or beneficially owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five (5) years from the date of grant. (d) Exercisability of Options. (i) Options shall become exercisable in accordance with such terms and conditions of the Plan and specified in the Grant Instrument. The Company may accelerate the exercisability of any or all outstanding Options at any time for any reason. (ii) The Company may provide in a Grant Instrument that the Grantee may elect to exercise part or all of an Option before it otherwise has become exercisable. Any shares so purchased shall be restricted shares and shall be subject to a repurchase right in favor of the Company during a specified restriction period, with the repurchase price equal to the lesser of (A) the Exercise Price or (B) the Fair Market Value of such shares at the time of repurchase, and (C) any other restrictions determined by the Company. (e) Grants to Non-Exempt Employees. Options granted to persons who are non-exempt employees under the Fair Labor Standards Act of 1938, as amended, shall have an Exercise Price not less than one hundred percent (100%) of the Fair Market Value of the Company Stock on the date of grant, and may not be exercisable for at least six (6) months after the date of grant (except that such Options may become exercisable upon the Grantee's death, Disability (as defined below) or retirement, or upon a Change in Control (as defined below) or other circumstances permitted by applicable regulations). (f) Termination of Employment, Disability, or Death. (i) Except as provided below, an Option may only be exercised while the Grantee is employed by, or providing service to, the Employer (as defined below) as an Employee, Key Advisor or member of the Board. In the event that a Grantee ceases to be employed by, or provide service to, the Employer for any reason other than Disability, death, termination for Cause (as defined below), or as set forth in Section 5(f)(v) of this Plan, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within ninety (90) days after the date on which the Grantee ceases to be employed by, or provide service to, the Employer (or within such other period of time as may be specified by the Company), but in any event no later than the date of expiration of the Option term. Except as otherwise provided, any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Employer shall terminate as of such date. (ii) In the event the Grantee ceases to be employed by, or provide service to, the Employer on account of a termination by the Employer for Cause, any Option held by the Grantee shall terminate as of the date on which the Grantee ceases to be employed by, or provide service to, the Employer. In addition, notwithstanding any other provisions of this Section 5, if after the Grantee's termination of employment or service, the Company determines that the Grantee engaged in conduct that constitutes Cause, any Option held by the Grantee shall terminate as the date the Company determines that the Grantee engaged in such conduct. Upon any exercise of an Option, the Company may withhold delivery of share certificates pending resolution of an inquiry that could lead to a finding resulting in a forfeiture. (iii) In the event the Grantee ceases to be employed by, or provide service to, the Employer because of a Disability, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one (1) year after the date on which the Grantee ceases to be employed by, or provide service to, the Employer (or within such other period of time as may be specified by the Company), but in any event no later than the date of expiration of the Option term. Except as otherwise provided, any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Employer shall terminate as of such (iv) If the Grantee dies while employed by, or providing service to, the Employer, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one (1) year after the date the Grantee's death (or within such other period of time as may be specified by the Company), but in any event no later than the date of expiration of the Option term. If the Grantee dies within ninety (90) days after the date on which the Grantee ceased to be employed or provide service on account of a termination specified in Section 5(f)(i) above (or within such other period of time as may be specified by the Company), any Option that is otherwise exercisable by the Grantee shall terminate unless exercised within one (1) year after the date on which the Grantee ceased to be employed by, or provide service to, the Employer (or within such other period of time as may be specified), but in any event no later than the date of expiration of the Option term. Except as otherwise provided, any of the Grantee's Options that are not otherwise exercisable as of the date of the Grantee's death shall terminate as of such date. (v) Notwithstanding anything herein to the contrary, to the extent that any Company-sponsored plan, policy or arrangement, or any agreement to which the Company is a party provides for a longer exercise period for a Grantee's Options under applicable circumstances than the exercise period that is provided for in this Section 5(f) under those circumstances, then the exercise period set forth in such plan, policy, arrangement or agreement applicable to such circumstances shall apply in lieu of the exercise period provided for in this Section 5(f). (vi) For purposes of this Section 5(f) and Section 6 below: (a) (A) The term "Employer" shall mean the Company and its parent and subsidiary corporations or other entities, as determined by the (B) "Employed by, or provide service to, the Employer" shall mean employment or service as an Employee, Key Advisor or member of the Board (so that, for purposes of exercising Options or SARs and satisfying conditions with respect to Stock Awards, or Restricted Units a Grantee shall not be considered to have terminated employment or service until the Grantee ceases to be an Employee, Key Advisor or member of the Board). (C) "Disability" shall mean a Grantee's becoming disabled within the meaning of the Employer's long-term disability plan applicable to the Grantee, as determined in the sole discretion of the Committee or its delegate. (D) "Cause" means (i) willful and continued failure by the Grantee to substantially perform the Grantee's duties with the Company (other than any such failure resulting from the Grantee's incapacity due to physical or mental illness) or (ii) the willful engaging by the Grantee in conduct which is demonstrably injurious to the Company, monetarily or otherwise. For purposes of this definition, no act, or failure to act, on the Grantee's part shall be deemed "willful" unless done, or omitted to be done, by the Grantee not in good faith or without reasonable belief that the Grantee's act, or failure to act, was in the best interest of the Company. Notwithstanding the preceding definition, the term "Cause" shall have the same meaning given to such term or similar term in an employment or other agreement between a Grantee and an (g) Exercise of Options. A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company. The Grantee shall pay the Exercise Price for an Option as specified by the Company (i) in cash, (ii) payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board, or (iii) by such other method as the Company may approve. Shares of Company Stock used to exercise an Option shall have been held by the Grantee for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option. The Grantee shall pay the Exercise Price and the amount of any withholding tax due (pursuant to Section 8 below). (h) Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the Company Stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds One Hundred Thousand Dollars ($100,000), then the Option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an employee of the Company or a parent or subsidiary (within the meaning of Section 424(f) of the Code) of 6. STOCK AWARDS The Company may transfer shares of Company Stock or cash to an Employee, Non-Employee Director, or Key Advisor under a Stock Award. The following provisions are applicable to Stock Awards. (a) General Requirements. Shares of Company Stock issued or transferred pursuant to Stock Awards may be issued or transferred for consideration or for no consideration, and subject to restrictions or no restrictions. Restrictions on Stock Awards shall lapse over a period of time or according to such other criteria as set forth in the Grant Instrument. The period of time during which the Stock Award will remain subject to restrictions will be designated in the Grant Instrument as the "Restriction Period." (b) Number of Shares. The Grant Instrument shall set forth the number of shares of Company Stock to be issued or transferred pursuant to a Stock Award and the restrictions applicable to such shares. (c) Requirement of Employment or Service. If the Grantee ceases to be employed by, or provide service to, the Employer (as defined in Section 5(f) above) during a period designated in the Grant Instrument as the Restriction Period, or if other specified conditions are not met, the Stock Award shall terminate as to all shares covered by the Stock Award as to which the restrictions have not lapsed, and those shares of Company Stock must be immediately returned to the Company. The Company may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. (d) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge, or otherwise dispose of the shares of the Stock Award except to a successor under Section 9(a) below. Each certificate for Stock Awards shall contain a legend giving appropriate notice of the restrictions in the Grant. The Grantee shall be entitled to have the legend removed from the stock certificate covering the shares subject to restrictions when all restrictions on such shares have lapsed. The Company may determine that it will not issue certificates for Stock Awards until all restrictions on such shares have lapsed, or that the Company will retain possession of certificates for Stock Awards until all restrictions on such shares have lapsed. (e) Right to Vote and to Receive Dividends. The right to vote the shares of a Stock Award during the Restriction Period shall be exercisable only by the manager of the business unit of the Company for which the Grantee performs services or with which the Grantee is most closely associated (the "Voting Trustee"). The Voting Trustee shall vote the shares of a Stock Award during the Restriction Period for or against any given matter upon which the shareholders of the Company are provided with the right to vote in proportion to the results of such vote taken by the shareholders of the Company on such matter. The Committee may, but shall not be required to, adopt additional rules and provisions governing the voting trust of which this paragraph is subject. The Grantee shall have the right to receive any dividends or other distributions paid on such restricted shares, subject to any restrictions deemed appropriate by the Committee. (f) Lapse of Restrictions. All restrictions imposed on Stock Awards shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of all conditions. The Company may determine, as to any or all Stock Awards, that the restrictions shall lapse without regard to any Restriction Period. (g) Restricted Stock Units. The Committee or its delegate may grant Restricted Units ("Restricted Units") to an Employee or Key Advisor. Each Restricted Unit shall represent the right of the Grantee to receive an amount in cash or Company Stock (as determined by the Committee or its delegate) based on the value of the Restricted Unit, if performance goals established by the Committee are met or upon the lapse of a specified vesting period. A Restricted Unit shall be based on the Fair Market Value of a share of Company Stock or on such other measurement base as the Committee or its delegate deems appropriate. The Committee or its delegate shall determine the number of Restricted Units to be granted and the requirements applicable to such Restricted Units. (h) Designation as Qualified Performance-Based Compensation. The Committee may determine that Stock Awards or Restricted Units granted to an Employee shall be considered "qualified performance-based compensation" under Section 162(m) of the Code. The provisions of this paragraph (g) shall apply to Stock Awards or Restricted Units that are to be considered "qualified performance-based compensation" under Section 162(m) of the Code. (i) Performance Goals. When Stock Awards or Restricted Units are to be considered "qualified performance-based compensation" are granted, the Committee shall establish in writing (A) the objective performance goals that must be met, (B) the performance period during which the performance goals must be met (the "Performance Period"), (C) the threshold, target and maximum amounts that may be paid if the performance goals are met, and (D) any other conditions that the Committee deems appropriate and consistent with the Plan and Section 162(m) of the Code. The performance goals may relate to the Employee's business unit or the performance of the Company and its parents and subsidiaries as a whole, or any combination of the foregoing. The Committee shall use objectively determinable performance goals based on one (1) or more of the following criteria: stock price, earnings per share, net earnings, operating earnings, return on assets, stockholder return, return on equity, growth in assets, unit volume, sales, market share, or strategic business criteria consisting of one (1) or more objectives based on meeting specified revenue goals, market penetration goals, geographic business expansion goals, cost targets or goals relating to acquisitions or divestitures. (ii) Establishment of Goals. The Committee shall establish the performance goals in writing either before the beginning of the Performance Period or during a period ending no later than the earlier of (A) ninety (90) days after the beginning of the Performance Period or (B) the date on which twenty-five percent (25%) of the Performance Period has been completed, or such other date as may be required or permitted under applicable regulations under Section 162(m) of the Code. The performance goals shall satisfy the requirements for "qualified performance-based compensation," including the requirement that the achievement of the goals be substantially uncertain at the time they are established and that the goals be established in such a way that a third party with knowledge of the relevant facts could determine whether and to what extent the performance goals have been met. The Committee shall not have discretion to increase the amount of compensation that is payable upon achievement of the designated performance goals. (iii) Announcement of Grants. The Committee shall certify and announce the results for each Performance Period to all Grantees immediately following the announcement of the Company's financial results for the Performance Period. If and to the extent that the Committee does not certify that the performance goals have been met, the grants of Stock Awards for the Performance Period shall be forfeited or shall not be made, as applicable. (iv) Death, Disability or Other Circumstances. The Committee may provide that Stock Awards or Restricted Units shall be payable or restrictions on Stock Awards shall lapse, in whole or in part, in the event of the Grantee's death or Disability during the Performance Period, or under other circumstances consistent with the Treasury regulations and rulings under Section 162(m) of the 7. STOCK APPRECIATION RIGHTS The Company may grant SARs to an Employee, Non-Employee Director, or Key Advisor. The following provisions are applicable to SARs. (a) General Requirements. The Company may grant SARs to an Employee, Non-Employee Director or Key Advisor separately or in tandem with any Option (for all or a portion of the applicable Option). Tandem SARs may be granted either at the time the Option is granted or at any time thereafter while the Option remains outstanding; provided, however, that, in the case of an Incentive Stock Option, SARs may be granted only at the time of the grant of the Incentive Stock Option. Unless otherwise specified in the Grant Instrument, the base amount of each SAR shall be equal to the per share Exercise Price of the related Option or, if there is no related Option, the Fair Market Value of a share of Company Stock as of the date of grant of the SAR. (b) Tandem SARs. In the case of tandem SARs, the number of SARs granted to a Grantee that shall be exercisable during a specified period shall not exceed the number of shares of Company Stock that the Grantee may purchase upon the exercise of the related Option during such period. Upon the exercise of an Option, the SARs relating to the Company Stock covered by such Option shall terminate. Upon the exercise of SARs, the related Option shall terminate to the extent of an equal number of shares of Company Stock. (c) Exercisability. A SAR shall be exercisable during the period specified in the Grant Instrument and shall be subject to such vesting and other restrictions as may be specified. The Company may accelerate the exercisability of any or all outstanding SARs at any time for any reason. SARs may only be exercised while the Grantee is employed by, or providing service to, the Employer or during the applicable period after termination of employment or service as described in Section 5(f) above. A tandem SAR shall be exercisable only during the period when the Option to which it is related is also exercisable. (d) Grants to Non-Exempt Employees. Notwithstanding the foregoing, SARs granted to persons who are non-exempt employees under the Fair Labor Standards Act of 1938, as amended, shall have a base amount not less than one hundred percent (100%) of the Fair Market Value of the Company Stock on the date of grant, and may not be exercisable for at least six (6) months after the date of grant (except that such SARs may become exercisable, as determined by the Committee, upon the Grantee's death, Disability or retirement, or upon a Change of Control or other circumstances permitted by applicable regulations). (e) Value of SARs. When a Grantee exercises SARs, the Grantee shall receive in settlement of such SARs an amount equal to the value of the stock appreciation for the number of SARs exercised, payable in Company Stock. The stock appreciation for a SAR is the amount by which the Fair Market Value of the underlying Company Stock on the date of exercise of the SAR exceeds the base amount of the SAR as described in Section 7(a) above. For purposes of calculating the number of shares of Company Stock to be received, shares of Company Stock shall be valued at their Fair Market Value on the date of exercise of the SAR. Notwithstanding anything to the contrary, the Company may pay the appreciation of a SAR in the form of cash, shares of Company Stock, or a combination of the two (2), so long as the ability to pay such amount in cash does not result in the Grantee incurring taxable income related to the SAR prior to the Grantee's exercise of the SAR. (f) Number of SARs Authorized for Issuance. For purposes of Section 3(a) of the Plan, SARs to be settled in shares of Company Stock shall be counted in full against the number of shares of Company Stock available for award under the Plan, regardless of the number of exercise gain shares issued upon the settlement of the SAR. 8. WITHHOLDING OF TAXES (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state, and local tax withholding requirements. The Employer may require that the Grantee or other person receiving or exercising Grants pay to the Employer the amount of any federal, state, or local taxes that the Employer is required to withhold with respect to such Grants, or the Employer may deduct from other wages paid by the Employer the amount of any withholding taxes due with respect to such Grants. (b) Election to Withhold Shares. If the Company so permits, a Grantee may elect to satisfy the Employer's income tax withholding obligation with respect to a Grant by having shares withheld up to an amount that does not exceed the Grantee's minimum applicable withholding tax rate for federal (including FICA), state, and local tax liabilities. The election must be in a form and manner prescribed by the Company. 9. TRANSFERABILITY OF GRANTS (a) Nontransferability of Grants. Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee's lifetime. A Grantee may not transfer those rights except (i) by will or by the laws of descent and distribution or (ii) with respect to SARs and Option grants other than Incentive Stock Options, pursuant to a domestic relations order or otherwise as permitted by the Company. When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee may exercise such rights. Any such successor must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Transfer of Nonqualified Stock Options. Notwithstanding the foregoing, the Grant Instrument may provide that a Grantee may transfer Nonqualified Stock Options to family members, or one (1) or more trusts or other entities for the benefit of or owned by family members, consistent with applicable securities laws, provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer. 10. CHANGE IN CONTROL OF THE COMPANY As used herein, a "Change of Control" shall be deemed to have occurred (a) Any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) (other than persons who are shareholders on the effective date of the Plan) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the voting power of the then outstanding securities of the Company; provided that a Change of Control shall not be deemed to occur as a result of a change of ownership resulting from the death of a shareholder, and a Change of Control shall not be deemed to occur as a result of a transaction in which the Company becomes a subsidiary of another corporation and in which the shareholders of the Company, immediately prior to the transaction, will beneficially own, immediately after the transaction, shares entitling such shareholders to more than 50% of all votes to which all shareholders of the parent corporation would be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote); or (b) The consummation of (i) a merger or consolidation of the Company with another corporation where the shareholders of the Company, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such shareholders to more than 50% of all votes to which all shareholders of the surviving corporation would be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote), (ii) a sale or other disposition of all or substantially all of the assets of the Company or (iii) a liquidation or dissolution of the Company. 11. CONSEQUENCES OF A CHANGE IN CONTROL (a) Notice. Upon a Change of Control, the Company shall provide each Grantee with outstanding Grants written notice of such Change of Control. (b) Assumption of Grants. Upon a Change of Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless otherwise determined, all outstanding Options and SARs that are not exercised shall be assumed by, or replaced with comparable options by the surviving corporation (or a parent or subsidiary of the surviving corporation), and outstanding Stock Awards and Restricted Units shall be converted to Stock Awards or Restricted Units of the surviving corporation (or a parent or subsidiary of the surviving corporation). (c) Other Alternatives. Notwithstanding the foregoing, in the event of a Change of Control, any of the following actions with respect to any or all outstanding Grants may occur as determined by the Company (i) outstanding Options and SARs shall accelerate and become exercisable, in whole or in part, (ii) the restrictions and conditions on outstanding Stock Awards and Restricted Units shall lapse, in whole or in part, (iii) Grantees shall be required to surrender their outstanding Options and SARs in exchange for a payment in cash or stock, in an amount equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee's unexercised Options exceeds the Exercise Price of the Options or the base amount exceeds the unexercised SAR, (iv) after giving Grantees an opportunity to exercise their outstanding Options and SARs all outstanding Options and SARs shall terminate as of the date of the Change of Control or such other date as specified. The Company shall have no obligation to take any of the foregoing actions, and, in the absence of any such actions, outstanding Options, SARs, Stock Awards and Restricted Units shall continue in effect according to their terms (subject to any assumption pursuant to subsection (b)). 12. REQUIREMENTS FOR ISSUANCE OR TRANSFER OF SHARES (a) Limitations on Issuance or Transfer of Shares. No Company Stock shall be issued or transferred in connection with any Grant hereunder unless and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with. Any Grant made shall be conditioned on the Grantee's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued or transferred under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon. (b) Lock-Up Period. If so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any underwritten offering of securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), a Grantee (including any successor or assigns) shall not sell or otherwise transfer any shares or other securities of the Company during the thirty (30) day period preceding and the one hundred eighty (180)-day period following the effective date of a registration statement of the Company filed under the Securities Act for such underwriting (or such shorter period as may be requested by the Managing Underwriter and agreed to by the Company) (the "Market Standoff Period"). The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 13. AMENDMENT AND TERMINATION OF THE PLAN (a) Amendment. The Board or its delegate may amend or terminate the Plan at any time; provided, however, that neither the Board nor its delegate shall have the authority to amend the Plan without stockholder approval if such approval is required in order to comply with the Code or other applicable laws, or to comply with applicable stock exchange requirements. (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth (10th) anniversary of its effective date, unless the Plan is terminated earlier by the Company or is extended by the Company with the approval of the stockholders. (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of a Grantee unless the Grantee consents or unless the Company acts under Section 19(b) below. The termination of the Plan shall not impair the power and authority of the Company with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended under Section 19(b) below or may be amended by agreement of the Company and the Grantee consistent with the Plan. (d) Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns. 14. FUNDING OF THE PLAN This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants. 15. RIGHTS OF PARTICIPANTS Nothing in this Plan shall entitle any Employee, Non-Employee Director, Key Advisor, or other person to any claim or right to be granted a Grant under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Employer or any other employment rights. 16. NO FRACTIONAL SHARES No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Company shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 17. HEADINGS Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall 18. EFFECTIVE DATE OF THE PLAN The Plan shall be effective on October 31, 2005, subject to the subsequent approval of the Plan by the shareholders of the Company. 19. MISCELLANEOUS (a) Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Company to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to employees thereof who become Employees, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Company may make a Grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company, the parent or any of their subsidiaries in substitution for a stock option or stock award grant made by such corporation. The terms and conditions of the substitute grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Company shall prescribe the provisions of the substitute grants. (b) Compliance with Law. The Plan, the exercise of Options and SARs, and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to Section 16 of the Exchange Act it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. In addition, it is the intent of the Company that the Plan and applicable Grants under the Plan comply with the applicable provisions of Section 162(m) of the Code and Section 422 of the Code. To the extent that any legal requirement of Section 16 of the Exchange Act or Section 162(m) or Section 422 of the Code as set forth in the Plan ceases to be required under Section 16 of the Exchange Act or Section 162(m) or Section 422 of the Code, that Plan provision shall cease to apply. The Company may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Company may also adopt rules regarding the withholding of taxes on payments to Grantees. The Company may, in its sole discretion, agree to limit its authority under this Section 19(b). (c) Employees Subject to Taxation Outside the United States. With respect to Grantees who are subject to taxation in countries other than the United States, Grants may be made on such terms and conditions as the Company deems appropriate to comply with the laws of the applicable countries, and the Company may create such procedures, addenda and subplans and make such modifications as may be necessary or advisable to comply with such laws. (d) Governing Law. The validity, construction, interpretation, and effect of the Plan and Grant Instruments issued under the Plan shall be governed and construed by and determined in accordance with the laws of the State of Delaware, without giving effect to the conflict of laws provisions thereof.

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professional_accounting

Retired NASD® Rules GENERAL PROVISIONS (0100) MEMBERSHIP AND REGISTRATION RULES (1000) CONDUCT RULES (2000–3000) 2000. BUSINESS CONDUCT 2200. COMMUNICATIONS WITH CUSTOMERS AND THE PUBLIC 2310. Recommendations to Customers (Suitability) 2315. Recommendations to Customers in OTC Equity Securities 2320. Best Execution and Interpositioning 2330. Customers' Securities or Funds 2340. Customer Account Statements 2341. Margin Disclosure Statement 2342. SIPC Information 2350. Broker/Dealer Conduct on the Premises of Financial Institutions 2361. Day-Trading Risk Disclosure Statement 2370. Borrowing From or Lending to Customers 2410. Net Prices to Persons Not in Investment Banking or Securities Business 2420. Dealing with Non-Members 2450. Installment or Partial Sales 2460. Payments for Market Making 2510. Discretionary Accounts 2520. Margin Requirements 2710. Corporate Financing Rule — Underwriting Terms and Arrangements 2711. Research Analysts and Research Reports 2720. Public Offerings of Securities With Conflicts of Interest 2730. Securities Taken in Trade 2740. Selling Concessions, Discounts and Other Allowances 2750. Transactions with Related Persons 2760. Offerings 'At the Market' 2770. Disclosure of Price in Selling Agreements 2780. Solicitation of Purchases on an Exchange to Facilitate a Distribution of Securities 2790. Restrictions on the Purchase and Sale of Initial Equity Public Offerings 2830. Investment Company Securities 2840. Trading in Index Warrants, Currency Index Warrants, and Currency Warrants 2870. Reserved 2900. RESPONSIBILITIES TO OTHER BROKERS OR DEALERS 3000. RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS, EMPLOYEES, AND OTHERS' EMPLOYEES MARKETPLACE RULES (4000–7000) PROCEDURAL RULES (8000–14000) Retired Incorporated NYSE Rules Retired Incorporated NYSE Rule Interpretations Location: FINRA Manual > Retired Rules > Retired NASD® Rules > CONDUCT RULES (2000–3000) > 2000. BUSINESS CONDUCT > 2800. SPECIAL PRODUCTS > 2810. Direct Participation Programs 08-35 SEC Approves Amendments to NASD Rule 2810 (Direct Participation Programs); Effective Date: August 6, 2008 95-64 SEC Approves Amendments To Article III, Section 34 Of The NASD Rules Of Fair Practice And Part I Of Schedule D To The NASD By-Laws Relating To Limited Partnership Rollup Transactions 95-63 SEC Approves Amendments To Article III, Section 34 Of The NASD Rules Of Fair Practice Relating To Freely Tradeable Direct Participation Program Securities 94-70 SEC Approves Adoption Of NASD Limited Partnership Rollup Transaction Rules; 93-44 SEC Approves Increase In Non-Cash Sales Incentive Compensation 91-78 Request for Comments on Member Participation in Partnership Rollups and Listing of Securities Resulting from Rollups on Nasdaq/NMS; Last Date for Comments: February 1, 1992 91-56 SEC Approval of Amendments to Appendix F Concerning Member Participation in Partnership RoIIups 89-16 Amendment to Appendix F Permitting Indeterminate Compensation in Public Direct Participation Programs — Effective February 1, 1989 86-81 Amendments to Appendix F Regarding Freely Tradable Partnership Units Effective Immediately 86-77 John Franklin & Associates 1975 Hempstead Turnpike East Meadow, New York 11554 86-66 Due Diligence Expense Reimbursements in Connection with Direct Participation Programs 85-29 Compensation Received in Connection with Direct Participation Programs 85-17 Request for Comments on Proposed Amendment to Appendix F Concerning Sales Incentives for Direct Participation Programs 84-64 Securities and Exchange Commission Interpretation of Application of Rule 15c2-4 to Direct Participation Program Offerings 84-28 Amendments to Appendix F Concerning Sales Incentives for Direct Participation Programs This rule is no longer applicable. NASD Rule 2810 has been superseded by FINRA Rule 2310. Please consult the appropriate FINRA Rule. For the purposes of this Rule, the following terms shall have the stated meanings: (1) Affiliate — when used with respect to a member or sponsor, shall mean any person which controls, is controlled by, or is under common control with, such member or sponsor and includes: (A) any partner, officer or director (or person performing similar functions) of (i) such member or sponsor, or (ii) a person which beneficially owns 50% or more of the equity interest in, or has the power to vote 50% or more of the voting interest in, such member or sponsor; (B) any person which beneficially owns or has the right to acquire 10% or more of the equity interest in or has the power to vote 10% or more of the voting interest in (i) such member or sponsor, or (ii) a person which beneficially owns 50% or more of the equity interest in, or has the power to vote 50% or more of the voting interest in, such member or sponsor; (C) any person with respect to which such member or sponsor, the persons specified in subparagraph (A) or (B), and the immediate families of partners, officers or directors (or persons performing similar functions) specified in subparagraph (A), or other person specified in subparagraph (B), in the aggregate beneficially own or have the right to acquire 10% or more of the equity interest or have the power to vote 10% or more of the voting interest; (D) any person an officer of which is also a person specified in subparagraph (A) or (B) and any person a majority of the board of directors of which is comprised of persons specified in subparagraph (A) or (B); or (E) any person controlled by a person or persons specified in subparagraphs (A), (B), (C), or (D). (2) Cash available for distribution — cash flow less amount set aside for restoration or creation of reserves. (3) Cash flow — cash funds provided from operations, including lease payments on net leases from builders and sellers, without deduction for depreciation, but after deducting cash funds used to pay all other expenses, debt payments, capital improvements and replacements. (4) Direct participation program (program) — a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof. A program may be composed of one or more legal entities or programs but when used herein and in any rules or regulations adopted pursuant hereto the term shall mean each of the separate entities or programs making up the overall program and/or the overall program itself. Excluded from this definition are real estate investment trusts, tax qualified pension and profit sharing plans pursuant to Sections 401 and 403(a) of the Internal Revenue Code and individual retirement plans under Section 408 of that Code, tax sheltered annuities pursuant to the provisions of Section 403(b) of the Internal Revenue Code, and any company including separate accounts, registered pursuant to the Investment Company Act of 1940. (5) Dissenting limited partner — a person who, on the date on which soliciting material is mailed to investors, is a holder of a beneficial interest in a limited partnership that is the subject of a limited partnership rollup transaction, and who casts a vote against the transaction and complies with procedures established by the Association, except that for purposes of an exchange or tender offer, such person shall file an objection in writing under the Rules of the Association during the period in which the offer is outstanding. Such objection in writing shall be filed with the party responsible for tabulating the votes or tenders. (6) Equity interest — when used with respect to a corporation, means common stock and any security convertible into, exchangeable or exercisable for common stock, and, when used with respect to a partnership, means an interest in the capital or profits or losses of the partnership. (7) Fair market net worth — total assets computed at fair market value less total liabilities. (8) Limited partner or investor in a limited partnership — the purchaser of an interest in a direct participation program that is a limited partnership who is not involved in the day-to-day management of the limited partnership and bears limited liability. (9) Limited partnership — an unincorporated association that is a direct participation program organized as a limited partnership whose partners are one or more general partners and one or more limited partners, which conforms to the provisions of the Revised Uniform Limited Partnership Act or the applicable statute that regulates the organization of such partnership. (10) Limited partnership rollup transaction — a transaction involving the combination or reorganization of one or more limited partnerships, directly or indirectly, in which: (A) some or all of the investors in any of such limited partnerships will receive new securities, or securities in another entity, that will be reported under a transaction reporting plan declared effective before January 1, 1991, by the Commission under Section 11A of the Act.* (B) any of the investors' limited partnership securities are not, as of the date of the filing, reported under a transaction reporting plan declared effective before January 1, 1991, by the Commission under Section 11A of the Act.** (C) investors in any of the limited partnerships involved in the transaction are subject to a significant adverse change with respect to voting rights, the term of existence of the entity, management compensation, or investment objectives; and (D) any of such investors are not provided an option to receive or retain a security under substantially the same terms and conditions as the original issue. Notwithstanding the foregoing definition, a "limited partnership rollup transaction" does not include: (i) a transaction that involves only a limited partnership or partnerships having an operating policy or practice of retaining cash available for distribution and reinvesting proceeds from the sale, financing, or refinancing of assets in accordance with such criteria as the Commission determines appropriate; (ii) a transaction involving only limited partnerships wherein the interests of the limited partners are repurchased, recalled or exchanged pursuant to the terms of the pre-existing limited partnership agreements for securities in an operating company specifically identified at the time of the formation of the original limited partnership; (iii) a transaction in which the securities to be issued or exchanged are not required to be and are not registered under the Securities Act of 1933; (iv) a transaction that involves only issuers that are not required to register or report under Section 12 of the Act, both before and after the transaction; (v) a transaction, except as the Commission may otherwise provide for by rule for the protection of investors, involving the combination or reorganization of one or more limited partnerships in which a non-affiliated party succeeds to the interests of the general partner or sponsor, if: a. such action is approved by not less than 66 2/3 percent of the outstanding units of each of the participating limited partnerships; and b. as a result of the transaction, the existing general partners will receive only compensation to which they are entitled as expressly provided for in the pre-existing partnership agreements; or (vi) a transaction, except as the Commission may otherwise provide for by rule for the protection of investors, in which the securities offered to investors are securities of another entity that are reported under a transaction reporting plan declared effective before January 1, 1991, by the Commission under Section 11A of the Act;* if: a. such other entity was formed, and such class of securities was reported and regularly traded, not less than 12 months before the date on which soliciting material is mailed to investors; and b. the securities of that entity issued to investors in the transaction do not exceed 20 percent of the total outstanding securities of the entity, exclusive of any securities of such class held by or for the account of the entity or a subsidiary of the entity. (vii) a transaction involving only entities registered under the Investment Company Act of 1940 or any Business Development Company as defined in Section 2(a)(48) of that Act. (11) Management fee — a fee paid to the sponsor, general partner(s), their affiliates, or other persons for management and administration of a direct participation program. (12) Organization and offering expenses — expenses incurred in preparing a direct participation program for registration and subsequently offering interests in the program to the public, including all forms of compensation paid to underwriters, broker/dealers, or affiliates thereof in connection with the offering of the program. (13) Participant — the purchaser of an interest in a direct participation program. (14) Person — any natural person, partnership, corporation, association or other legal entity. (15) Prospectus — a prospectus as defined by Section 2(10) of the Securities Act of 1933, as amended, an offering circular as described in SEC Rule 256 under the Securities Act of 1933, or, in the case of an intrastate offering, any document utilized for the purpose of announcing the offer and sale of securities to the public. (16) Registration statement — a registration statement as defined by Section 2(8) of the Securities Act of 1933, as amended, a notification on Form 1-A filed with the Commission pursuant to the provisions of SEC Rule 255 under the Securities Act of 1933 and, in the case of an intrastate offering, any document initiating a registration or similar process for an issue of securities which is required to be filed by the laws or regulations of any state. (17) Solicitation expenses — direct marketing expenses incurred by a member, in connection with a limited partnership rollup transaction such as telephone calls, broker/dealer fact sheets, members' legal and other fees related to the solicitation, as well as direct solicitation compensation to members. (18) Sponsor — a person who directly or indirectly provides management services for a direct participation program whether as general partner, pursuant to contract or otherwise. (19) Transaction costs — costs incurred in connection with a limited partnership rollup transaction, including printing and mailing the proxy, prospectus or other documents; legal fees not related to the solicitation of votes or tenders; financial advisory fees; investment banking fees; appraisal fees; accounting fees; independent committee expenses; travel expenses; and all other fees related to the preparatory work of the transaction, but not including costs that would have otherwise been incurred by the subject limited partnerships in the ordinary course of business or solicitation expenses. No member or person associated with a member shall participate in a public offering of a direct participation program, a limited partnership rollup transaction or, where expressly provided below, a real estate investment trust as defined in Rule 2340 (d)(4) ("REIT"), except in accordance with this paragraph (b), provided however, this paragraph (b) shall not apply to an initial or secondary public offering of or a secondary market transaction in a unit, depositary receipt or other interest in a direct participation program that complies with subparagraph (2)(D). (2) Suitability (A) A member or person associated with a member shall not underwrite or participate in a public offering of a direct participation program unless standards of suitability have been established by the program for participants therein and such standards are fully disclosed in the prospectus and are consistent with the provisions of subparagraph (B). (B) In recommending to a participant the purchase, sale or exchange of an interest in a direct participation program, a member or person associated with a member shall: (i) have reasonable grounds to believe, on the basis of information obtained from the participant concerning his investment objectives, other investments, financial situation and needs, and any other information known by the member or associated person, that: a. the participant is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in the prospectus, including the tax benefits where they are a significant aspect of the program; b. the participant has a fair market net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity; and c. the program is otherwise suitable for the participant; and (ii) maintain in the files of the member documents disclosing the basis upon which the determination of suitability was reached as to each participant. (C) Notwithstanding the provisions of subparagraphs (A) and (B) hereof, no member shall execute any transaction in direct participation program in a discretionary account without prior written approval of the transaction by the customer. (D) Subparagraphs (A) and (B), and, only in situations where the member is not affiliated with the direct participation program, subparagraph (C) shall not apply to: (i) a secondary public offering of or a secondary market transaction in a unit, depositary receipt, or other interest in a direct participation program that is listed on a national securities exchange; or (ii) an initial public offering of a unit, depositary receipt or other interest in a direct participation program for which an application for listing on a national securities exchange has been approved by such exchange and the applicant makes a good faith representation that it believes such listing on an exchange will occur within a reasonable period of time following the formation of the program. (3) Disclosure (A) Prior to participating in a public offering of a direct participation program or REIT, a member or person associated with a member shall have reasonable grounds to believe, based on information made available to him by the sponsor through a prospectus or other materials, that all material facts are adequately and accurately disclosed and provide a basis for evaluating the program. (B) In determining the adequacy of disclosed facts pursuant to subparagraph (A) hereof, a member or person associated with a member shall obtain information on material facts relating at a minimum to the following, if relevant in view of the nature of the program: (i) items of compensation; (ii) physical properties; (iii) tax aspects; (iv) financial stability and experience of the sponsor; (v) the program's conflict and risk factors; and (vi) appraisals and other pertinent reports. (C) For purposes of subparagraphs (A) or (B) hereof, a member or person associated with a member may rely upon the results of an inquiry conducted by another member or members, provided that: (i) the member or person associated with a member has reasonable grounds to believe that such inquiry was conducted with due care; (ii) the results of the inquiry were provided to the member or person associated with a member with the consent of the member or members conducting or directing the inquiry; and (iii) no member that participated in the inquiry is a sponsor of the program or an affiliate of such sponsor. (D) Prior to executing a purchase transaction in a direct participation program or a REIT, a member or person associated with a member shall inform the prospective participant of all pertinent facts relating to the liquidity and marketability of the program or REIT during the term of the investment. Included in the pertinent facts shall be information regarding whether the sponsor has offered prior programs or REITs in which disclosed in the offering materials was a date or time period at which the program or REIT might be liquidated, and whether the prior program(s) or REIT(s) in fact liquidated on or around that date or during the time period. (4) Organization and Offering Expenses (A) No member or person associated with a member shall underwrite or participate in a public offering of a direct participation program or REIT if the organization and offering expenses are not fair and reasonable, taking into consideration all relevant factors. (B) In determining the fairness and reasonableness of organization and offering expenses that are deemed to be in connection with or related to the distribution of the public offering for purposes of subparagraph (A) hereof, the arrangements shall be presumed to be unfair and unreasonable if: (i) organization and offering expenses, as defined in subparagraph (b)(4)(C), in which a member or an affiliate of a member is a sponsor, exceed an amount that equals fifteen percent of the gross proceeds of the offering; (ii) the total amount of all items of compensation from whatever source, including compensation paid from offering proceeds and in the form of "trail commissions," payable to underwriters, broker/dealers, or affiliates thereof exceeds an amount that equals ten percent of the gross proceeds of the offering (excluding securities purchased through the reinvestment of dividends); (iii) any compensation in connection with an offering is to be paid to underwriters, broker/dealers, or affiliates thereof out of the proceeds of the offering prior to the release of such proceeds from escrow, provided, however, that any such payment from sources other than proceeds of the offering shall be made only on the basis of bona fide transactions; (iv) commissions or other compensation are to be paid or awarded either directly or indirectly, to any person engaged by a potential investor for investment advice as an inducement to such advisor to advise the purchaser of interests in a particular program or REIT, unless such person is a registered broker/dealer or a person associated with such a broker/dealer; (v) the program or REIT provides for compensation of an indeterminate nature to be paid to members or persons associated with members for sales of the program or REIT, or for services of any kind rendered in connection with or related to the distribution thereof, including, but not necessarily limited to, the following: a percentage of the management fee, a profit sharing arrangement, brokerage commissions, an over-riding royalty interest, a net profits interest, a percentage of revenues, a reversionary interest, a working interest, a security or right to acquire a security having an indeterminate value, or other similar incentive items; (vi) the program or REIT charges a sales load or commission on securities that are purchased through the reinvestment of dividends, unless the registration statement registering the securities under the Securities Act of 1933 became effective prior to August 6, 2008; or (vii) the member has received reimbursement for due diligence expenses that are not included in a detailed and itemized invoice, unless the amount of the reimbursement is included in the calculation of underwriting compensation as a non-accountable expense allowance, which when aggregated with all other such non-accountable expenses, does not exceed three percent of offering proceeds. (C) The organization and offering expenses subject to the limitations in subparagraph (b)(4)(B)(i) above include the following: (i) issuer expenses that are reimbursed or paid for with offering proceeds, including overhead expenses, which issuer expenses include, but are not limited to, expenses for: a. assembling, printing and mailing offering materials, processing subscription agreements, generating advertising and sales materials; b. legal and accounting services provided to the sponsor or issuer; c. salaries and non-transaction-based compensation paid to employees or agents of the sponsor or issuer for performing services for the issuer; d. transfer agents, escrow holders depositories, engineers and other experts; and e. registration and qualification of securities under federal and state law, including taxes and fees and NASD fees; (ii) underwriting compensation, which includes but is not limited to items of compensation listed in Rule 2710 (c)(3) including payments: a. to any wholesaling or retailing firm that is engaged in the solicitation, marketing, distribution or sales of the program or REIT securities; b. to any registered representative of a member who receives transaction-based compensation in connection with the offering, except to the extent that such compensation has been included in a. above; c. to any registered representative who is engaged in the solicitation, marketing, distribution or sales of the program or REIT securities, except: 1. to the extent that such compensation has been included in a. above; 2. for a registered representative whose functions in connection with the offering are solely and exclusively clerical or ministerial; and 3. for a registered representative whose sales activities are de minimis and incidental to his or her clerical or ministerial job functions; or d. for training and education meetings, legal services provided to a member in connection with the offering, advertising and sales material generated by the member and contributions to conferences and meetings held by non-affiliated members for their registered representatives. (iii) due diligence expenses incurred when a member affirmatively discharges its responsibilities to ensure that all material facts pertaining to a program or REIT are adequately and accurately disclosed in the offering document. (D) Notwithstanding subparagraphs (b)(4)(C)(ii)b. and c. above, for every program or REIT filed with the Corporate Financing Department (the "Department") for review, the Department shall, based upon the information provided, make a determination as to whether some portion of a registered representative's non-transaction-based compensation should not be deemed to be underwriting compensation if the registered representative is either: (i) a dual employee of a member and the sponsor, issuer or other affiliate with respect to a program or REIT with ten or fewer registered representatives engaged in wholesaling, in which instance the Department may make such determination with respect to the ten or fewer registered representatives engaged in wholesaling; or (ii) a dual employee of a member and the sponsor, issuer or other affiliate who is one of the top ten highest paid executives based on non-transaction-based compensation in any program or REIT. (E) All items of compensation paid by the program or REIT directly or indirectly from whatever source to underwriters, brokers/dealers, or affiliates thereof, including, but not limited to, sales commissions, wholesaling fees, due diligence expenses, other underwriter's expenses, underwriter's counsel's fees, securities or rights to acquire securities, rights of first refusal, consulting fees, finder's fees, investor relations fees, and any other items of compensation for services of any kind or description, which are deemed to be in connection with or related to the public offering, shall be taken into consideration in computing the amount of compensation for purposes of determining compliance with the provisions of subparagraphs (A) and (B). (F) The determination of whether compensation paid to underwriters, broker/dealers, or affiliates thereof is in connection with or related to a public offering, for purposes of this subparagraph (4), shall be made on the basis of such factors as the timing of the transaction, the consideration rendered, the investment risk, and the role of the member or affiliate in the organization, management and direction of the enterprise in which the sponsor is involved. (i) An affiliate of a member which acts or proposes to act as a general partner, associate general partner, or other sponsor of a program or REIT shall be presumed to be bearing investment risk for purposes of this paragraph (b) if the affiliate: a. is subject to potential liability as a general partner to the same extent as any other general partner; b. is not indemnified against potential liability as a general partner to any greater or different extent than any other general partner for its actions or those of any other general partner; c. has a net worth equal to at least five percent of the net proceeds of the public offering or $1.0 million, whichever is less; provided, however, that the computation of the net worth shall not include an interest in the program offered but may include net worth applied to satisfy the requirements of this paragraph (b) with respect to other programs or REITs; and d. agrees to maintain net worth as required by subparagraph c. above under its control until the earlier of the removal or withdrawal of the affiliate as a general partner, associate general partner, or other sponsor, or the dissolution of the program or REIT. (ii) For purposes of determining the factors to be utilized in computing compensation derived from securities received in connection with a public offering, the guidelines set forth in Rule 2710 shall govern to the extent applicable. (G) Subject to the limitations on direct and indirect non-cash compensation provided under subparagraph (C), no member shall accept any cash compensation unless all of the following conditions are satisfied: (i) all compensation is paid directly to the member in cash and the distribution, if any, of all compensation to the member's associated persons is controlled solely by the member; (ii) the value of all compensation to be paid in connection with an offering is included as compensation to be received in connection with the offering for purposes of subparagraph (B); (iii) arrangements relating to the proposed payment of all compensation are disclosed in the prospectus or similar offering document; (iv) the value of all compensation paid in connection with an offering is reflected on the books and records of the recipient member as compensation received in connection with the offering; and (v) no compensation paid in connection with an offering is directly or indirectly related to any non-cash compensation or sales incentive items provided by the member to its associated persons. (5) Valuation for Customer Account Statements No member may participate in a public offering of direct participation program or REIT securities unless the general partner or sponsor of the program or REIT will disclose in each annual report distributed to investors pursuant to Section 13(a) of the Act a per share estimated value of the direct participation program securities, the method by which it was developed, and the date of the data used to develop the estimated value. (6) Participation in Rollups (A) No member or person associated with a member shall participate in the solicitation of votes or tenders from limited partners in connection with a limited partnership rollup transaction, irrespective of the form of the resulting entity (i.e., a partnership, real estate investment trust or corporation), unless any compensation received by the member: (i) is payable and equal in amount regardless of whether the limited partner votes affirmatively or negatively in the proposed limited partnership rollup transaction; (ii) in the aggregate, does not exceed 2% of the exchange value of the newly-created securities; and (iii) is paid regardless of whether the limited partners reject the proposed limited partnership rollup transaction. (B) No member or person associated with a member shall participate in the solicitation of votes or tenders from limited partners in connection with a limited partnership rollup transaction unless the general partner(s) or sponsor(s) proposing the limited partnership rollup transaction agrees to pay all solicitation expenses related to the limited partnership rollup transaction, including all preparatory work related thereto, in the event the limited partnership rollup transaction is rejected. (C) No member or person associated with a member shall participate in any capacity in a limited partnership rollup transaction if the transaction is unfair or unreasonable. (i) A limited partnership rollup transaction will be presumed not to be unfair or unreasonable if the limited partnership rollup transaction provides for the right of dissenting limited partners: a. to receive compensation for their limited partnership units based on an appraisal of the limited partnership assets performed by an independent appraiser unaffiliated with the sponsor or general partner of the program that values the assets as if sold in an orderly manner in a reasonable period of time, plus or minus other balance sheet items, and less the cost of sale or refinancing and in a manner consistent with the appropriate industry practice. Compensation to dissenting limited partners of limited partnership rollup transactions may be cash, secured debt instruments, unsecured debt instruments, or freely tradeable securities; provided, however, that: 1. limited partnership rollup transactions which utilize debt instruments as compensation must provide for a trustee and an indenture to protect the rights of the debt holders and provide a rate of interest equal to at least 120% of the applicable federal rate as determined in accordance with Section 1274 of the Internal Revenue Code of 1986; 2. limited partnership rollup transactions which utilize unsecured debt instruments as compensation, in addition to the requirements of subparagraph 1., must limit total leverage to 70% of the appraised value of the assets; 3. all debt securities must have a term no greater than 8 years and provide for prepayment with 80% of the net proceeds of any sale or refinancing of the assets previously owned by the partnership entitles subject to the limited partnership rollup transaction or any part thereof; and 4. freely tradeable securities used as compensation to dissenting limited partners must be previously listed on a national securities exchange prior to the limited partnership rollup transaction, and the number of securities to be received in return for limited partnership interests must be determined in relation to the average last sale price of the freely tradeable securities in the 20-day period following the date of the meeting at which the vote on the limited partnership rollup transaction occurs. If the issuer of the freely tradeable securities is affiliated with the sponsor or general partner, newly issued securities to be used as compensation to dissenting limited partners shall not represent more than 20 percent of the issued and outstanding shares of that class of securities after giving effect to the issuance. For purposes of the preceding sentence, a sponsor or general partner is "affiliated" with the issuer of the freely tradeable securities if the sponsor or general partner receives any material compensation from the issuer or its affiliates in conjunction with the limited partnership rollup transaction or the purchase of the general partner's interest; provided, however, that nothing herein shall restrict the ability of a sponsor or general partner to receive any payment for its equity interests and compensation as otherwise provided by this subparagraph. b. to receive or retain a security with substantially the same terms and conditions as the security originally held. Securities received or retained will be considered to have the same terms and conditions as the security originally held if: 1. there is no material adverse change to dissenting limited partners' rights with respect to the business plan or the investment, distribution and liquidation policies of the limited partnership; and 2. the dissenting limited partners receive substantially the same rights, preferences and priorities as they had pursuant to the security originally held; or c. to receive other comparable rights including, but not limited to: 1. approval of the limited partnership rollup transaction by 75% of the outstanding units of each of the individual participating limited partnerships and the exclusion of any individual limited partnership from the limited partnership rollup transaction which fails to reach the 75% threshold. The third-party appointed to tabulate votes and dissents pursuant to subparagraph (C)(ii)b.4. hereof shall submit the results of such tabulation to the Association; 2. review of the limited partnership rollup transaction by an independent committee of persons not affiliated with the general partner(s) or sponsor. Whenever utilized, the independent committee: A. shall be approved by a majority of the outstanding securities of each of the participating partnerships; B. shall have access to the books and records of the partnerships; C. shall prepare a report to the limited partners subject to the limited partnership rollup transaction that presents its findings and recommendations, including any minority views; D. shall have the authority to negotiate the proposed transaction with the general partner or sponsor on behalf of the limited partners, but not the authority to approve the transaction on behalf of the limited partners; E. shall not deliberate for a period longer than 60 days, although extensions will be permitted if unanimously agreed upon by the members of the independent committee or if approved by the Association; F. may be compensated and reimbursed by the limited partnerships subject to the limited partnership rollup transaction and shall have the ability to retain independent counsel and financial advisors to represent all limited partners at the limited partnerships' expense provided the fees are reasonable; and G. shall be entitled to indemnification to the maximum extent permitted by law from the limited partnerships subject to the limited partnership rollup transaction from claims, causes of action or lawsuits related to any action or decision made in furtherance of their responsibilities; provided, however, that general partners or sponsors may also agree to indemnify the independent committee; or 3. any other comparable rights for dissenting limited partners proposed by general partners or sponsors, provided, however, that the general partner(s) or sponsor demonstrates to the satisfaction of the Association or, if the Association determines appropriate, to the satisfaction of an independent committee, that the rights proposed are comparable. (ii) Regardless of whether a limited partnership rollup transaction is in compliance with subparagraph (C)(i), a limited partnership rollup transaction will be presumed to be unfair and unreasonable: a. if the general partner(s): 1. converts an equity interest in any limited partnership(s) subject to a limited partnership rollup transaction for which consideration was not paid and which was not otherwise provided for in the limited partnership agreement and disclosed to limited partners, into a voting interest in the new entity (provided, however, an interest originally obtained in order to comply with the provisions of Internal Revenue Service Revenue Proclamation 89-12 may be converted); 2. fails to follow the valuation provisions, if any, in the limited partnership agreements of the subject limited partnerships when valuing their limited partnership interests; or 3. utilizes a future value of their equity interest in the limited partnership rather than the current value of their equity interest, as determined by an appraisal conducted in a manner consistent with subparagraph (C)(i)a., when determining their interest in the new entity; b. as to voting rights, if: 1. the voting rights in the entity resulting from a limited partnership rollup transaction do not generally follow the original voting rights of the limited partnerships participating in the limited partnership rollup transaction; provided, however, that changes to voting rights may be effected if the Association determines that such changes are not unfair or if the changes are approved by an independent committee; 2. a majority of the interests in an entity resulting from a limited partnership rollup transaction may not, without concurrence by the sponsor, general partner(s), board of directors, trustee, or similar governing entity, depending on the form of entity and to the extent not inconsistent with applicable state law, vote to: A. amend the limited partnership agreement, articles of incorporation or by-laws, or indenture; B. dissolve the entity; C. remove the general partner, board of directors, trustee or similar governing entity, and elect a new general partner, board of directors, trustee or similar governing entity; or D. approve or disapprove the sale of substantially all of the assets of the entity; 3. the general partner(s) or sponsor(s) proposing a limited partnership rollup transaction do not provide each limited partner with a document which instructs the limited partner on the proper procedure for voting against or dissenting from the transaction; or 4. the general partner(s) or sponsor(s) does not utilize an independent third party to receive and tabulate all votes and dissents in connection with the limited partnership rollup transaction, and require that the third party make the tabulation available to the general partner and any limited partner upon request at any time during and after voting occurs; c. as to transaction costs, if: 1. transaction costs of a rejected limited partnership rollup transaction are not apportioned between general and limited partners of the subject limited partnerships according to the final vote on the proposed transaction as follows: A. the general partner(s) or sponsor(s) bear all transaction costs in proportion to the total number of abstentions and votes to reject the limited partnership rollup transaction; and B. limited partners bear transaction costs in proportion to the number of votes to approve the limited partnership rollup transaction; or 2. individual limited partnerships that do not approve a limited partnership rollup transaction are required to pay any of the transaction costs, and the general partner or sponsor is not required to pay the transaction costs on behalf of the non-approving limited partnerships, in a limited partnership rollup transaction in which one or more limited partnerships determines not to approve the transaction, but where the transaction is consummated with respect to one or more approving limited partnerships; or d. as to fees of general partners, if: 1. general partners are not prevented from receiving both unearned management fees discounted to a present value (if such fees were not previously provided for in the limited partnership agreement and disclosed to limited partners) and new asset-based fees; 2. property management fees and other general partner fees are inappropriate, unreasonable and more than, or not competitive with, what would be paid to third parties for performing similar services; or 3. changes in fees which are substantial and adverse to limited partners are not approved by an independent committee according to the facts and circumstances of each transaction. (c) Non-Cash Compensation (1) Definitions The terms "compensation," "non-cash compensation" and "offeror" as used in this Section (c) of this Rule shall have the following meanings: (A) "Compensation" shall mean cash compensation and non-cash compensation. (B) "Non-cash compensation" shall mean any form of compensation received in connection with the sale and distribution of direct participation securities that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging. (C) "Offeror" shall mean an issuer, sponsor, an adviser to an issuer or sponsor, an underwriter and any affiliated person of such entities. (2) Restriction on Non-Cash Compensation In connection with the sale and distribution of direct participation program or REIT securities, no member or person associated with a member shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation, except as provided in this provision. Non-cash compensation arrangements are limited to the following: (A) Gifts that do not exceed an annual amount per person fixed periodically by the Board of Governors1 and are not conditioned on achievement of a sales target. (B) An occasional meal, a ticket to a sporting event or the theater, or comparable entertainment which is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target. (C) Payment or reimbursement by offerors in connection with meetings held by an offeror or by a member for the purpose of training or education of associated persons of a member, provided that: (i) associated persons obtain the member's prior approval to attend the meeting and attendance by a member's associated persons is not conditioned by the member on the achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by subparagraph (c)(2)(D); (ii) the location is appropriate to the purpose of the meeting, which shall mean a United States office of the offeror or the member holding the meeting, or a facility located in the vicinity of such office, or a United States regional location with respect to meetings of associated persons who work within that region or, with respect to meetings with direct participation programs or REITs, a United States location at which a significant or representative asset of the program or REIT is located; (iii) the payment or reimbursement is not applied to the expenses of guests of the associated person; and (iv) the payment or reimbursement by the offeror is not conditioned by the offeror on the achievement of a sales target or any other non-cash compensation arrangement permitted by subparagraph (c)(2)(D). (D) Non-cash compensation arrangements between a member and its associated persons or a company that controls a member company and the member's associated persons, provided that no unaffiliated non-member company or other unaffiliated member directly or indirectly participates in the member's or non-member's organization of a permissible non-cash compensation arrangement; and (E) Contributions by a non-member company or other member to a non-cash compensation arrangement between a member and its associated persons, provided that the arrangement meets the criteria in subparagraph (c)(2)(D). A member shall maintain records of all non-cash compensation received by the member or its associated persons in arrangements permitted by subparagraphs (c)(2)(C)–(E). The records shall include: the names of the offerors, non-members or other members making the non-cash compensation contributions; the names of the associated persons participating in the arrangements; the nature and value of non-cash compensation received; the location of training and education meetings; and any other information that proves compliance by the member and its associated persons with subparagraph (c)(2)(C)–(E). (d) Exemptions Pursuant to the Rule 9600 Series, the Association may exempt a member or person associated with a member from the provisions of this Rule for good cause shown. * Transaction reporting plans under Section 11A were declared effective prior to January 1, 1991 for the Nasdaq National Market System, the New York Stock Exchange, and the American Stock Exchange. ** Transaction reporting plans under Section 11A were declared effective prior to January 1, 1991 for the Nasdaq National Market System, the New York Stock Exchange, and the American Stock Exchange. 1The current annual amount fixed by the Board of Governors is $100. Amended by SR-NASD-2003-68 eff. April 7, 2003. Amended by SR-NASD-95-21 eff. July 11, 1995. Amended by SR-NASD-95-19 eff. July 3, 1995. Amended to incorporate Appendix F by SR-NASD-93-48 eff. Mar. 8, 1994. Amended SR-NASD-81-19 eff. Sept. 16, 1982; Jan. 17, 1984; SR-NASD-84-2 eff. July 3, 1984; SR-NASD-85-26 eff. Nov. 5. 1985; SR-NASD-86-21 eff. Sept. 15, 1986; SR-NASD-86-22 eff. Jan. 1, 1989; SR-NASD-84-10 eff. Feb. 1, 1989; SR-NASD-91-24 eff. Aug. 19, 1991; SR-NASD-93-29 eff. June 23, 1993. Adopted by SR-NASD-77-8 eff. July 14, 1980. Selected Notices: 73-50, 77-03, 78-12, 81-34, 82-14, 82-50, 82-51, 82-52, 83-13, 84-28, 84-64, 85-17, 85-29, 86-66, 86-81, 88-88, 89-16, 91-56, 91-78, 93-15, 93-44, 94-24, 94-70, 95-63, 95-64, 08-35.

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professional_accounting

No Reasonable Cause When Tax Return Preparer Fails to E-file Extension February 7, 2022 by Leslie Book 2 Comments A recent district court opinion addresses the inability to establish reasonable cause for a late filing penalty even if a longtime preparer promised but failed to e-file an extension of time to file a 1040. The case, Oosterwijk v United States, brings in interesting reasonable cause issues and highlights the limits of the IRS First Time Penalty Abatement policy. In 2017, taxpayers Erik and Aspasia Oosterwijk sold for many millions of dollars a Baltimore based wholesale meat business that they had run for decades. When it came time to file their 2017 tax return on Tuesday April 17, 2018 (Monday April 16, 2018 was Emancipation Day in DC), the taxpayers expected their longtime preparer to e-file an extension and instruct IRS to apply a payment of about $1.8 million in taxes. The taxpayers made sure they transferred money to their checking account, and kept looking to see when the tax payment would hit the account. By April 25, when the money was still not debited from their account, the taxpayers emailed their longtime CPA tax return preparer, who told them to wait until April 30, and if the money were still in their checking account at that date he would follow up with the IRS. On April 29 the now concerned taxpayers emailed their CPA again saying that the money was still in their account. The preparer checked his records and…… You guessed it. The preparer realized that that he failed to e-file the extension and had not given instructions to IRS to debit the payment. What happens next compounds the original problem. The preparer advised the Oosterwijks that if they immediately filed a six-month Extension Request on Form 4868, they would have until October 15, 2018, to file their tax return, and the penalties for late filing would stop accruing.. The taxpayers followed the advice and immediately mailed in the Form 4868 and a check for $1.8 million, which IRS processed on May 4, 2018. On June 29, 2018 the Oosterwijks’ CPA e-filed their 2017 return. Upon processing the return, IRS assessed failure to pay penalties of about $8,860 for the one month non payment delinquency period that ran April 17 to May 4, 2018. IRS assessed failure to file (FTF) penalties of about $259,000 for the three month late filing period that ran from April 17 to June 29th 2018, the date that Oosterwijks’ CPA e-filed their return on their behalf. The Oosterwijks (and their CPA) were surprised that the IRS assessed a FTF penalty for the two-month period that ran from May 15 to June 29th. Based on their CPA’s advice, the taxpayers had incorrectly believed that by paying their taxes, submitting the Extension Request on May 4 (during the first month), and filing the return before October 15, they would halt the accrual of any FTF penalties beyond the first monthly delinquency. Well, as you likely know, the CPA and his clients were mistaken. A late filed extension to file does not excuse FTF penalties for any subsequent filing. In November 2018, after the IRS assessed both delinquency penalties, the taxpayers’ CPA requested penalty relief based on reasonable cause. The IRS denied the relief, and the CPA appealed administratively on behalf of his clients. The Appeals Officer agreed to abate about 50% of both delinquency penalties. Despite the 50% abatement, the taxpayers were not happy with the result. By March of 2019, the taxpayers sent in another letter to IRS stating that they believed they should be relieved of all the penalties, raising the issue of their reasonable cause for late filing due to their CPA’s failure to e-file the extension and his incorrect substantive advice about how to halt the FTF penalty’s accrual. IRS did not respond, and the taxpayers paid the balance due and filed a refund claim. After six months passed they then filed a refund suit in federal district court, claiming that they had reasonable cause for the delinquency due to both the mistaken belief that the extension were filed and the reliance on substantive advice that a late filed extension excused a portion of the FTF penalties. Following the complaint, the government filed a motion to dismiss, which the court treated as a motion for summary judgment. As a threshold matter, why didn’t the taxpayers avoid having to file a suit and request administrative relief under the IRS’s First Time Abatement policy? To add insult to injury the Oosterwijks were not eligible, because their decades long history of tax compliance was tainted by a $7 late payment penalty from the 2014 tax year and the first time abatement for delinquency penalties requires a clean past three years of tax compliance. With that out of the way the opinion first addressed a variance issue because the formal refund claim addressed reasonable cause relating to the mistaken belief that the extension was filed and did not mention the advice the CPA gave about limiting penalty accrual by filing a 4868 after the due date of the return. The opinion concluded that the claim and communications with IRS were sufficient to put IRS on notice about the full extent of the reasonable cause argument. (as an aside the opinion also seems to mix up the SOL issues in 6511 and 6532). That gets to the merits of the reasonable cause defense. The taxpayers argued that the FTF penalties should be completely excused because they had reasonable cause for filing late, specifically that their accountant failed to e-file their extension request and their personal e-filing access was limited. Boyle and Non Delegable Duties This of course brings in the Boyle case and its applicability to failures to e-file, which we have discussed in Delinquency Penalties: Boyle in the Age of E-Filing and more recently in Possible Opening in Defending Against Late Filing Penalty When Preparer Fails to E-file Timely. To date, even when a taxpayer is relying on an agent to e-file, courts have been unwilling to distinguish Boyle and have held that reliance on a third party to file a return does not establish reasonable cause because “[i]t requires no special training or effort to ascertain a deadline and make sure that it is met.” The Oosterwijk opinion cites to the opinion in Boyle, and also to Justice Brennan’s concurring opinion, where he “stressed that the ‘ordinary business care and prudence’ standard applies only to the “ordinary person.” That is, the standard exempts individuals with disabilities or infirmities that render them physically or mentally incapable of knowing, remembering, and complying with a filing deadline.” The Oosterwijks argued that “Boyle does not apply to electronic filing, because a taxpayer cannot personally confirm that an accountant has e-filed as promised.” The Oosterwijks essentially argued that the placement of a third party (the preparer) “between the taxpayer and the IRS, and the Oosterwijks’ inability either to e-file on their own or to confirm the e-filing’s transmission put the filing beyond their control according to Justice Brennan’s concurrence.” The opinion disagreed, noting that the taxpayers were free to paper file an extension (and in fact did so): The specialized technology and professionals-only availability of e-filing need not have been a barrier to the filing of an Extension Request; the same means available to the Boyle taxpayer in 1979 were available to the Oosterwijks in 2017, even if the IRS encourages e-filing. Moreover, the opinion notes that Justice Brennan’s Boyle concurrence “contemplates differently abled taxpayers who are physically or mentally incapable of meeting filing deadline. The Oosterwijks do not fall under this exception.” What About The CPA’s Substantive Advice? Boyle does not prevent a finding of reasonable cause when a taxpayer’s non or late filing was due to erroneous substantive legal advice as compared to just an agent’s failure to file a return or extension. To that end, the Oosterwijks argued that the penalty period after the first month should be excused because their preparer mistakenly believed and advised them that if they mailed an extension after the due date of the return so long as they paid any balance due and filed the 2017 return by October 15, 2018 they would only be subjected to one-month FTF penalty. This, they argued, amounted to substantive legal advice. A. Is The Penalty Divisible As I mentioned above, that advice was wrong; the FTF penalty is based on the net tax due as of the due date of the return, and the delinquent extension provided no benefit. But should the taxpayer be expected to second-guess their preparer? The court’s inquiry focused on timing. Does it matter if the substantive advice arises after the due date of the return? The opinion notes that the reasonable cause inquiry looks to the due date, and while the due date (and thus inquiry time) could be extended if the taxpayer timely filed an extension, actions beyond the due date are not determinative. To be sure, the opinion notes that reasonable cause at the due date does not mean that there is reasonable cause for the entire delinquency period, citing to the Federal Circuit Court of Appeals case from 2013, Estate of Liftin v US. The government argued that any advice that the Oosterwijks’ preparer gave after the April 17 due date was irrelevant if as of the original due date the taxpayer did not establish that it had reasonable cause (and as discussed above there was no reasonable cause as of April 17). The taxpayers essentially argued that the FTF penalty was divisible, or that whether a taxpayer has reasonable cause should be evaluated on a monthly basis given that the penalty amount is triggered by each monthly delinquency period: To the Oosterwijks, the core issue is whether reasonable cause arose as to parts of the penalty incurred in later months when, after the deadline had already passed, they relied on their tax professional’s bad substantive advice about what actions would stop the accrual of a tax penalty. They say that this would leave intact the April 2018 penalty but would require removal of the penalties for May and June 2018, the months after [the CPA’s] incorrect April 30 advice. The Oosterwijks focus on the distinction between relying on a tax professional to perform the ministerial (and non-delegable, under Boyle) duty of filing an extension return, as compared to the tax professional’s erroneous substantive advice about what actions would halt the penalty’s accrual. On divisibility, the court examined case law which suggested that the FTF penalty was divisible but distinguished those circumstances. Those cases mostly involved erroneous “legal advice about the availability of second extensions after the taxpayer had already timely filed and obtained a first extension.” In those cases there was reasonable cause at the original due date but not later: These second-extension cases are distinct from the Oosterwijks’. The taxpayers in these cases were erroneously advised by their attorneys before their (first extended) deadlines had passed, meaning they could still have had reasonable cause under § 6651. The fact that they received erroneous advice after their original deadlines is immaterial, because their reasonable cause evaluation was governed by their first extended deadline. In contrast, the Oosterwijks received their erroneous advice after the deadline had passed and therefore after the door had closed on reasonable cause for late filing. Similarly, the opinion distinguished Estate of Liftin, where a taxpayer had reasonable cause at the date of filing based on erroneous advice about not needing to file an estate tax return until after the taxpayer’s spouse had become a citizen. In Liftin, the reasonable cause defense did not apply to the FTF penalty when circumstances changed and the spouse became a citizen, but there was still an additional 9-month delinquency prior to filing: Liftin shows that although the penalty is not entirely indivisible for the purposes of the reasonable cause exception, it is not divisible in the way the Oosterwijks hope. They, unlike the Liftin taxpayer, failed to meet the initial requirements of reasonable cause. The purpose of encouraging timely filing is best served by reading the statute to allow reasonable cause to expire based on a change in circumstances at some point in the delinquency but not allowing it to materialize where the taxpayer had none at the time of filing. B. Even if the Penalty Were Divisible the Advice Was Not Reasonable For good measure, the opinion notes that even if the penalty were divisible in the way the Oostwerwijks argued they still would not qualify for relief because the advice they received was not reasonable given the explicit text of Form 4868. In so concluding the opinion cites to Baer v US, a 2020 Court of Federal Claims opinion that considered a CPA’s failure to file a 4868 because he believed that any extension had to be accompanied by a taxpayer payment. While Baer held that the CPA’s actions were not advice and thus could not justify a taxpayer’s reliance, it also held that if it did amount to advice it was not based on a “reasonable factual or legal assumption.” That was because the text of the extension form directly contradicted the CPA’s mistaken belief, that it could not file a 4868 a scenario analogous to the Oosterwijk’s situation where the form itself stated that the taxpayer must file the 4868 by the due date to receive the extension. In contrast in La Meres v Commissioner, one case where a taxpayer was able to establish that mistaken advice as to an extension was reasonable cause, the opinion notes that the advice concerned the advisor’s mistaken belief that the taxpayer was entitled to two extensions of time to file an estate tax return, an issue not addressed in the form itself but only “toward the end of the relevant estate tax regulation” and one in which the IRS actions misled the taxpayer into thinking a second extension was valid. The court signs off by acknowledging that it is “sympathetic to the Oosterwijks, who were not willfully neglectful but rather appear to have relied on the advice of a trusted professional, intending to fulfill their obligations under the tax laws.” Yet the court also acknowledges that the government was not at fault and did in fact abate about half of the penalties. I am not sure I accept that there is no government fault here. Even though I suspect the taxpayers’ longtime preparer will likely reimburse the taxpayers in light of a possible malpractice suit (though maybe Congress should consider directly penalizing the preparer rather than forcing the taxpayer to seek reimbursement from the preparer), the case leaves a bad taste in my mouth. Apart from my belief that courts (and the IRS) should distinguish Boyle when e-filing makes it difficult to monitor an agent’s actions, the policy underlying the imposition of civil penalties and the first time abatement policy itself suggest that the IRS should have exercised discretion and abated the FTF penalty in full. Recall that the taxpayers had a long history of tax compliance, save for a 2014 $7 delinquency penalty. Under the First Time Abatement policy, the IRS will abate a delinquency penalty if a taxpayer Didn’t previously have to file a return or have no penalties for the 3 tax years prior to the tax year in which the taxpayer received a penalty; Filed all currently required returns or filed an extension of time to file; and Has paid, or arranged to pay, any tax due. As the IRS acknowledges, “penalties should relate to the standards of behavior they encourage. Penalties best aid voluntary compliance if they support belief in the fairness and effectiveness of the tax system.” IRM 20.1.1.2.1 (11-25-2011) Encouraging Voluntary Compliance. While perhaps the IRS has the power to penalize taxpayers like the Oosterwijks, the taxpayers’ de minimis $7 delinquency penalty is all that stood in the way of a full abatement. The IRS should apply the First Time Abatement policy by ignoring a de mininimis assessment during the three-year period. Even if the policy were not changed to have a deminimis carveout, when a taxpayer has a long history of compliance and the delinquency is directly attributable to preparer error, perhaps the government should show mercy. After all, as Shakespeare wrote, mercy can have an effect that is “twice blest.” It is needed more so these days as trust in our public institutions and IRS in particular seems to be eroding. Sometimes doing the right thing means the IRS looking the other way. Even if the law is on its side. Filed Under: Civil Penalties About Leslie Book Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law. A. Lavar Taylor says The “ordinary business care and prudence” standard does not require “extraordinary” business care and prudence. When a taxpayer is aware of the deadline and gets assurance from a trusted tax professional that the deadline has been met (which was not the fact pattern in Boyle), in many, if not most, cases the taxpayer should meet the “ordinary care an prudence” standard. Fact patterns like the one in Oosterwijk should at least raise triable issues of fact as to whether the standard was met, i.e., the question of whether they met the applicable standard should be decided by a jury or judicial fact finder. For “ordinary” persons, there should not be strict liability for penalties where taxpayers are aware of the deadline, their trusted tax professional is aware of the deadline, and their trusted tax professional screws up. Of course, if it is a jury question, taxpayers can still end up losing on the factual issue. Don’t conflate the argument that there is a legitimate issue of fact with the argument that the taxpayer has actually demonstrated reasonable cause. They are two separate issues. Bob Kamman says If my client is going to owe nearly $2 million and we already know it, I’m not going to put off filing a 4868 until April 15. The extension form for 2021 returns is available now. If clients at the deadline want to delegate filing it and making a payment, online or by mailed check, I will tell them to delegate it to someone else. The taxpayers probably have a history of requesting last-minute extensions – they may have been waiting for a Schedule K-1, perhaps for their own business, with a return due on March 15 that had already been extended. We don’t know the net worth of these taxpayers. If it’s $100 million, should that make a difference in how much mercy IRS shows? Taxpayers with negative net worth might find even greater hardship in paying a $2,000 penalty under similar circumstances. The solution here is to bifurcate the First Time Abatement Policy: If you had to pay FTP in the last three years, another FTP won’t be abated. If you had to pay FTF in the last three years, another FTF won’t be abated. But we won’t penalize you for both if you only messed up on one.

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professional_accounting

(b) Includes $17.0 prepayment related to program share repurchases. See note 8. (a) Additional equipment of $8.2 was acquired through a finance lease. See note 4. These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB) and the accounting policies we have adopted in accordance with International Financial Reporting Standards (IFRS). These unaudited interim condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly our financial position as at June 30, 2015 and our financial performance, comprehensive income and cash flows for the three and six months ended June 30, 2015. The unaudited interim condensed consolidated financial statements were authorized for issuance by our board of directors on July 23, 2015. These unaudited interim condensed consolidated financial statements are based upon accounting policies and estimates consistent with those used and described in note 2 of our 2014 annual audited consolidated financial statements. There have been no material changes to our significant accounting estimates and assumptions or the judgments affecting the application of such estimates and assumptions during the second quarter of 2015 from those described in the notes to our 2014 annual audited consolidated financial statements. The near-term economic environment could also impact certain estimates necessary to prepare our consolidated financial statements, in particular, the estimates related to the recoverable amount used in our impairment testing of our non-financial assets, and the discount rates applied to our net pension and non-pension post-employment benefit assets or liabilities. For the second quarter and first half of 2015, we had three customers that individually represented more than 10% of total revenue (second quarter and first half of 2014 — three customers). In March 2015, we entered into a multi-year supply agreement with a solar cell supplier that includes a commitment by us to provide cash advances of up to $36.0 to help this supplier expand its manufacturing operations into Malaysia. As of June 30, 2015, we advanced $21.0 of this amount, which we have recorded as other current assets of $13.5 and other non-current assets of $7.5 in our balance sheet as of June 30, 2015. We expect to advance the remaining committed cash amounts during the second half of 2015 and expect to fully recover all such cash advances from this supplier through quarterly repayment installments starting in the fourth quarter of 2015, through the end of 2017. In April 2015, we entered into a five-year agreement to lease manufacturing equipment valued at up to $22 to be used in our solar operations in Asia. As of June 30, 2015, we recorded lease obligations totaling $8.2, consisting of short-term obligations of $1.0 and long-term obligations of $7.2, related to the manufacturing equipment we received as of such date. Our lease payments are due quarterly and commence in January 2016. This lease qualifies as a finance lease under IFRS. We have an accounts receivable sales agreement to sell up to $250.0 at any one time in accounts receivable on an uncommitted basis (subject to pre-determined limits by customer) to three third-party banks. Each of these banks had a Standard and Poor's long-term rating of BBB+ or above and short-term rating of A-2 or above at June 30, 2015. The term of this agreement has been annually extended in recent years for additional one-year periods (and is currently extendable to November 2016 under specified circumstances), but may be terminated earlier as provided in the agreement. At June 30, 2015, we had sold $55.0 of accounts receivable under this facility (December 31, 2014 — $50.0). The accounts receivable sold are removed from our consolidated balance sheet and reflected as cash provided by operating activities in our consolidated statement of cash flows. Upon sale, we assign the rights to the accounts receivable to the banks. We continue to collect cash from our customers and remit the cash to the banks when collected. We pay interest and fees which we record in finance costs in our consolidated statement of operations. We record our inventory provisions and valuation recoveries in cost of sales. We record inventory provisions to reflect write-downs in the value of our inventory to net realizable value, and valuation recoveries primarily to reflect realized gains on the disposition of inventory previously written down to net realizable value. We recorded net inventory provisions of $2.5 and $4.2 for the second quarter and first half of 2015, respectively (second quarter and first half of 2014 — $2.3 and $4.8, respectively). We regularly review our estimates and assumptions used to value our inventory through analysis of historical performance. Our $300.0 revolving credit facility was scheduled to mature in October 2018. In order to fund a portion of our share repurchases under the substantial issuer bid (the SIB) that we completed in June 2015, we amended this facility in May 2015 to add a non-revolving term loan component (the Term Loan) in the amount of $250.0 (in addition to the previous revolving credit $300.0 limit), and to extend the maturity of the entire facility to May 2020. We funded the SIB using a combination of the Term Loan, $25.0 drawn on our revolving credit facility, and available cash on hand. See note 8. This revolving portion of the facility (the Revolving Facility) has an accordion feature that allows us to increase the $300.0 limit by an additional $150.0 on an uncommitted basis upon satisfaction of certain terms and conditions. The Revolving Facility also includes a $25.0 swing line, subject to the overall credit limit, that provides for short-term borrowings up to a maximum of seven days. The Revolving Facility permits us and certain designated subsidiaries to borrow funds for general corporate purposes, including acquisitions. Borrowings under this Revolving Facility bear interest for the period of the draw at various base rates selected by us consisting of LIBOR, Prime, Base Rate Canada, and Base Rate (each as defined in the amended credit agreement), plus a margin. The margin for borrowings under the Revolving Facility ranges from 0.6% to 1.4% (except in the case of the LIBOR base rate, in which case, the margin ranges from 1.6% to 2.4%), based on a specified financial ratio based on indebtedness. The Term Loan bears interest at LIBOR plus a margin ranging from 2.0% to 3.0% based on the same financial ratio. We are permitted to make additional voluntary repayments of the Term Loan, subject to certain terms and conditions. Repaid amounts on the Term Loan may not be re-borrowed. We incurred debt issuance costs of $2.1 in connection with the amendment of the credit facility, which we recorded as an offset against the proceeds from the Term Loan, and such costs are deferred and amortized over the term of the Term Loan using the effective interest rate method. At June 30, 2015, we were in compliance with all applicable restrictive and financial covenants required by our current credit facility. Commitment fees paid in the second quarter and first half of 2015 were $0.3 and $0.6, respectively (second quarter and first half of 2014 — $0.5 and $1.0, respectively). At June 30, 2015, we had $26.8 (December 31, 2014 — $28.5) outstanding in letters of credit under this facility. We also have a total of $70.0 of uncommitted bank overdraft facilities available for intraday and overnight operating requirements. There were no amounts outstanding under these overdraft facilities at June 30, 2015 or December 31, 2014. We have repurchased subordinate voting shares in the open market and otherwise for cancellation in recent years pursuant to normal course issuer bids (NCIBs), which allow us to repurchase a limited number of subordinate voting shares during a specified period, and pursuant to substantial issuer bids, including most recently, the SIB, as described below. As part of the NCIB process, we have entered into Automatic Share Purchase Plans (ASPPs) with brokers, that allow such brokers to purchase our subordinate voting shares in the open market on our behalf, for cancellation under our NCIBs (including during any applicable trading blackout periods). In addition, we have entered into program share repurchases (PSRs) as part of the NCIB process, pursuant to which we make a prepayment to a broker in consideration for the right to receive a variable number of subordinate voting shares upon such PSR's completion. Under such PSRs, the price and number of subordinate voting shares to be repurchased by us is determined based on a discount to the volume weighted-average market price of our subordinate voting shares during the term of the PSR, subject to certain terms and conditions. The subordinate voting shares repurchased under any PSR are cancelled upon completion of each PSR under the NCIB. The maximum number of subordinate voting shares we are permitted to repurchase for cancellation under each NCIB is reduced by the number of subordinate voting shares we purchase in the open market during the term of such NCIB to satisfy obligations under our stock-based compensation plans. In August 2014, we completed an NCIB launched in August 2013 (the 2013 NCIB), which allowed us to repurchase, at our discretion, up to approximately 9.8 million subordinate voting shares in the open market, or as otherwise permitted. During the first quarter of 2014, we paid $12.1 (including transaction fees) to repurchase and cancel 1.2 million subordinate voting shares under the 2013 NCIB at a weighted average price of $10.11 per share. In addition, we completed two PSRs for $44.1 ($27.1 paid in the first quarter of 2014 and $17.0 paid in the second quarter of 2014), pursuant to which we repurchased and cancelled 4.0 million subordinate voting shares at a weighted average price of $11.04 per share under the 2013 NCIB. On September 9, 2014, the TSX accepted our notice to launch a new NCIB (the 2014 NCIB), which allows us to repurchase, at our discretion, until the earlier of September 10, 2015 or the completion of purchases thereunder, up to approximately 10.3 million subordinate voting shares (representing approximately 5.8% of our total outstanding subordinate voting and multiple voting shares at the time of launch) in the open market or as otherwise permitted, subject to the normal terms and limitations of such bids. In December 2014, the TSX accepted our notice to amend the 2014 NCIB to permit the repurchase of our subordinate voting shares thereunder through one or more PSRs. In connection therewith, we paid $50.0 to a broker in December 2014 under a PSR for the right to receive a variable number of our subordinate voting shares upon such PSR's completion. We completed this PSR on January 28, 2015, pursuant to which we repurchased and cancelled 4.4 million subordinate voting shares at a weighted average price of $11.38 per share. During the first quarter of 2015, subsequent to the completion of this PSR, we paid $19.8 (including transaction fees) to repurchase and cancel an additional 1.7 million subordinate voting shares under the 2014 NCIB at a weighted average price of $11.66 per share. We did not repurchase any shares under the 2014 NCIB in the second quarter of 2015. In the second quarter of 2015, we launched and completed the SIB, pursuant to which we repurchased and cancelled approximately 26.3 million subordinate voting shares at a price of $13.30 per share (for an aggregate purchase price of $350.0), representing approximately 15.5% of our total multiple voting shares and subordinate voting shares issued and outstanding prior to completion of the SIB. We also recorded $1.1 in transaction related costs. We funded the share repurchases using a combination of the Term Loan, $25.0 drawn on the Revolving Facility, and cash on hand. See note 7. We grant share unit awards to employees under our stock-based compensation plans. We have the option to satisfy the delivery of shares upon vesting of the awards by purchasing subordinate voting shares in the open market or by settling such awards in cash. Under one of these plans, we also have the option to satisfy the delivery of shares by issuing new subordinate voting shares from treasury, subject to certain limits. From time-to-time, we pay cash for the purchase by a trustee of subordinate voting shares in the open market to satisfy the delivery of shares upon vesting of awards. For accounting purposes, we classify these shares as treasury stock until they are delivered pursuant to the plans. We did not purchase any subordinate voting shares in the open market to satisfy the delivery requirements under our stock-based compensation plans during the second quarters or the first six months of 2015 or 2014. At June 30, 2015, the trustee held 0.5 million subordinate voting shares for this purpose, having a value of $5.6 (December 31, 2014 — 2.0 million subordinate voting shares with a value of $21.4). During the first quarter of 2015, we granted 2.1 million (first quarter of 2014 — 2.6 million) performance share units (PSUs), of which 60% vest based on the achievement of a market performance condition tied to Total Shareholder Return (TSR), and the balance vest based on a non-market performance condition based on pre-determined financial targets. See note 2(n) of our 2014 annual audited consolidated financial statements for a description of TSR. We estimated the grant date fair value of the TSR-based PSUs using a Monte Carlo simulation model. The grant date fair value of the non-TSR-based PSUs is determined by the market value of our subordinate voting shares at the time of grant and may be adjusted in subsequent periods to reflect a change in the estimated level of achievement related to the applicable performance condition. We expect to settle these awards with subordinate voting shares purchased in the open market by a trustee or issued from treasury. The number of PSUs that will actually vest will vary from 0 to the amount set forth in the table above as outstanding at June 30, 2015 (representing the maximum potential payout) depending on the level of achievement of the relevant performance conditions. We did not grant any PSUs during the second quarter of 2015. During the second quarter and first half of 2015, we received cash proceeds of $0.6 and $2.6, respectively (second quarter and first half of 2014 — $6.0 and $6.3, respectively) relating to the exercise of stock options granted to employees. At June 30, 2015, 1.2 million (December 31, 2014 — 1.1 million) DSUs were outstanding. For the second quarter and first half of 2015, we recorded employee stock-based compensation expense (excluding DSUs) of $7.1 and $18.6, respectively (second quarter and first half of 2014 — $6.4 and $17.3, respectively), and DSU expense of $0.5 and $1.0, respectively (second quarter and first half of 2014 — $0.5 and $1.0, respectively). The amount of our employee stock-based compensation expense varies from period-to-period. The portion of our expense that relates to performance-based compensation generally varies depending on the level of achievement of pre-determined performance goals and financial targets. During the second quarter and first half of 2015, we recorded restructuring charges of $9.5 and $9.8, respectively (second quarter and first half of 2014 — $0.3 and $0.3, respectively) to consolidate certain of our sites and reduce our workforce. For the second quarter of 2015, we recorded cash charges of $5.3, primarily employee termination costs and non-cash charges of $4.2, primarily to write down certain equipment to recoverable amounts. During the quarter, we consolidated two of our semiconductor sites into a single location to reduce the cost structure and improve the margin performance of that business. The remainder of our restructuring actions for the quarter consisted primarily of employee headcount reductions we implemented in various geographies. Our restructuring provision at June 30, 2015 was $4.9 (December 31, 2014 — $1.9) comprised primarily of employee termination costs. In the second quarter and first half of 2014, other was comprised primarily of recoveries of damages we received in connection with the settlement of class action lawsuits in which we were a plaintiff, related to certain purchases we made in prior periods. Our financial assets are comprised primarily of cash and cash equivalents, accounts receivable and derivatives used for hedging purposes. Our financial liabilities are comprised primarily of accounts payable, certain accrued and other liabilities and provisions, the Term Loan, borrowings from the Revolving Facility, and derivatives. We record the majority of our financial liabilities at amortized cost except for derivative liabilities, which we measure at fair value. We classify our term deposits as held-to-maturity. We record our short-term investments in money market funds at fair value, with changes recognized in our consolidated statement of operations. The carrying value of the Term Loan approximates its fair value. Our current portfolio consists of bank deposits and certain money market funds that primarily hold U.S. government securities. The majority of our cash and cash equivalents is held with financial institutions each of which had at June 30, 2015 a Standard and Poor's short-term rating of A-1 or above. Borrowings under our credit facility bear interest at specified rates plus a margin. See note 7. Our borrowings under this facility, which at June 30, 2015 totalled $275.0, expose us to interest rate risk due to potential increases to the specified rates and margins. Our major currency exposures at June 30, 2015 are summarized in U.S. dollar equivalents in the following table. We have included in this table only those items that we classify as financial assets or liabilities and which were denominated in non-functional currencies. In accordance with the IFRS financial instruments standard, we have excluded items such as pension and non-pension post-employment benefits and income taxes. The local currency amounts have been converted to U.S. dollar equivalents using the spot rates at June 30, 2015.

{'timestamp': '2019-04-22T06:08:30Z', 'url': 'https://corporate.celestica.com/node/6201', 'language': 'en', 'source': 'c4'}

professional_accounting

Contingent interest payment (CoPa) features were introduced in 2001. The first security to carry this feature was the $829m Danaher 0% due 2021 senior note that was issued in January 2001. Holders of the converts would receive an incremental interest payment if the underlying stock reached a predetermined level (usually 120% of conversion price). Incorporating the CoPa feature allows the issuer to treat the convertible as a Contingent Payment Debt Instrument (CPDI) for tax purposes. Any debt instrument whose payments are uncertain in the amount or timing being dependent in another event can be classified as CPDI. By treating the security as a CPDI, the issuer gets substantial tax benefits. This feature has been rare in new converts, but still exists in older ones. Lehman published a report titled, “Grappling with call risk in CoPa converts” on 3/18/04 that does a good job of explaining the concept. Some of that material is incorporated into this post. The benefits result from the fact that, for tax purposes, the issuer gets to accrue interest expense at a comparable (non-contingent) straight debt rate (i.e., with similar ratings, ranking, maturity, and the like) rather than the stated yield to maturity (YTM) rate of the convertible with the CoPa feature. Since the comparable rate is, in almost all cases, greater than the stated yield of the convertible, it results in tax shield benefits to the issuer. Clearly, the issuer maximizes the value of the tax shield when the spread between the stated YTM of the convertible and the CPDI rate is the widest. Assuming that the convertible remains outstanding through maturity, and principal is repaid at maturity, the issuer would be required to reverse the additional/incremental tax shield benefit the issuer received throughout the life of the security. The additional/incremental tax shield benefit essentially accumulates as a deferred tax liability on the issuer’s balance sheet. The primary benefit for the issuer lies in the present value or timing impact of the tax shield cash flows. Assuming the convertible remains outstanding and principal is repaid at maturity, the issuer receives a higher tax shield during the life of the security, but reverses it only at maturity. It is this present value effect of the incremental tax shield that creates enormous value for the issuer. If parity is greater than the tax accreted price of the CoPa convertible (as of the effective date of the call), the issuer does not incur any recapture. In this situation, convertible holders convert their security into common stock. If parity is greater than the call price, but less than the tax-accreted price of the CoPa convertible, the recapture amount equals the tax shield on the difference between the tax-accreted price of the convertible and parity. In this case, also, convertible holders convert the security to the underlying common stock. If parity is less than the call price and the tax-accreted price of the convertible, the recapture amount is the tax shield on the difference between the tax- accreted price of the convertible and the call price. In this case, investors would find it economical to take the call price rather than converting. Based on the preceding scenarios, it is clear that the issuer of a CoPa convertible is likely to incur the highest recapture costs in scenario 3, followed by scenario 2, and no zero recapture costs in scenario 1. The magnitude of the recapture will depend on 1) the size of the security, and 2) the size of the tax shield benefits that the issuer has reaped. The size of the tax shield benefits are, in turn, a function of, 1) the spread between the YTM of the convertible and the comparable rate used with the CPDI classification of the security, 2) the corporate tax rate of the issuer, and 3) the convertible’s structure (i.e., zero coupon versus cash pay versus par zero bond). The greater the spread between the convert’s yield and the comparable rate used for tax purposes, the larger will be the tax shield benefit to the issuer. All else being equal, zero coupon structures provide higher tax shield benefits relative to cash-pay bond structures. The higher the corporate tax rate, the greater will be the value of the tax shield. In addition, the Company shall pay contingent interest (“Contingent Interest”) to the Holders during any six-month period (a “Contingent Interest Period”) from February 15 to August 14 and from August 15 to February 14, commencing with the six-month period beginning February 15, 2012, if the average Market Price of a Note for the five Trading Day period ending on the third Trading Day immediately preceding the relevant Contingent Interest Period equals $1,200 (120% of the principal amount of a Note) or more per $1,000 principal amount of the Note. Some issuers do not want to repay the tax recapture so they will give a put sweetener to keep the bonds outstanding. One issuer that is known for put sweeteners is OMC, which uses this strategy to manage converts so that is essentially pays a short term interest rate on a long term instrument. According to OMC’s treasurer, there is a limitation on the number of times that put sweeteners can be used. The Copa recapture also discourages the issuer from calling the bond unless the stock is above a certain price so that there is no recapture. To find this out, you must construct a spreadsheet that determines how much the issuer has already benefited from deducting higher taxes. The longer the convert has stayed outstanding, the higher the threshold price to avoid recapture. The following is taken from BAC’s report titled, “Tax benefits inspires convertible exchanges” on 10/29/09. This act provides benefits for applicable convertible bond exchanges and we see recent transactions from WCC, AMMD and BGC partially driven by such tax benefits. By exchanging a newly issued Contingent Payment (CoPa) convertible bond for their existing convertibles, these companies would generate a gain from debt retirement, which can be excluded from taxable income for 5 years and then be amortized over the following 5-taxable-year period. In addition, these companies are allowed to deduct the interest cost on the newly issued converts at a so-called Comparable Yield, which is much higher than the nominal coupon carried on these convertibles.

{'timestamp': '2019-04-23T06:57:25Z', 'url': 'http://convertarb.net/?page_id=154', 'language': 'en', 'source': 'c4'}

professional_accounting

FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number (811-23377) Tidal ETF Trust 898 N. Broadway, Suite 2 Massapequa, New York 11758 Eric W. Falkeis (Name and address of agent for service) Registrant's telephone number, including area code Date of fiscal year end: November 30 Date of reporting period: November 30, 2019 Item 1. Reports to Stockholders. Aware Ultra-Short Duration Enhanced Income ETF Ticker: AWTM Beginning on January 1, 2021, as permitted by regulations adopted by the U.S. Securities and Exchange Commission (the “SEC”), paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the Fund’s reports from your financial intermediary, such as a broker dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report. If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. Please contact your financial intermediary to elect to receive shareholder reports and other Fund communications electronically. You may elect to receive all future reports in paper free of charge. Please contact your financial intermediary to inform them that you wish to continue receiving paper copies of shareholder reports and for details about whether your election to receive reports in paper will apply to all funds held with your financial intermediary. A Message to our Shareholders Portfolio Allocations Schedule of Investments Statement of Assets and Liabilities Statement of Operations Statement of Changes in Net Assets Notes to Financial Statements Report of Independent Registered Public Accounting Firm Expense Example Trustees and Executive Officers Dear Shareholders, 2019 was a banner year for the Aware Ultra-Short Duration Enhanced Income ETF (Ticker: AWTM). Not only did the fund launch last year, but also it was a very successful year in terms of asset accumulation, performance and recognition from the ETF industry. We launched the fund on January 29. Over the year the fund’s assets under management grew from $10 million in seed capital, the investment needed to start the fund, to more than $300 million at the end of our fiscal year, November 30. At the time of our semi-annual report on May 31, the fund posted a net asset value (“NAV”) return of 1.54% and market return of 1.65%, compared with the 0.84% return of our benchmark, the ICE BofA Merrill Lynch U.S. 3-Month Treasury Bill Index, a measure of short-term (nearly risk free) U.S. Treasury bill securities. Our top-notch team of portfolio managers continued their success into the second half of 2019. For the fiscal year ended November 30, AWTM produced a total NAV return of 3.22% and market return of 3.23%, compared with the 1.95% return posted by our benchmark index. Since inception through calendar year 2019, the fund posted a NAV return of 3.48% and market return of 3.50% vs. the benchmark’s 2.09%, and had roughly $350 million in assets under management. Fiscal year relative performance was primarily driven by our overweight to spread product including both corporate and mortgage- and asset-backed spaces. Within the corporate space, we benefited from our strong security selection, especially within the bank, automotive and manufacturing industries, as these bonds rallied due to supportive idiosyncratic and industry trends. BBB-rated securities represented the highest contributor from a quality standpoint. In the mortgage- and asset-backed spaces, the management team emphasized single family rental and agency credit risk transfer securities. These results exceeded our expectations and led to recognition from the ETF industry. Zacks Investment Research named our fund one of the most successful ETF launches of the first quarter of 2019, because of the speed with which we accumulated assets. ETF.com, one of the leading research firms covering the industry, named AWTM one of the Top ETF Launches for the year. ETF.com ranked AWTM fifth out of the more than 200 U.S.-listed ETFs launched in 2019. The year culminated with a nomination for the ETF.com Best New Active ETF Award. Last but not least, we added a new head of quantitative research to our portfolio team. What the Market Looked Like This Year We were lucky to launch AWTM at a time when net inflows into U.S. fixed-income ETFs exceeded net inflows into domestic equity ETFs, commodity ETFs and international equity ETFs. In 2019, total inflows into U.S.-listed ETFs rose 3% year over year to $326.3 billion, according to ETF.com. It was the second largest inflows on record, topped only by the $476.1 billion in 2017. U.S. fixed income ETFs attracted $135.4 billion compared with $130.2 billion that went into U.S. equity ETFs. The Bloomberg Barclays U.S. Aggregate Bond Index climbed 8.72% to post its best performance in 17 years. After halting its tightening cycle in January, the Federal Open Market Committee (FOMC) began cutting its target for the federal funds rate to the current range of 1.5% to 1.75% in July. After peaking at 3.125% during the second half of 2018, the Federal Reserve’s (Fed) median dot plot (which represents the middle of the market’s views of where the fed funds rate should be at the end of a period) has dropped to 1.625%. The reduction in the fed funds rate was identified as a policy adjustment, not the beginning of an easing cycle. With the global economy slowing and market disruptors like the US-China trade war front and center, the Fed believed it was important to provide some cautionary moves to ensure the U.S. economy didn’t slide into a recession. The Goldilocks economy of stable-yet-subdued economic growth, low unemployment and low inflation is expected to continue. U.S. economic growth looks to continue expanding this year. We believe run rate gross domestic product (GDP) growth will be below the 3.2% print in the first quarter of 2019. Year over year, U.S. GDP grew 2.1% for the period ending September 30, 2019; this reflects the tariff-driven drop in imports from China (which are subtracted from GDP). The U.S. unemployment rate continues to be around historic lows. While wage growth isn’t as strong as we would like, consumer spending remains strong. Inflation remains tame and has struggled to achieve a level greater than the 2% personal consumption expenditure core price index target the Fed has sought. Lower rates have not given inflation the boost the Fed wants. The U.S. Treasury curve saw interest rates -- for 2-year Treasuries up through 30-year Treasuries -- drop in the second half of our fiscal year, compared with the first half of the fiscal year. Over the six-month period ended May 31, the 2-year U.S. Treasury note saw its yield plunge to 1.61% from 1.92%. The long end of the curve was driven by lower-than-desirable inflationary pressure and geopolitical events. These events include Brexit, the current trade dispute with China, and flare-ups in the Middle East. Over the same period, the 10-year U.S. Treasury note saw its yield tumble to 1.78% from 2.13%. The market seems to have accepted the FOMC’s way of thinking -- three rate reductions are all that is necessary -- as the yield curve inversion disappeared in November. The spread between 10-year and 3-month U.S. Treasuries has been a reliable harbinger of economic slowdowns. However, in the current environment, we believe the inversion is more reflective of the Fed’s reaction to persistently slow growth and low inflation expectations. Somewhat counter intuitively, cash bond investment grade (option adjusted) spreads tightened (from 137 basis points on May 31 to 115 basis points on November 30). Still, the demand for yield continues. Our Forecast for the Near Future We expect the Goldilocks economy (stable growth, low unemployment, and low inflation) to propel the credit cycle further, making us less concerned about an abrupt end to the bull market. We also feel that the recent inversion of the yield curve will not lead to a recession within the near term. Fixed-income investors are currently willing to accept lower yields to hold a longer maturity security, which has the effect of making the slope of the yield curve look more ominous than it really is. Our concern will grow as the spread between the 10-year and 3-month Treasuries (-.22) approaches the 10-year term premium, which Adrian Crump & Munch (ACM) estimates to be - .96 as of November 30. Every recession since the 1970s has seen the 10-year – 3-month spread drop below ACM’s estimate. Combining our Goldilocks view of the economy with our belief that many fixed-income investors today are overly pessimistic, we continue to like spread product over U.S. Treasuries, both in corporate and structured credit. This mean’s we are willing to push towards the higher end of our 75- to 100-basis-point target above the 3-month Treasury bill. Like the Fed, we remain data dependent. We will continue to closely monitor the geopolitical and financial environments to determine if our fund positioning remains true to our objective. Aware Asset Management’s investment team navigates global markets by using in-depth research and analysis to effectively manage global risk and identify opportunities in today’s complicated market and regulatory environments. AWTM is a way to bring our expertise to a wider market of investors. The fund is an actively managed fixed-income ETF. It seeks to maximize current income, targeting a yield of 0.75% to 1.00% more than the 3-month Treasury bill, while preserving capital and maintaining a high level of daily liquidity to meet our clients’ short-term operational needs. The goal of the fund is to lower clients’ exposure to interest rate risk and market volatility using short-duration securities. We are truly proud of our first ETF launch and feel strongly that AWTM offers a solid alternative to lower yielding cash, money market, and other ultra-short duration ETF investments. In conclusion, we thank you for the assets you have entrusted with us. We deeply value your trust and will continue to focus our efforts on meeting your broad investment needs. For any questions regarding the Aware Ultra-Short Duration Enhanced Income ETF, please contact your financial adviser or call one of our shareholder associates at (866) 539-9530. We also encourage you to visit our website at www.awareetf.com for additional information regarding the ETF or other thought pieces behind its management. John E. Kaprich, CFA Investment Director, Aware Asset Management Portfolio Manager, Aware Ultra-Short Duration Enhanced Income ETF Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus. A prospectus may be obtained by visiting awareetf.com. Please read the prospectus carefully before you invest. The performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Investment return and principal value will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. A fund’s NAV is the sum of all its assets less any liabilities, divided by the number of shares outstanding. The market price is the most recent price at which the fund was traded. Index returns and sector returns are for illustrative purposes only and do not represent actual Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and unavailable for direct investment. For the purpose of the Fund’s yield target, yield is defined as the weighted average yield-to-maturity of the Fund’s holdings. The yield or total return obtained by Fund shareholders may be different. Yield-to-maturity is the return from a fixed income instrument assuming the instrument is held to maturity. There is no guarantee that the Fund will meet its income target. An investment in the fund involves risk, including loss of principal. The Fund is subject to the same risks as the underlying bonds in the portfolio such as credit, prepayment, call and interest rate risk. As interest rates rise the value of bond prices will decline. Performance Summary (Unaudited) Total Returns for the period ended November 30, 2019: Aware Ultra-Short Duration Enhanced Income ETF - NAV Aware Ultra-Short Duration Enhanced Income ETF - Market ICE BofA Merrill Lynch 3-Month U.S. Treasury Bill Index This chart illustrates the performance of a hypothetical $10,000 investment made on January 28, 2019, and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The chart assumes reinvestment of capital gains, dividends, and return of capital, if applicable, for a fund and dividends for an index. Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling (866) 539-9530. Portfolio Allocations at November 30, 2019 (Unaudited) Industry/Security Type % of Net Assets Collateralized Mortgage Obligations Auto Manufacturers Federal Agency Obligations Collateralized Loan Obligations Miscellaneous Manufacturers Cash & Cash Equivalents (1) Diversified Financial Services Mortgage Backed Securities United States Treasury Bills Forest Products & Paper United States Treasury Notes Trucking & Leasing Represents cash, money market funds and other assets in excess of liabilities. Schedule of Investments at November 30, 2019 ASSET BACKED SECURITIES: 10.2% American Homes 4 Rent Trust, Series 2014-SFR2, Class A 3.786%, 10/17/36 Bayview Opportunity Master Fund IVa Trust, Series 2016-SPL1, Class A 4.000%, 4/28/55 Edsouth Indenture No. 5, LLC, Series 2014-1, Class A 2.408% (1 Month LIBOR USD + 0.700%), 2/25/39 1 Home Partners of America Trust, Series 2017-1, Class A Home Partners of America Trust, Series 2018-1, Class C Invitation Homes Trust, Series 2017-SFR2, Class B 2.913% (1 Month LIBOR USD + 1.150%), 12/17/36 1 Invitation Homes Trust, Series 2018-SFR2, Class A Progress Residential Trust, Series 2019-SFR1, Class A Renew, Series 2017-1A, Class A SLM Student Loan Trust, Series 2005-3, Class A5 SoFi Professional Loan Program, LLC, Series 2015-B, Class A1 Starwood Waypoint Homes Trust, Series 2017-1, Class A Towd Point Mortgage Trust, Series 2016-1, Class A1 3.500%, 2/25/55 1 Towd Point Mortgage Trust, Series 2019-HY1, Class A1 TOTAL ASSET BACKED SECURITIES (Cost $30,686,280) COLLATERALIZED LOAN OBLIGATIONS: 6.1% ALM XVIII Ltd., Series 2016-18A, Class A2R Anchorage Capital CLO 7 Ltd., Series 2015-7A, Class AR BlueMountain CLO 2015-2 Ltd., Series 2015-2A, Class A1R The accompanying notes are an integral part of these financial statements. SCHEDULE OF INVESTMENTS at November 30, 2019 (Continued) COLLATERALIZED LOAN OBLIGATIONS: 6.1% (Continued) BlueMountain CLO 2016-3 Ltd., Series 2016-3A, Class BR Cathedral Lake CLO 2015-3 Ltd., Series 2015-3A, Class CR Crown Point CLO III Ltd., Series 2015-3A, Class A2R Octagon Investment Partners 20-R Ltd., Series 2019-4A, Class B OHA Credit Funding 3 Ltd., Series 2019-3A, Class B1 Romark CLO III Ltd., Series 2019-3A, Class A1 Shackleton 2017-X CLO Ltd., Series 2017-10A, Class A Tralee CLO IV Ltd., Series 2017-4A, Class B Trestles CLO II Ltd., Series 2018-2A, Class A2 Voya CLO 2017-2 Ltd., Series 2017-2A, Class A2A 3.711% (3 Month LIBOR USD + 1.710%), 6/7/30 1 Whitehorse XII Ltd., Series 2018-12A, Class A TOTAL COLLATERALIZED LOAN OBLIGATIONS COLLATERALIZED MORTGAGE OBLIGATIONS: 7.6% Deephave Residential Mortgage Trust, Series 2019-2A, Class A1 Fannie Mae Connecticut Avenue Securities, Series 2015-C01, Class 2M2 Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2015-DN1, Class M3 Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2015-DNA2, Class M2 COLLATERALIZED MORTGAGE OBLIGATIONS: 7.6% (Continued) Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2015-HQ2, Class M2 Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2015-HQA1, Class M2 GS Mortgage-Backed Securities Corp Trust, Series 2019-PJ3, Class A6 JP Morgan Mortgage Trust, Series 2017-1, Class A5 JP Morgan Mortgage Trust, Series 2019-1, Class A11 New Residential Mortgage Loan Trust, Series 2017-5A, Class A1 Sequoia Mortgage Trust, Series 2014-3, Class B1 3.940%, 10/25/44 1 Towd Point HE Trust, Series 2019-HE1, Class A1 WaMu Mortgage Pass-Through Certificates Trust, Series 2006-AR1, Class 2A1A 3.396% (12 Month US Treasury Average + 1.070%), 1/25/46 1 TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS CORPORATE BONDS: 55.4% Aerospace & Defense: 0.1% L3Harris Technologies, Inc. Agriculture: 0.7% Viterra, Inc. 5.950%, 8/1/20 Auto Manufacturers: 6.5% Ford Motor Credit Co., LLC General Motors Financial Co., Inc. CORPORATE BONDS: 55.4% (Continued) Auto Manufacturers: 6.5% (Continued) Harley-Davidson Financial Services, Inc. Hyundai Capital America Nissan Motor Acceptance Corp. Volkswagen Group of America Finance, LLC Banks: 18.6% Barclays PLC Citigroup, Inc. 3.172% (3 Month LIBOR USD + 1.070%), 12/8/21 1 2.421% (SOFR + 0.870%), 11/4/22 1 Credit Suisse Group Funding Guernsey Ltd. The Goldman Sachs Group, Inc. HSBC Bank USA N.A. Banks: 18.6% (Continued) 5.300% (3 Month LIBOR USD + 3.800%), 5/1/20 1,2,3 4.625% (3 Month LIBOR USD + 2.580%), 11/1/22 1,2,3 Lloyds Bank PLC Lloyds Banking Group PLC Mitsubishi UFJ Financial Group, Inc. Mizuho Financial Group, Inc. Sumitomo Mitsui Financial Group, Inc. Wells Fargo & Co. Wells Fargo Bank N.A. 3.325% (3 Month LIBOR USD + 0.490%), 7/23/21 1,2 2.082% (3 Month LIBOR USD + 0.650%), 9/9/22 1,2 Chemicals: 0.4% Celanese US Holdings, LLC LyondellBasell Industries NV Monsanto Co. Computers: 1.7% Dell International LLC / EMC Corp. Diversified Financial Services: 2.4% Ally Financial, Inc. GE Capital International Funding Co. Unlimited Co. Mitsubishi UFJ Lease & Finance Co. Ltd. Electric: 2.3% Forest Products & Paper: 0.3% Georgia-Pacific, LLC 5.400%, 11/1/20 Insurance: 4.6% AEGON Funding Co., LLC MetLife, Inc. 5.250% (3 Month LIBOR USD + 3.575%), 6/15/20 1,2,3 Metropolitan Life Global Funding I 2.110% (SOFR + 0.570%), 9/7/20 1 Protective Life Global Funding Internet: 0.2% Alibaba Group Holding Ltd. Media: 0.3% Discovery Communications, LLC Mining: 1.3% Glencore Finance Canada Ltd. Glencore Funding, LLC Miscellaneous Manufacturers: 5.8% General Electric Co. Oil & Gas: 1.8% Occidental Petroleum Corp. Oil & Gas Services: 0.1% Schlumberger Oilfield UK PLC Pharmaceuticals: 4.1% AbbVie, Inc. Allergan Sales, LLC Pharmaceuticals: 4.1% (Continued) Bayer US Finance II, LLC Pipelines: 0.7% Sabine Pass Liquefaction, LLC Spectra Energy Partners L.P. Real Estate Investment Trusts (REITs): 0.3% Service Properties Trust Semiconductors: 3.0% Broadcom Corp. / Broadcom Cayman Finance Ltd. Software: 0.1% VMware, Inc. Trucking & Leasing: 0.1% Penske Truck Leasing Co. LP / PTL Finance Corp. TOTAL CORPORATE BONDS (Cost $165,640,763) FEDERAL AGENCY OBLIGATIONS: 6.4% Federal Farm Credit Banks Funding Corp. 1.790% (FCPR DLY + -2.960%), 10/29/21 1 FEDERAL AGENCY OBLIGATIONS: 6.4% (Continued) Federal Home Loan Banks TOTAL FEDERAL AGENCY OBLIGATIONS MORTGAGE BACKED SECURITIES: 1.7% Atrium Hotel Portfolio Trust, Series 2017-ATRM, Class B NYT Mortgage Trust, Series 2019-NYT, Class B CHT Mortgage Trust, Series 2017-CSMO, Class B Madison Avenue Trust, Series 2013-650M, Class A Monarch Beach Resort Trust, Series 2018-MBR, Class C TOTAL MORTGAGE BACKED SECURITIES (Cost $5,096,728) 5,092,618 UNITED STATES TREASURY OBLIGATIONS: 1.2% United States Treasury Bills: 1.0% 1.533%, 12/3/19 4,5 United States Treasury Notes: 0.2% TOTAL UNITED STATES TREASURY OBLIGATIONS (Cost $3,501,319) SHORT-TERM INVESTMENTS: 9.3% COMMERCIAL PAPER: 8.6% EI du Pont de Nemours & Co. Food: 1.7% ONEOK, Inc. Broadcom, Inc. Telecommunications: 2.7% Verizon Communications, Inc. TOTAL COMMERCIAL PAPER MONEY MARKET FUNDS: 0.7% First American Treasury Obligations Fund, Class X, 1.586% 6 TOTAL MONEY MARKET FUNDS TOTAL SHORT-TERM INVESTMENTS TOTAL INVESTMENTS IN SECURITIES: 97.9% Other Assets in Excess of Liabilities: 2.1% TOTAL NET ASSETS: 100.0% DLY - Daily FCPR - Federal Reserve Bank Prime Loan Rate U.S. LIBOR - London Interbank Offered Rate SOFR - Secured Overnight Financing Rate Variable rate security; rate shown is the rate in effect on November 30, 2019. An index may have a negative rate. Interest rate may also be subject to a ceiling or floor. Fixed-to-variable or fixed-to-float bond; rate shown is the rate in effect on November 30, 2019. An index may have a negative rate. Interest rate may also be subject to a ceiling or floor. Perpetual call date security. Date shown is next call date. Rate represents the annualized effective yield maturity from the purchase price. Zero coupon security. The rate quoted is the annualized seven-day effective yield as of November 30, 2019. Statement of Assets and Liabilities November 30, 2019 Investments in securities, at value (Cost $293,475,654) (Note 2) Receivables: Investment securities sold Payables: Due to custodian Management fees (Note 3) COMPONENTS OF NET ASSETS Total distributable earnings Net Asset Value (unlimited shares authorized): Shares of beneficial interest issued and outstanding Net asset value Statement of Operations For the Period Ended November 30, 2019 (1) REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments Change in net unrealized appreciation/depreciation on investments Net realized and unrealized gain on investments Net increase in net assets resulting from operations The Fund commenced operations on January 28, 2019 and listed on the exchange on January 29, 2019. The information presented is from January 28, 2019 to November 30, 2019. Period Ended November 30, INCREASE (DECREASE) IN NET ASSETS FROM: DISTRIBUTIONS TO SHAREHOLDERS Net dividends and distributions (2,963,363 ) CAPITAL SHARE TRANSACTIONS Net increase in net assets derived from net change in outstanding shares (2) Total increase in net assets Beginning of period End of period Summary of share transactions is as follows: November 30, 2019 (1) Shares sold (3) 6,475,000 $ 325,969,686 Shares redeemed (4) (525,000 ) (26,421,517 ) Net increase Net variable fees of $130,336. Net variable fees of $10,573. Financial Highlights For a capital share outstanding throughout the period Net asset value, beginning of period INCOME FROM INVESTMENT OPERATIONS: Net investment income (2) Total from investment operations LESS DISTRIBUTIONS: From net investment income (1.10 ) Total distributions Net asset value, end of period 3.22 %(3) RATIOS / SUPPLEMENTAL DATA: Net assets, end of period (millions) 49 %(3) Ratio of expenses to average net assets Ratio of net investment income to average net assets Calculated using average shares outstanding method. Not annualized. Annualized. Notes to Financial Statements November 30, 2019 NOTE 1 – ORGANIZATION The Aware Ultra-Short Duration Enhanced Income ETF (the “Fund”) is a diversified series of shares of beneficial interest of Tidal ETF Trust (the “Trust”), which was organized as a Delaware statutory trust on June 4, 2018 and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946 “Financial Services—Investment Companies.” The Fund commenced operations on January 28, 2019 and listed on the exchange on January 29, 2019. The Fund’s investment objective is to seek to maximize current income targeting a yield of 0.75% to 1.00% over the yield of the most recently issued 3-month U.S. Treasury bill while maintaining a portfolio consistent with the preservation of capital and daily liquidity designed to meet the requirements of the relevant standard-setting and regulatory support organization applicable to U.S. insurance companies for treatment equivalent to that of investment grade securities held by a U.S. insurance company, while striving to achieve the status denoting the highest available credit quality category for such investments held by U.S. insurance companies. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Security Valuation. Equity securities, which may include Real Estate Investment Trusts (“REITs”), Business Development Companies (“BDCs”), and Master Limited Partnerships (“MLPs”), listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded on the valuation date (or at approximately 4:00 p.m. EST if a security’s primary exchange is normally open at that time), or, if there is no such reported sale on the valuation date, at the most recent quoted bid price or mean between the most recent quoted bid and ask prices for long and short positions. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. Prices of securities traded on the securities exchange will be obtained from recognized independent pricing agents (“Independent Pricing Agents”) each day that the Fund is open for business. Debt securities are valued by using an evaluated mean of the bid and asked prices provided by Independent Pricing Agents. The Independent Pricing Agents may employ methodologies that utilize actual market transactions (if the security is actively traded), broker dealer supplied valuations, or other methodologies designed to identify the market value for such securities. In arriving at valuations, such methodologies generally consider factors such as security prices, yields, maturities, call features, ratings and developments relating to specific securities. If the value for a security cannot be determined, a fair value will be determined by the Valuation Committee using the Fair Value Procedures approved by the Board of Trustees (the “Board”). When a security is “fair valued,” consideration is given to the facts and circumstances relevant to the particular situation, including a review of various factors set forth in the pricing procedures adopted by the Board. Fair value pricing is an inherently subjective process, and no single standard exists for determining fair value. Different funds could reasonably arrive at different values for the same security. The use of fair value pricing by a fund may cause the net asset value of its shares to differ significantly from the net asset value that would be calculated without regard to such considerations. As described above, the Fund utilizes various methods to measure the fair value of their investments on a recurring basis. U.S. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of inputs are: Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data. NOTES TO FINANCIAL STATEMENTS November 30, 2019 (Continued) Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available; representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available. The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The following is a summary of the inputs used to value the Fund’s investments as of November 30, 2019: $ — $ 30,705,108 $ — $ 30,705,108 — 18,275,227 — 18,275,227 Corporate Bonds (1) — 166,319,608 — 166,319,608 — 5,092,618 — 5,092,618 United States Treasury Obligations 2,136,479 — — 2,136,479 Total Investments in Securities $ 2,136,479 $ 292,029,173 $ — $ 294,165,652 See Schedule of Investments for the industry breakout. Federal Income Taxes. The Fund has elected to be taxed as a “regulated investment company” and intends to distribute substantially all taxable income to its shareholders and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. Therefore, no provision for federal income taxes or excise taxes has been made. In order to avoid imposition of the excise tax applicable to regulated investment companies, the Fund intends to declare as dividends in each calendar year at least 98.0% of its net investment income (earned during the calendar year) and at least 98.2% of its net realized capital gains (earned during the twelve months ended November 30) plus undistributed amounts, if any, from prior years. As of November 30, 2019, the Fund did not have any tax positions that did not meet the threshold of being sustained by the applicable tax authority. Generally, tax authorities can examine all the tax returns filed for the last three years. The Fund identifies its major tax jurisdiction as U.S. Federal and the Commonwealth of Delaware; however, the Fund is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially. Securities Transactions and Investment Income. Investment securities transactions are accounted for on the trade date. Gains and losses realized on sales of securities are determined on a specific identification basis. Discounts/premiums on debt securities purchased are accreted/amortized over the life of the respective securities using the effective interest method. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. Other non-cash dividends are recognized as investment income at the fair value of the property received. Withholding taxes on foreign dividends have been provided for in accordance with the Trust’s understanding of the applicable country’s tax rules and rates. Paydown gains and losses on mortgage-related and other asset-backed securities are recorded as components of interest income on the Statement of Operations. Distributions to Shareholders. Distributions to shareholders from net investment income for the Fund are declared and paid on a monthly basis. Distributions to shareholders from net realized gains on securities for the Fund normally are declared and paid on an annual basis. Distributions are recorded on the ex-dividend date. Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates. Share Valuation. The NAV per share of the Fund is calculated by dividing the sum of the value of the securities held by the Fund, plus cash or other assets, minus all liabilities by the total number of shares outstanding for the Fund, rounded to the nearest cent. The Fund’s shares will not be priced on the days on which the New York Stock Exchange (“NYSE”) is closed for trading. Guarantees and Indemnifications. In the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. Debt Securities Risk. The Fund invests in debt securities, such as bonds and certain asset-backed securities, that involve certain risks, including: Call Risk. During periods of falling interest rates, an issuer of a callable bond held by the Fund may “call” or repay the security prior to its stated maturity, and the Fund may have to reinvest the proceeds at lower interest rates, resulting in a decline in the Fund’s income. Event Risk. Event risk is the risk that corporate issuers may undergo restructurings, such as mergers, leveraged buyouts, takeovers, or similar events financed by increased debt. As a result of the added debt, the credit quality and market value of a company’s bonds and/or other debt securities may decline significantly. Extension Risk. When interest rates rise, certain obligations will be repaid by the obligor more slowly than anticipated, causing the value of these securities to fall. Agency Debt. The Fund invests in unsecured bonds or debentures issued by U.S. government agencies, including the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and government-sponsored entities, including, the Government National Mortgage Administration (“GinnieMae”). Bonds or debentures issued by U.S. government agencies, government-sponsored entities, or government corporations, including, among others, Fannie Mae and Freddie Mac, are generally backed only by the general creditworthiness and reputation of the U.S. government agency, government-sponsored entity, or government corporation issuing the bond or debenture and are not guaranteed by the U.S. Department of the Treasury (“U.S. Treasury”) or backed by the full faith and credit of the U.S. government. As a result, there is uncertainty as to the current status of many obligations of Fannie Mae, Freddie Mac and other agencies that are placed under conservatorship of the federal government. By contrast, Ginnie Mae securities are generally backed by the full faith and credit of the U.S. government. Asset-Backed Securities. The Fund may invest in asset-backed securities. The price paid by the Fund for asset-backed securities, the yield the Fund expects to receive from such securities, and the average life of such securities are based on a number of factors, including the anticipated rate of prepayment of the underlying assets. The value of these securities may be significantly affected by changes in interest rates, the market’s perception of issuers, and the creditworthiness of the parties involved. The ability of the Fund to successfully utilize these instruments may depend on the ability of the Sub-Adviser to forecast interest rates and other economic factors correctly. These securities may have a structure that makes their reaction to interest rate changes and other factors difficult to predict, making their value highly volatile. Commercial Paper. The value of the Fund’s investments in commercial paper, which is an unsecured promissory note that generally has a maturity date between one and 270 days and is issued by a U.S. or foreign entity, is susceptible to changes in the issuer’s financial condition or credit quality. Investments in commercial paper are usually discounted from their value at maturity. Commercial paper can be fixed-rate or variable rate and can be adversely affected by changes in interest rates. L. Exchange Traded Fund (“ETF”) Risks. Authorized Participants, Market Makers, and Liquidity Providers Concentration Risk. The Fund has a limited number of financial institutions that are authorized to purchase and redeem shares directly from the Fund (known as “Authorized Participants” or “APs”). In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following events occur, shares may trade at a material discount to NAV and possibly face delisting: (i) APs exit the business or otherwise become unable to process creation and/or redemption orders and no other APs step forward to perform these services; or (ii) market makers and/or liquidity providers exit the business or significantly reduce their business activities and no other entities step forward to perform their functions. Costs of Buying or Selling Shares. Due to the costs of buying or selling shares, including brokerage commissions imposed by brokers and bid/ask spreads, frequent trading of shares may significantly reduce investment results and an investment in shares may not be advisable for investors who anticipate regularly making small investments. Shares May Trade at Prices Other Than NAV. As with all ETFs, shares may be bought and sold in the secondary market at market prices. Although it is expected that the market price of shares will approximate the Fund’s NAV, there may be times when the market price of shares is more than the NAV intra-day (premium) or less than the NAV intra-day (discount) due to supply and demand of shares or during periods of market volatility. This risk is heightened in times of market volatility, periods of steep market declines, and periods when there is limited trading activity for shares in the secondary market, in which case such premiums or discounts may be significant. Trading. Although shares are listed on a national securities exchange, such as NYSE Arca, Inc. (the “Exchange”) and may be traded on U.S. exchanges other than the Exchange, there can be no assurance that shares will trade with any volume, or at all, on any stock exchange. In stressed market conditions, the liquidity of shares may begin to mirror the liquidity of the Fund’s underlying portfolio holdings, which can be significantly less liquid than shares. Floating or Variable Rate Securities. The Fund may invest in floating or variable rate securities. Floating or variable rate securities pay interest at rates that adjust in response to changes in a specified interest rate or reset at predetermined dates (such as the end of a calendar quarter). Securities with floating or variable interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates but may decline in value if their interest rates do not rise as much, or as quickly, as comparable market interest rates. Although floating or variable rate securities are generally less sensitive to interest rate risk than fixed rate securities, they are subject to credit, liquidity and default risk and may be subject to legal or contractual restrictions on resale, which could impair their value. Foreign Securities Risks. Investments in securities or other instruments of non-U.S. issuers involve certain risks not involved in domestic investments and may experience more rapid and extreme changes in value than investments in securities of U.S. companies. Financial markets in foreign countries often are not as developed, efficient or liquid as financial markets in the United States, and therefore, the prices of non-U.S. securities and instruments can be more volatile. In addition, the Fund will be subject to risks associated with adverse political and economic developments in foreign countries, which may include the imposition of economic sanctions. Generally, there is less readily available and reliable information about non-U.S. issuers due to less rigorous disclosure or accounting standards and regulatory practices. Mortgage Backed Securities (“MBS”). The Fund invests in MBS issued or guaranteed by the U.S. government. Such securities are subject to credit, interest rate, prepayment, and extension risks. These securities also are subject to risk of default on the underlying mortgage or asset, particularly during periods of economic downturn. Small movements in interest rates may quickly and significantly reduce the value of certain MBS. Interest Rate Risk. The Fund’s investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally declines. Securities with greater interest rate sensitivity and longer maturities generally are subject to greater fluctuations in value. Credit Risk. The Fund’s investments are subject to the risk that issuers and/or counterparties will fail to make payments when due or default completely. If an issuer’s or counterparty’s financial condition worsens, the credit quality of the issuer or counterparty may deteriorate, making it difficult for the Fund to sell such investments. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditworthiness may also affect the value of an investment in that issuer. U.S. Government Obligations Risk. Obligations of U.S. government agencies and authorities receive varying levels of support and may not be backed by the full faith and credit of the U.S. government, which could affect the Fund’s ability to recover should they default. No assurance can be given that the U.S. government will provide financial support to its agencies and authorities if it is not obligated by law to do so. Additionally, market prices and yields of securities supported by the full faith and credit of the U.S. government or other countries may decline or be negative for short or long periods of time. Foreign Currency and Foreign Currency Translation. The prices for foreign securities are reported in local currency. Tidal ETF Services LLC (the “Administrator”) converts these prices to U.S. dollars using currency exchange rates. Pursuant to contracts with the Trust’s Administrator, exchange rates are provided daily by Independent Pricing Agents. Assets and liabilities denominated in foreign currencies will be translated into U.S. dollars at the prevailing exchange rates as provided by an appropriate pricing service. Reclassification of Capital Accounts. Accounting principles generally accepted in the United States of America require that certain components of net assets relating to permanent differences be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. For the period ended November 30, 2019, no adjustments were made. Recently Issued Accounting Pronouncements. In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of Topic 820. The amendments in ASU No. 2018-13 are the result of a broader disclosure project called FASB Concept Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The objective and primary focus of the project are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of the financial statements. ASU No. 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of ASU No. 2018-13. The Fund has chosen to early adopt the eliminated or modified disclosures. Subsequent Events. In preparing these financial statements, the Fund has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued. The Fund has determined that there were no subsequent events that would need to be disclosed in the Fund’s financial statements. NOTE 3 – COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS Toroso Investments, LLC (“Toroso” and/or the “Adviser”) serves as investment adviser to the Fund pursuant to an investment advisory agreement between the Trust and the Adviser with respect to the Fund (“Advisory Agreement”) and, pursuant to the Advisory Agreement, has overall responsibility for the general management and administration the Fund. Pursuant to the Advisory Agreement, the Fund pays the Adviser a unitary management fee based on the average daily net assets of the Fund at the annualized rate of 0.23%. Out of the unitary management fee, the Adviser is obligated to pay or arrange for the payment of substantially all expenses of the Fund, including the cost of sub-advisory, transfer agency, custody, fund administration, and all other related services necessary for the Fund to operate. Under the Advisory Agreement, the Adviser has agreed to pay all expenses incurred by the Fund except for interest charges on any borrowings, dividends and other expenses on securities sold short, taxes, brokerage commissions and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments, acquired fund fees and expenses, accrued deferred tax liability, extraordinary expenses, distribution fees and expenses paid by the Fund under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act, and the unitary management fee payable to the Adviser (collectively, “Excluded Expenses”). The unitary fees incurred are paid monthly to the Adviser. Aware Asset Management, Inc. (the “Sub-Adviser”) serves as sub-adviser to the Fund pursuant to the sub-advisory agreement between the Adviser and the Sub-Adviser with respect to the Fund (“Sub-Advisory Agreement”) and, pursuant to the Sub-Advisory Agreement, is responsible for execution of the Sub-Adviser’s strategy of the Fund. The Sub-Adviser is responsible for the day-to-day management of the Fund’s portfolio. Pursuant to the Sub-Advisory Agreement, the Adviser pays the Sub-Adviser a fee for the services and facilities it provides based on the average daily net assets of the Fund at the annualized rate of 0.21%. The sub-advisory fees incurred are paid monthly to the Sub-Adviser. The Sub-Adviser is a wholly-owned subsidiary of Aware Integrated, Inc., a nonprofit corporation. Under the Sub-Advisory Agreement, the Sub-Adviser has agreed to assume the Adviser’s obligation to pay all expenses incurred by the Fund except for the sub-advisory fee payable to the Sub-Adviser and Excluded Expenses. Such expenses incurred by the Fund and paid by the Sub-Adviser include fees charged by the Administrator, which is an affiliate of the Adviser. The Administrator, in its capacity, performs various administrative and management services for the Fund. The Administrator coordinates the payment of Fund-related expenses and manages the Trust’s relationships with its various service providers. U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Fund Services”), serves as the Fund’s sub- administrator, fund accountant and transfer agent. In those capacities Fund Services performs various administrative and accounting services for the Fund. Fund Services prepares various federal and state regulatory filings, reports and returns for the Fund, including regulatory compliance monitoring and financial reporting; prepares reports and materials to be supplied to the Board; and monitors the activities of the Fund’s custodian, transfer agent, and fund accountant. U.S. Bank N.A. (the “Custodian”), an affiliate of Fund Services, serves as the Fund’s custodian. Foreside Fund Services, LLC (the “Distributor”) acts as the Fund’s principal underwriter in a continuous public offering of the Fund’s shares. Certain officers and trustees of the Trust are affiliated with the Adviser, Sub-Adviser and Fund Services. None of the affiliated trustees or the Trust’s officers receive compensation from the Fund. NOTE 4 – PURCHASES AND SALES OF SECURITIES For the period ended November 30, 2019, the cost of purchases and proceeds from the sales or maturities of securities, excluding short-term investments and U.S. government securities were $281,759,827 and $52,304,373, respectively. For the period ended November 30, 2019, the cost of purchases and proceeds from the sales or maturities of long-term U.S. Government securities were $19,400,000 and $0, respectively. NOTE 5 – INCOME TAXES AND DISTRIBUTIONS TO SHAREHOLDERS The tax character of distributions paid during the period ended November 30, 2019, was as follows: Distributions paid from: Long-term capital gains (1) Designated as long-term capital gain dividend, pursuant to Internal Revenue Code Section 852(b)(3) As of November 30, 2019, the components of accumulated earnings/(losses) on a tax basis were as follows: Cost of investments (2) Gross tax unrealized appreciation Gross tax unrealized depreciation (107,281 ) Net tax unrealized appreciation Undistributed ordinary income Undistributed long-term capital gain Other accumulated loss (6,664 ) Total accumulated gain The difference between book and tax-basis unrealized appreciation was attributable primarily to the treatment of wash sales. Net capital losses incurred after November 30 and net investment losses incurred after December 31, and within the taxable year, are deemed to arise on the first business day of the Fund’s next taxable year. As of November 30, 2019, the Fund had no late year losses. As of November 30, 2019, there were short-term Capital Loss Carryovers of $6,664 for the Fund. NOTE 6 – CREDIT FACILITY U.S. Bank N.A. has made available to the Fund a credit facility pursuant to separate Loan and Security Agreements for temporary or extraordinary purposes. Credit facility details for the period ended November 30, 2019, are as follows: Maximum available credit Largest amount outstanding on an individual day Average daily loan outstanding (1 Day) Credit facility outstanding as of November 30, 2019 Average interest rate Interest expense incurred for the period ended November 30, 2019 was $513. The Sub-Adviser paid the interest expense pursuant to the Sub-Advisory Agreement and is included in the unitary management fee. NOTE 7 – SHARE TRANSACTIONS Shares of the Fund are listed and traded on the Exchange. Market prices for the shares may be different from their NAV. The Fund issues and redeems shares on a continuous basis at NAV generally in blocks of 25,000 shares, called “Creation Units.” Creation Units are issued and redeemed principally in-kind for securities included in a specified universe. Once created, shares generally trade in the secondary market at market prices that change throughout the day. Except when aggregated in Creation Units, shares are not redeemable securities of the Fund. Creation Units may only be purchased or redeemed by Authorized Participants. An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a Depository Trust Company participant and, in each case, must have executed a Participant Agreement with the Distributor. Most retail investors do not qualify as Authorized Participants nor have the resources to buy and sell whole Creation Units. Therefore, they are unable to purchase or redeem the shares directly from the Fund. Rather, most retail investors may purchase shares in the secondary market with the assistance of a broker and are subject to customary brokerage commissions or fees. The Fund currently offers one class of shares, which has no front-end sales load, no deferred sales charge, and no redemption fee. A fixed transaction fee is imposed for the transfer and other transaction costs associated with the purchase or sale of Creation Units. The standard fixed transaction fee for the Fund is $250, payable to the Custodian. The fixed transaction fee may be waived on certain orders if the Fund’s Custodian has determined to waive some or all of the costs associated with the order or another party, such as the Adviser, has agreed to pay such fee. In addition, a variable fee may be charged on all cash transactions or substitutes for Creation Units of up to a maximum of 2% of the value of the Creation Units subject to the transaction. Variable fees are imposed to compensate the Fund for transaction costs associated with the cash transactions. Variable fees received by the Fund, if any, are disclosed in the capital shares transactions section of the Statement of Changes in Net Assets. The Fund may issue an unlimited number of shares of beneficial interest, with no par value. All shares of the Fund have equal rights and privileges. To the Shareholders of Aware Ultra-Short Duration Enhanced Income ETF and The Board of Trustees of Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities of Aware Ultra-Short Duration Enhanced Income ETF (the “Fund”), a series of Tidal ETF Trust (the “Trust”), including the schedule of investments, as of November 30, 2019, the related statement of operations, statement of changes in net assets, and the financial highlights for the period January 28, 2019 (commencement of operations) to November 30, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of November 30, 2019, the results of its operations, the changes in its net assets, and the financial highlights for the period January 28, 2019 to November 30, 2019, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We have served as the auditor of one or more of the funds in the Trust since 2018. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of November 30, 2019 by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion. TAIT, WELLER & BAKER LLP Expense Example For the Period Ended November 30, 2019 (Unaudited) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including brokerage commissions paid on purchases and sales of Fund shares, and (2) ongoing costs, including management fees of the Fund. The example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which is from June 1, 2019 to November 30, 2019. Actual Expenses The first line of the following table provides information about actual account values based on actual returns and actual expenses. To the extent the Fund invests in shares of other investment companies as part of its investment strategy, you will indirectly bear your proportionate share of any fees and expenses charged by the underlying funds in which the Fund invests in addition to the expenses of the Fund. Actual expenses of the underlying funds are expected to vary among the various underlying funds. These expenses are not included in the example. The example includes, but is not limited to, unitary fees. However, the example does not include portfolio trading commissions and related expenses, interest expense or dividends on short positions taken by the Fund. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period’’ to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the following table provides information about hypothetical account values based on a hypothetical return and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If these transactional costs were included, your costs would have been higher. Account Value Expenses Paid Hypothetical (5% annual return before expenses) Expenses are equal to the Fund’s annualized expense ratio for the most recent six-month period of 0.23% multiplied by the average account value over the period multiplied by 183/365 to reflect the most recent six-month period. Trustees and Executive Officers (Unaudited) Name, Address and Year of Birth Held with Term of Office and Length of Time Served Principal Occupation(s) During Past 5 Years in Fund Overseen by Trustee Other Directorships Held by Trustee Independent Trustees (1) Mark H.W. Baltimore c/o Tidal ETF Services, LLC Indefinite term; since 2018 Co-Chief Executive Officer, Global Rhino, LLC (asset management consulting firm) (since 2018); Chief Executive Officer, Global Sight, LLC (asset management distribution consulting firm) (2016-2018); Head of Global Distribution Services, Foreside Financial Group, LLC (broker-dealer) (2016); Managing Director, Head of Global Distribution Services, Beacon Hill Fund Services (broker-dealer) (2015-2016); Vice President, Head of International Sales & Business Development, Charles Schwab & Company (asset management firm) (2014-2015). Dusko Culafic Senior Operational Due Diligence Analyst, Aurora Investment Management, LLC (2012-2018). Senior Strategic & Financial Advisor, Credijusto and Acrecent (financial technology companies) (since 2017); Founding Partner / Capital Markets & Head of Corporate Development, SQN Latina (specialty finance company) (2016-2017); Managing Director: Origination & Structuring, Securitization Group, BMO Capital Markets Trustees and Executive Officers (Unaudited) (Continued) Interested Trustees Eric W. Falkeis (2) President, Principal Executive Officer, Trustee, Chairman, and Secretary President and Principal Executive Officer since 2019, Indefinite term; Trustee, Chairman, and Secretary since 2018, Indefinite term Chief Executive Officer, Tidal ETF Services LLC (since 2018); Chief Operating Officer (and other positions), Rafferty Asset Management, LLC (2013-2018) and Direxion Advisors, LLC (2017-2018); Senior Vice President and Chief Financial Officer (and other positions), U.S. Bancorp Fund Services, LLC (1997-2013). Independent Director, Muzinich BDC, Inc. (since 2019); Trustee, Professionally Managed Portfolios (31 series) (since 2011); Interested Trustee, Direxion Funds, Direxion Shares ETF Trust, and Direxion Insurance Trust Ian C. Carroll, CFA (3) Head of Corporate Research, Aware Asset Management, Inc. (since 2018); Principal Corporate Credit Research Analyst, Blue Cross and Blue Shield of Minnesota (insurance company) (since 2017); Credit Research Analyst, California Public Employees’ Retirement System Daniel H. Carlson Treasurer, Principal Financial Officer and Principal Accounting Officer Chief Financial Officer, Chief Compliance Officer, and Managing Member, Toroso Investments, LLC (since 2012). Bridget P. Garcia, Esq. c/o Cipperman Compliance Services, LLC 480 E. Swedesford Road, Suite 220 Compliance Manager, Cipperman Compliance Services, LLC (since 2017); Senior Associate, Central Compliance - Risk Management Group (2016-2017), Client Services Associate (2014-2016), Corporate Operations Group - Business Services Admin (2010-2014), Macquarie Group (global financial services firm). Aaron J. Perkovich c/o U.S. Bancorp Fund Services, LLC 615 East Michigan Street Vice President, U.S. Bancorp Fund Services, LLC (since 2006). Cory R. Akers Assistant Vice President, U.S. Bancorp Fund Services, LLC (since 2006). All Independent Trustees of the Trust are not “interested persons” of the Trust as defined under the 1940 Act (“Independent Trustees”). Mr. Falkeis is considered an “interested person” of the Trust due to his positions as President, Principal Executive Officer, Chairman and Secretary of the Trust and Chief Executive Officer of Tidal ETF Services LLC, an affiliate of the Adviser. Mr. Carroll is considered an “interested person” of the Trust due to his position as Head of Corporate Research of Aware Asset Management, Inc., a sub-adviser to a series of the Trust. QUALIFIED DIVIDEND INCOME/DIVIDENDS RECEIVED DEDUCTION (Unaudited) For the period ended November 30, 2019, certain dividends paid by the Fund may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003 and the Tax Cuts and Jobs Act of 2017. The percentage of dividends declared from ordinary income designated as qualified dividend income for the period ended November 30, 2019 was 0.00%. For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends received deduction for the period ended November 30, 2019 was 0.00%. The percentage of taxable ordinary income distributions that are designated as short-term capital gain distribution under Internal Revenue Section 871(k)(2)(c) for the period ended November 30, 2019 was 0.00%. Information about Proxy Voting (Unaudited) A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available upon request without charge, by calling (866) 539-9530 or by accessing the Fund’s website at www.awareetf.com. Furthermore, you can obtain the description on the SEC’s website at www.sec.gov. When available, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12 months ending June 30 is available upon request without charge by calling (866) 539-9530 or by accessing the SEC’s website at www.sec.gov. Information about the Portfolio Holdings (Unaudited) The Fund files its complete schedule of portfolio holdings for its first and third fiscal quarters with the SEC on Form N-Q (through the quarter ended February 29, 2020) or Part F of Form N-PORT (beginning with filings thereafter). The Fund’s Form N-Q or Part F of Form N-PORT is available without charge, upon request, by calling (800) 536-3230. Furthermore, you can obtain the Form N-Q or Part F of Form N-PORT on the SEC’s website at www.sec.gov. The Fund’s portfolio holdings are posted on the Fund’s website daily at www.awareetf.com. Frequency Distribution of Premiums and Discounts (Unaudited) Information regarding how often shares of the Fund trade on the exchange at a price above (i.e., at a premium) or below (i.e., at a discount) to its daily net asset value (“NAV”) is available, without charge, on the Fund’s website at www.awareetf.com/documents.php. Information about the Fund’s Trustees (Unaudited) The Statement of Additional Information (“SAI”) includes additional information about the Fund’s Trustees and is available without charge, upon request, by calling (866) 539-9530. Furthermore, you can obtain the SAI on the SEC’s website at www.sec.gov or the Fund’s website at www.awareetf.com. Toroso Investments, LLC Investment Sub-Adviser Aware Asset Management, Inc. 3535 Blue Cross Road Eagan, Minnesota 55122 Two Liberty Place 50 South 16th Godfrey & Kahn, S.C. 833 East Michigan Street, Suite 1800 U.S. Bank N.A. Custody Operations 1555 North RiverCenter Drive, Suite 302 Tidal ETF Services, LLC Transfer Agent, Fund Accountant and Fund Sub-Administrator U.S. Bancorp Fund Services, LLC Foreside Fund Services, LLC Three Canal Plaza, Suite 100 Symbol – AWTM CUSIP – 886364108 Item 2. Code of Ethics. The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer and principal financial officer. The registrant has not made any amendments to its code of ethics during the period covered by this report. The registrant has not granted any waivers from any provisions of the code of ethics during the period covered by this report. A copy of the registrant’s Code of Ethics is filed herewith. Item 3. Audit Committee Financial Expert. The registrant’s Board of Trustees of the Trust has determined that there is at least one audit committee financial expert serving on its audit committee. Mr. Dusko Culafic is the “audit committee financial expert” and is considered to be “independent” as each term is defined in Item 3 of Form N-CSR. Item 4. Principal Accountant Fees and Services. The registrant has engaged its principal accountant to perform audit services, audit-related services, tax services and other services during the past fiscal year. “Audit services” refer to performing an audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. “Audit-related services” refer to the assurance and related services by the principal accountant that are reasonably related to the performance of the audit. “Tax services” refer to professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. There were no “Other services” provided by the principal accountant. The following table details the aggregate fees billed or expected to be billed for the last fiscal year for audit fees, audit-related fees, tax fees and other fees by the principal accountant. FYE 11/30/2019 FYE 11/30/2018 Audit Fees $12,500 N/A Audit-Related Fees N/A N/A Tax Fees $2,500 N/A All Other Fees N/A N/A The audit committee has adopted pre-approval policies and procedures that require the audit committee to pre-approve all audit and non-audit services of the registrant, including services provided to any entity affiliated with the registrant. The percentage of fees billed by Tait Weller & Baker LLP applicable to non-audit services pursuant to waiver of pre-approval requirement were as follows: Non-Audit Related Fees FYE 11/30/2019 FYE 11/30/2018 Registrant N/A N/A Registrant’s Investment Adviser N/A N/A All of the principal accountant’s hours spent on auditing the registrant’s financial statements were attributed to work performed by full-time permanent employees of the principal accountant. The following table indicates the non-audit fees billed or expected to be billed by the registrant’s accountant for services to the registrant and to the registrant’s investment adviser (and any other controlling entity, etc.—not sub-adviser) for the last year. The audit committee of the board of trustees/directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser is compatible with maintaining the principal accountant's independence and has concluded that the provision of such non-audit services by the accountant has not compromised the accountant’s independence. Item 5. Audit Committee of Listed Registrants. The registrant is an issuer as defined in Rule 10A-3 under the Securities Exchange Act of 1934, (the “Act”) and has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Act. The independent members of the committee are as follows: Dusko Culafic, Eduardo Mendoza, and Mark H.W. Baltimore. Item 6. Investments. Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable to open-end investment companies. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Item 10. Submission of Matters to a Vote of Security Holders. There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant’s board of Trustees. Item 11. Controls and Procedures. (a) The Registrant’s President/Principal Executive Officer and Treasurer/Principal Financial Officer have reviewed the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider. (b) There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the Registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting. Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies Item 13. Exhibits. (a) (1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Filed herewith. (2) A separate certification for each President/Principal Executive Officer and Treasurer/Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. (3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies. (4) Change in the registrant’s independent public accountant. There was no change in the registrant’s independent public accountant for the period covered by this report. (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Tidal ETF Trust By (Signature and Title) /s/ Eric W. Falkeis Eric W. Falkeis, President/Principal Executive Officer Date 02/10/20 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ Eric W. Falkeis By (Signature and Title)* /s/ Daniel Carlson Daniel Carlson, Treasurer/Principal Financial Officer * Print the name and title of each signing officer under his or her signature.

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professional_accounting

List and describe two internal financial statements that may be used at a non-profit organization. What is the importance of each one? Are these essential for a non-profit organization? Why or why not? In Kasky v. Nike, Inc., the California Supreme Court drew a distinction between a noncommercial speaker's statements criticizing a product as generally noncommercial speech and a commercial speaker's statements in praise or support of the same product. What was this distinction, and why did the California Supreme Court make it? Please explain in your own words and include references if used. Thank you... Examine the objective of conducting an audit of financial statements and its impact on stakeholders. Analyze the auditor's responsibilities in conducting an audit and the impact on stakeholders. Evaluate the importance of setting audit objectives, both general and specific, and their impact on the audit outcome. The financial statements of a company are management's, not the accountant's." What does this mean? 3. What are interim reports? Why are balance sheets often not provided with interim data? 5. What's the difference between ratio analysis and percentage analysis when interpreting financial statements? What is the value of these two types of analyses? 7. What's the difference between investing activities, financing activities, and operating activities. 9. Identify and explain one of the major steps involved in preparing the statement of cash flows. Compare Financial Statements of Ascension Health and HCA, Inc. What types of audit reports are issued for financial statement audits? Are all types of reports likely to be issued for audits of public companies? What types of audit reports are issued for financial statement audits? Are all of those types of reports likely to be issued for audits of public companies? If not, which ones are not likely used and why? (Assessing control risk) An auditor is required to obtain a sufficient understanding of each of the components of an entity's system of internal control to plan the audit of the entity's financial statementsand to assess control risk for the assertions embodied in the account balance, transaction class, and disclosure components of the financial statements. Required 1. Explain the reasons an auditor may assess control risk at the maximum level for one or more assertions embodied in an account balance. 2. What must an auditor do to support assessing control risk at less than the maximum level when the auditor has determined that controls have been placed in operation? 3. What should an auditor consider when seeking a further reduction in the planned assessed level of control risk? 4. What are an auditor's documentation requirements concerning an entity's system of internal control and the assessed level of control risk? What are the 5 methods of financial statement fraud? What are four important red flag areas of fictitious revenues? What is financial statement fraud and who commits this crime and why? Why is trend just as important if not more important than information that pertains to only one year? What is meant by "presentation of financial statement information in common-size amounts rather than dollar amounts?" Why is this type of presentation sometimes more meaningful than use of actual dollar amounts? Evaluate the following statement and give your explanation: The market system is a profit-and-loss system.

{'timestamp': '2019-04-19T14:24:14Z', 'url': 'https://brainmass.com/business/financial-statements/pg7', 'language': 'en', 'source': 'c4'}

professional_accounting

mcmarketstockprice->Moneycontrol/MC_Market/MC_Market_StockPrice_728x90|~|Moneycontrol/MC_Market/MC_Market_StockPrice_300x250|~|Moneycontrol/MC_Market/MC_Market_StockPrice_728x90_2|~|Moneycontrol/MC_Market/MC_Market_StockPrice_728x90_1|~|Moneycontrol/MC_Market/MC_Market_StockPrice_300x250_2|~|Moneycontrol/MC_Market/MC_Market_StockPrice_300x250_1|~|Moneycontrol/MC_Market/MC_Market_StockPrice_300x250_BTF|~|Moneycontrol/MC_PriceChart/MC_PriceChart_300x250_ATF|~|Moneycontrol/MC_PriceChart/MC_PriceChart_728x90_ATF|~|Moneycontrol/MC_PriceChart/MC_PriceChart_728x90_BTF|~|Moneycontrol/MC_Market/MC_Market_StockPrice_300x250/MC_Market_StockPrice_Notices_300x250_ATF|~|Moneycontrol/MC_Market/MC_Market_StockPrice_QuartResult_728x90|~|Moneycontrol/MC_Market/MC_Market_StockPrice_CapitalStruc_728x90|~|Moneycontrol/MC_Market/MC_Market_StockPrice_PriceChart_728x90|~|Moneycontrol/MC_Market/MC_Market_StockPrice_History_300x600_ATF|~|Moneycontrol/MC_PriceChart/MC_PriceChart_300x250_ATF_1|~|Moneycontrol/MC_PriceChart/MC_PriceChart_728x90_ATF_1|~|Moneycontrol/MC_PriceChart/MC_PriceChart_300x250_MTF-> Moneycontrol / Market / Steel - Sponge Iron / AUDITORS REPORT Godawari Power & Ispat Ltd. BSE: 532734 | NSE: GPIL | Represents Equity.Intra - day transactions are permissible and normal trading is done in this category Series: EQ | ISIN: INE177H01021 | SECTOR: Steel - Sponge IronSteel - Sponge Iron Please select a Day. Portfolio | Watchlist Set SMS Alert Open trading A/c Open trading A/c Corp Action Directors report Chairman's speech Godawari Power Godawari Power & Ispat Ltd. | BSE 268.60 -6.90 (-2.50%) | NSE 268.95 -5.95 (-2.16%) | Trade | Add Today's L/H 52 Wk L/H F&O Quote Pre Opening Session Prices AGM/EGM Mgmt Interviews Half Yearly Results Nine Months Results Financial Graphs SH Pattern MF holding Top Public SH Promoter H Large deals Latest price Fund Manager holdings BSE Live 268.60 -6.90 (-2.50%) Prev. Close Bid Price (Qty.) Offer Price (Qty.) NSE Live 268.95 (2212) VWAP And Current Price Comparison For Year : Download Annual Report in PDF format 2018 2017 2016 2015 2014 2013 2012 2011 2010 More 2009 2008 2007 2006 Annual Report 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 Auditor's Report 1. We have audited the attached balance sheet of Godawari Power & Ispat Limited as at 31st March, 2011, the profit and loss account and also the cash flow statement for the year ended on that date, annexed thereto. These financial statements are the responsibility of the company''s management. Our responsibility is to express an opinion on these financial statements based on our audit. 2. We conducted our audit in accordance with the auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 3. As required by the Companies (Auditors'' Report) Order, 2003 (As Amended) issued by the Central Government of India, in terms of sub section (4A) of Section 227 of the Companies Act, 1956, we enclose in the Annexurea statement on the matter specified in paragraphs 4 and 5 of the said order. 4. Further to our comment in the Annexure referred to above, we report that: (i) We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit; (ii) In our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books; (iii) The balance sheet, profit and loss account and cash flow statement dealt with by this report are in agreement with the books of account; (iv) In our opinion, the balance sheet, profit and loss account and cash flow statement dealt with by this report comply with the Accounting standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956; (v) On the basis of written representations received from the directors as on 31st March 2011, and taken on record by the Board of Directors, we report that none of the directors is disqualified as on 31st March 2011 from being appointed as a Director in terms of clause (g) of sub-section (1) of Section 274 of the Companies Act, 1956. (vi) In our opinion and to the best of our information and according to the explanations given to us the said accounts read alongwith the notes thereon, give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India: (a) in the case of the balance sheet, of the state of the affairs of the Company, as at 31st March, 2011. (b) in the case of the profit and loss account, of the profit for the year ended on that date; and (c) in the case of the cash flow statement, of the cash flows for the year ended on that date. Annexure Re: Godawari Power & Ispa: Limited Referred to in paragraph 3 of our report of even date, (i) (a) The Company has maintained the proper records showing full particulars including quantitative details and situation of fixed assets. (b) As explained to us, the fixed assets have been physically verified by the management at reasonable intervals, in phased verification programme, which, in our opinion, is reasonable, looking to the size of the company and the nature of its business. According to the information and explanations given to us, no material discrepancies were noticed on such verification. (c) The company has not disposed off any substantial part of its fixed assets during the year so as to affect its going concern status. (ii) (a) As explained to us, inventories have been physically verified during the year by the management. In our opinion, the frequency of the verification is reasonable. (b) The procedures of physical verification of inventories followed by the management are reasonable and adequate in relation to the size of the company and the nature of its business. (c) On the basis of our examination of the inventory records of the company, we are of the opinion that, the company is maintaining proper records of inventory. The discrepancies noticed on verification between the physical stocks and the book records were not material and have been properly dealt with in the books of account. (iii) (a) The company has granted unsecured loans to two companies covered in the register maintained under section 301 of the companies Act, 1956. The maximum amount involved was Rs. 110.11 lacs and the year-end balance of the loan granted to a company was Rs. 11.88 lacs. (b) In our opinion, the terms & conditions on which loans have been granted to the companies listed in the register maintained under section 301 of the Companies Act 1956, are not prima facie prejudicial to the interest of the company. (c) The receipt of the principal amount and interest wherever applicable was regular. (d) There was no overdue amount of loans granted to companies listed in the register maintained under section 301 of the Companies Act, 1956. (e) The company has taken unsecured loans from five companies covered in the register maintained under section 301 of the Companies Act, 1956 during the year, maximum amount involved was Rs. 7047.28 lacs and the year end balance of the loan taken from companies was Rs. 3617.89 lacs. (f) In our opinion, the terms & conditions on which loans have been taken from the companies listed in the register maintained under section 301 of the Companies Act 1956, are not prima facie prejudicial to the interest of the company. (g) The company was regular in repaying the amount as stipulated. (iv) In our opinion and according to the information & explanations given to us, there are adequate internal control procedures commensurate with the size of the company and nature of its business for the purchase of inventory, fixed assets and for the sale of goods and services. During the course of our audit, we have not observed any continuing failure to correct major weaknesses in internal controls. (v) (a) According to the information & explanations given to us, we are of the opinion that the transactions that need to be entered in the register maintained under section 301 of the Companies Act, 1956 have been so entered. (b) In our opinion and according to the information & explanations given to us, the transactions made in pursuance of contracts or arrangements entered in the register maintained under section 301 of the Companies Act, 1956 and exceeding the value of Rupees Five lacs in respect of any party during the year have been made at prices which are reasonable having regard to prevailing market prices at the relevant time. (vi) According to the information and explanations given to us, the company has not accepted deposits from public during the year therefore, the provisions of clause 4(vi) of the Companies (Auditor''s Report) Order, 2003 are not applicable to the company. (vii) In our opinion the company has an internal audit system commensurate with the size and nature of its business. (viii) We have broadly reviewed the books of account maintained by the company pursuant to the rules made by the Central Government for the maintenance of cost records under section 209(i)(d) of the Companies Act,1956, in respect of Company''s products to which the said rules are made applicable and are of the opinion that, prima facie, the prescribed accounts and records, have been made and maintained. We have, however, not made a detailed examination of the records. (ix) (a) The company is regular in depositing with appropriate authorities undisputed statutory dues including provident fund, investor education protection fund, employees'' state insurance, wealth tax, service tax, income tax, sales tax, custom duty, excise duty, cess and other material statutory dues applicable to it. According to the information & explanations given to us, no undisputed amounts of statutory dues as stated above were in arrears as at 31 st March 2011 for a period of more than six months from the date they became payable. (b) According to the information and explanations given to us, there are no dues of income tax, sales tax, wealth tax, service tax, custom duty, excise duty and cess which have not been deposited on account of any dispute except the following: Name of the Amount Forum where dispute is Nature or Dues Year (Rs. In lacs) pending Statue service Tax Disallowance of credit of 2005-06 18.34 Custom, Excise and Service Tax service tax Paid on onward Appellate Tribunal, New Delhi. freight Service Tax Service Tax - Demand on 2004-05 to 49.93 Custom, Excise and Service Tax GTOetc. 2006-07 Appellate Tribunal, New Delhi. Central Excise Act Duty on Iron Ore Fines & 2008-09 to 83.32 Custom, Excise and Service Tax Coal Fines 2009-10 Appellate Tribunal, New Delhi. Central Excise Act Disallowance of Duty on 2008-09 to 142.43 Custom, Excise and Service Tax Structural Items 2009-10 Appellate Tribunal, New Delhi. Central Excise Act Demand on account of 2007-08 11.12 Custom, Excise and Service Tax cenvat credit Appellate Tribunal, New Delhi. Central Excise Act Demand on account of 2008-09 7.59 Custom, Excise and Service Tax cenvat credit Appellate Tribunal, New Delhi. Central Excise Act Demand on account of 2008-09 9.13 Custom, Excise and Service Tax Cenvat on Input Services Appellate Tribunal, New Delhi. Central Excise Act Disallowance of Cenvat on 2008-09 16.69 Custom, Excise and Service Tax Capital Goods Appellate Tribunal, New Delhi. Central Excise Act Demand of duty on account 2007-08 to 63.81 Custom, Excise and Service Tax of Related Party transaction 2008-09 Appellate Tribunal, New Delhi. Central Excise Act Demand of duty on account 2006-07 to 47.72 Custom, Excise and Service Tax of Related Party transaction 2007-08 Appellate Tribunal, New Delhi. Income Tax Act Income Tax A.Y. 2007-08 4.01 Commissioner of Income Tax (Appeals),Raipur Income Tax Act Income Tax A.Y. 2008-09 25.25 Commissioner of Income Tax (Appeals), Raipur C G. Commercial Commercial Tax 2002-03 1.46 Deputy Commissioner, (Appl) Tax Act Commercial Taxes, Raipur Central Sales Tax Demand of Central Sales Tax 2002-03 23.18 Deputy Commissioner, (Appl) Commercial Taxes, Raipur (x) The company does no: have any accumulated losses and has not incurred cash losses during the financial year covered by our audi: and also in the immediately preceding financial year. (xi) In our opinion and according to the information and explanations given to us, the company has not defaulted in repayment of dues to the banks. (xii) In our opinion and according to the information and explanations given to us, the company has not granted any loans & advances on the basis of security by way of pledge of shares, debentures and other securities. (xiii) In our opinion, the company is not a chit fund or a nidhi / mutual benefit fund / society. Therefore, the provisions of clause 4(xiii) of the Companies (Auditor''s Report) Order, 2003 are not applicable to the company. (xiv) In our opinion and according to information and explanations given to us, the company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, the provisions of clause 4(xiv) of the Companies (Auditor''s Report) Order, 2003 are not applicable to the company. (xv) In our opinion and according to the information and explanations given to us, the terms and conditions on which the company has given corporate guarantees to the bank for loans taken by other company are not prima facie prejudicial to the interest of the company. (xvi) In our opinion, the term loans have been applied progressively for the purpose for which the loans were obtained. (xvii) According to the information and explanations given to us and on an overall examination of the balance sheet of the company, we are of the opinion that, short-term funds have not been used for long term investment. (xvi ii) According to the information and explanations given to us, the company has not made any preferential allotment of shares to any company, firms or other parties covered in the register maintained under section 301 of the Act. Therefore, the provisions of clause 4(xviii) of the Companies (Auditor''s Report) Order, 2003 are not applicable to the company. (xix) The company has created securities/charges in respect of secured debentures issued. (xx) The company has not raised any money by public issue during the year, therefore, the provisions of clause 4(xx) of the Companies (Auditor''s Report) Order,2003 are not applicable to the company. (xxi) In our opinion and according to the information and explanations given to us, no fraud on or by the company has been noticed or reported during the year. Therefore, the provisions of clause 4(xxi) of the Companies (Auditor''s Report) Order, 2003 are not applicable to the company. For OPSinghania & Co. (Firm Regn.No.002172C) Chartered Accountants O.P.Singhania Partner Raipur, 22nd May,2011 Membership No.:051909 Stock Views Brokerage Reports Top Shareholders Promoter Holding Nine Monthly Results Notes to Accounts Price of SBI on previous budgets Godawari Power & Ispat Stock Price | Godawari Power Stock Quote | Godawari Power Results | Godawari Power News | View All Related Searches Facebook Twitter Instagram Teglegram Jio News Download from Google Play Download from App Stoer Download from Windows Phone Network 18 Sites: News18 | Firstpost | CNBC TV18 | In.com | Cricketnext | Overdrive | Topper Learning

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professional_accounting

MyADT Upgrade to ADT Pulse ADT Acquires its Largest Independent Dealer, Defenders January 6, 2020 at 4:51 PM EST Exciting next step in ADT’s strategy to drive capital efficient growth; elimination of dealer margin reduces cost to acquire new customers and improves return on capital going forward Direct control of greater portion of ecosystem accelerates rollout of innovative security and home automation services Opportunistic transaction expected to be modestly beneficial to 2020 free cash flow before special items and to accelerate growth in subsequent years BOCA RATON, Fla., Jan. 06, 2020 (GLOBE NEWSWIRE) -- ADT Inc. (NYSE: ADT), a leading provider of security, automation, and smart home solutions serving consumer and business customers in the United States, announced today it has acquired Defenders, its largest independent dealer and only Authorized Premier Provider, for a purchase price of approximately $381 million1. As part of the transaction, Defenders founder David P. Lindsey and Jessica A. Lindsey received approximately 16.3 million shares of ADT common stock for 100% of their ownership in Defenders, while the remaining $260 million of consideration was paid in cash to retire existing Defenders debt, fund other liabilities, and pay transaction expenses. The cash consideration was partially funded from existing revolving credit facilities. “We’re excited to officially join forces with the impressive Defenders team after successfully partnering with them for nearly 22 years so that, as one company, we can create a unique and simplified platform,” said Jim DeVries, ADT’s President and Chief Executive Officer. “This opportunistic acquisition creates numerous strategic, financial and operational advantages for ADT, and is consistent with our stated goal of driving down the capital intensity of the business as we seek to drive long-term, profitable growth.” Mr. DeVries continued, “Together, we will have greater marketing efficiency through unified brand messaging, enhanced control of the customer experience, and the ability to provide a full suite of innovative security and home automation products, including consumer financing, to a complementary geographic footprint. Over time, we also expect lower subscriber acquisition costs, an improved revenue payback period, and new account gains from the optimization of our combined ecosystem.” “We have built our business by partnering with ADT to sell and install state-of-the-art security systems, helping to protect more than 2.2 million families through our best-in-class marketing team and expert knowledge of the industry,” said David Lindsey, Chairman and Founder, Defenders. “Given this longstanding and productive relationship, we are proud that this transaction will integrate us even closer into the ADT team, and I am excited to be a significant shareholder and see the benefits we are able to deliver to customers as a combined company.” “We are thrilled to join the ADT team,” said Jim Boyce, President & CEO, Defenders. “This acquisition brings our direct response marketing capabilities, best in class sales expertise, and national reach to a leading provider of security, automation, and smart home solutions. Together, we will be better positioned to leverage the trusted ADT brand, improve the combined company’s go-to-market operations and deliver an enhanced customer experience.” Strategic and Financial Benefits of Transaction Enhances Customer Experience: Provides ability to drive a unified brand message and premium customer experience to the majority of ADT’s residential customers. Simplifies Operating Ecosystem: Establishes a single party focused on the customer experience and lifetime value, and reduces channel conflict and potential for customer confusion. Improves Marketing Prowess: Leverages Defenders’ strengths in customer acquisition to drive optimized spend across channels and enable more effective marketing messaging and customer segmentation. Increases Go to Market Efficiency: Significantly enhances ability to bring new initiatives to a broader customer base more quickly, including consumer financing, DIY, and innovative equipment and service offerings. Drives Capital Efficiency: Results in a more capital efficient ADT through the elimination of dealer “margin.” Expected to be modestly beneficial to 2020 net cash provided by operating activities and free cash flow before special items and to create synergies to further drive net cash provided by operating activities and free cash flow before special items in subsequent years. Founded in 1998 and headquartered in Indianapolis, Defenders has approximately 2,900 team members across more than 130 field branch locations, and has developed a best-in-class direct marketing skillset, currently generating more than 6 billion ADT advertising impressions annually. Through its rigorously trained and certified technicians and its full suite of home security and automation products, including an 85 percent interactive take rate, Defenders currently helps more than 2.2 million families improve their lives and safety. Citi served as the financial advisor to Defenders. About ADT Inc. ADT is a leading provider of security, automation, and smart home solutions serving consumer and business customers through more than 200 locations, 9 monitoring centers, and the largest network of security professionals in the United States. The Company offers many ways to help protect customers by delivering lifestyle-driven solutions via professionally installed, do-it-yourself, mobile, and digital-based offerings for residential, small business, and larger commercial customers. For more information, please visit www.adt.com or follow on Twitter, LinkedIn, Facebook, and Instagram. Jason Smith - ADT [email protected] Paul Wiseman – ADT [email protected] NON-GAAP MEASURES To provide investors with additional information in connection with our results as determined in accordance with generally accepted accounting principles in the United States (“GAAP”), we disclose Free Cash Flow and Free Cash Flow before special items as non-GAAP measures. These measures are not financial measures calculated in accordance with GAAP and should not be considered as a substitute for net income, operating income, cash flows, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies. We believe that the presentation of Free Cash Flow is appropriate to provide additional information to investors about our ability to repay debt, make other investments, and pay dividends. We define Free Cash Flow as cash flows from operating activities less cash outlays related to capital expenditures. We define capital expenditures to include purchases of property, plant, and equipment; subscriber system asset additions; and accounts purchased through our network of authorized dealers or third parties outside of our authorized dealer network. These items are subtracted from cash flows from operating activities because they represent long-term investments that are required for normal business activities. Free Cash Flow adjusts for cash items that are ultimately within management’s discretion to direct, and therefore, may imply that there is less or more cash that is available than the most comparable GAAP measure. Free Cash Flow is not intended to represent residual cash flow for discretionary expenditures since debt repayment requirements and other non-discretionary expenditures are not deducted. These limitations are best addressed by using Free Cash Flow in combination with the cash flows as calculated in accordance with GAAP. Free Cash Flow before special items We define Free Cash Flow before special items as Free Cash Flow adjusted for payments related to (i) financing and consent fees, (ii) restructuring and integration, (iii) integration related capital expenditures, (iv) radio conversion costs, and (v) other payments or receipts that may mask the operating results or business trends of the Company. As a result, subject to the limitations described below, Free Cash Flow before special items is a useful measure of our cash available to repay debt, make other investments, and pay dividends. Free Cash Flow before special items adjusts for cash items that are ultimately within management’s discretion to direct, and therefore, may imply that there is less or more cash that is available than the most comparable GAAP measure. Free Cash Flow before special items is not intended to represent residual cash flow for discretionary expenditures since debt repayment requirements and other non-discretionary expenditures are not deducted. These limitations are best addressed by using Free Cash Flow before special items in combination with the GAAP cash flow numbers. ADT has made statements in this press release and other reports, filings, and other public written and verbal announcements that are forward-looking and therefore subject to risks and uncertainties. All statements, other than statements of historical fact, included in this document are, or could be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and are made in reliance on the safe harbor protections provided thereunder. These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters. Any forward-looking statement made in this press release speaks only as of the date on which it is made. ADT undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. Forward-looking statements can be identified by various words such as “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and similar expressions. These forward-looking statements are based on management’s current beliefs and assumptions and on information currently available to management. ADT cautions that these statements are subject to risks and uncertainties, many of which are outside of ADT’s control, and could cause future events or results to be materially different from those stated or implied in this document, including among others, risk factors that are described in the Company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained therein. 1 Based on ADT’s closing stock price of $7.45 on January 3, 2020. Source: ADT Inc. Medical Alerts Basic Medical Alerts Plus On-The-Go Emergency Response Dealer Lookup Call Us : 800.453.9841 FaceBook Twitter Pinterest Google+ Youtube © 2021 ADT LLC dba ADT Security Services. All rights reserved. ADT, the ADT logo, ADT Always There and 800.ADT.ASAP FREE and the product/service names listed in this document are marks and/or registered marks. Third party marks are the property of their respective owners.

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professional_accounting

About RPM Kirkland B. Andrews John M. Ballbach Bruce Carbonari David A. Daberko Jenniffer D. Deckard Salvatore D. Fazzolari Thomas S. Gross Julie A. Lagacy Robert A. Livingston Frederick R. Nance Frank C. Sullivan William B. Summers, Jr. Edward W. Moore Russell L. Gordon Janeen B. Kastner Michael H. Sullivan Kenneth M. Armstrong Scott Copeland Tracy D. Crandall Lonny R. DiRusso Matthew Franklin Gordon Hyde Timothy R. Kinser John F. Kramer Randell McShepard Matthew T. Ratajczak Keith R. Smiley Thomas C. Sullivan, Jr. Construction Brands Dryvit Systems Euclid Chemical Flowcrete Key Resin Newbrick StructureCare Tremco Barrier Tremco illbruck Vandex Performance Coatings Brands AD Fire Protection API S.p.A. Applied Polymerics Arnette Polymers Expanko Fibergrate Fibregrid Grupo PV Hummervoll Kemtile Logiball PDS Enviro Plasite Prime Resins Stonhard USL Ekspan USL Group ALEX PLUS Concrobium Gator Finishing Products Kwik Seal Okon SEAL-KRETE SPRAYMATE SPS Group Stops Rust Tor Coatings Touch 'n Foam Specialty Brands AGPRO NZ Chemspec Dane Group Day-Glo FinishWorks Holton Food Products Kop-Coat Mantrose-Haeuser Morrells NatureSeal Profile Food Radiant Color TCI Powder Coatings ValvTect Wood Finishes Group Historical Stock Price Direct Stock Purchase Current Dividend Dividend Reinvestment Plan Historical Dividends & Splits Reports / Financials Financials Snapshot Annual Reports & Proxy Statements Presentations & Webcasts RPM Reports Fiscal 2017 Second-Quarter Results - Second-quarter sales improve 3.0% - Net loss for the quarter of $70.9 million due to impairment charge and charge related to the decision to exit a business in the Middle East Recent acquisitions to add $160 million in annualized sales MEDINA, Ohio, Jan. 5, 2017 /PRNewswire/ -- RPM International Inc. (NYSE: RPM) today reported a 3.0% increase in sales and a net loss of $70.9 million for its fiscal 2017 second quarter ended November 30, 2016. The quarter's results included a $188.3 million pre-tax impairment charge related to its Kirker consumer nail enamel business. On an after-tax basis, the charge was $129.2 million, or $0.97 per share. The second quarter also included a charge of $12.3 million, or $0.09 per share, which had no tax impact, related to the decision to exit the Flowcrete polymer flooring business in the Middle East. Second-Quarter Results Net sales of $1.19 billion were up 3.0% over the $1.16 billion reported a year ago. Organic sales improved 3.8% and acquisition growth added 1.7%. Foreign currency translation reduced sales by 2.5%. The loss in the fiscal 2017 second quarter of $70.9 million compares to net income of $83.4 million in the fiscal 2016 second quarter. The fiscal 2017 second-quarter loss of $0.54 per diluted share compares to earnings per diluted share of $0.62 in the fiscal 2016 second quarter. Loss before income taxes of $106.9 million decreased from income before income taxes (IBT) of $120.3 million reported in the fiscal 2016 second quarter. RPM's consolidated loss before interest and taxes of $86.4 million decreased from consolidated earnings before interest and taxes (EBIT) of $141.6 million reported in the fiscal 2016 second quarter. The fiscal 2017 second quarter included the $188.3 million Kirker impairment charge and the $12.3 million charge related to the decision to exit Flowcrete Middle East, while the fiscal 2016 second quarter included the previously disclosed $14.5 million reversal of Kirker's final earnout accrual into income. Excluding these items, earnings per diluted share declined 5.5% from $0.55 per share to $0.52 per share, while consolidated EBIT of $114.2 million decreased 10.2% from $127.1 million last year. "We are pleased with the sales growth in the second quarter across each of our three segments in light of economic conditions and in comparison to our peer companies' recent performance. Even in our more global economically challenged industrial segment businesses, we are generating solid growth in local currencies. Translational and transactional foreign exchange challenges, previously communicated capacity issues in our consumer segment, and higher corporate benefit costs combined to generate lower year-over-year EBIT results, excluding the additional impairment charge and the decision to exit the Flowcrete business in the Middle East. Mid-year restructuring and expense reduction activities and the benefit of first-half acquisitions, along with having addressed the capacity situation at our DAP subsidiary, will allow revenue growth to be better leveraged to our bottom line during the fiscal 2017 fourth quarter and beyond," stated Frank C. Sullivan, chairman and chief executive officer. Second-Quarter Segment Sales and Earnings During the fiscal 2017 second quarter, industrial segment sales increased 1.6%, to $633.4 million from $623.3 million in the fiscal 2016 second quarter. Organic sales improved 2.2%, while acquisition growth added 2.2%. Foreign currency translation reduced sales by 2.8%. IBT for the industrial segment declined 21.4% to $50.3 million, from $64.0 million in the fiscal 2016 second quarter. Industrial segment EBIT declined 20.4% to $52.2 million, from $65.6 million in the fiscal 2016 second quarter. Industrial segment EBIT included the impact of a $12.3 million charge related to the decision to exit the Flowcrete polymer flooring business in the Middle East. Excluding this charge, industrial segment EBIT was down 1.7% to $64.5 million from $65.6 million last year, due to unfavorable mix. "Industrial sales remain choppy by geography and have continued to be negatively impacted by weakness in the global oil and gas and heavy equipment industries, along with continued currency headwinds. In Europe, sales were down 1.0% in actual dollars, but up 6.3% in local currencies, with solid results in the U.K. In Latin America, sales were down in the low single digits in both actual results and local currencies. Our businesses serving the U.S. commercial construction markets continue to see solid sales growth in the mid-single-digit range," Sullivan stated. Second-quarter sales for the specialty segment increased 5.7%, to $183.6 million from $173.6 million in the fiscal 2016 second quarter. Organic growth was 5.2%, while acquisitions added 2.5%. Foreign currency translation reduced sales by 2.0%. IBT for the specialty segment increased 10.2% to $31.2 million, from $28.3 million in the fiscal 2016 second quarter. Specialty segment EBIT improved 10.6%, to $31.0 million from $28.1 million a year ago. "Most of our core specialty businesses, particularly U.S.-based restoration and exterior insulation and finish systems product lines, had solid performance in the quarter. The specialty segment also benefited from several recent smaller acquisitions," Sullivan stated. RPM's fiscal 2017 second-quarter consumer segment sales increased 4.1%, to $373.8 million from $359.1 million a year ago. Organic sales increased 5.8%, while acquisition growth added 0.6%. Foreign currency translation reduced sales by 2.3%. The consumer segment had a loss before income taxes of $140.6 million, compared to IBT of $65.4 million in the fiscal 2016 second quarter. The segment reported a loss before interest and taxes of $140.6 million, which was a decline from EBIT of $65.4 million reported last year. As previously disclosed, fiscal 2016 second-quarter EBIT included the $14.5 million reversal of Kirker's final earnout accrual into income. During the current year, certain negative trends in the Kirker business led to a loss of several customers and market share and a downward revision to long-term forecasts, which were determined to represent an impairment triggering event, and, after additional testing, resulted in an impairment charge totaling $188.3 million. Excluding these Kirker items, consumer segment EBIT declined 6.2%, from $50.9 million in fiscal 2016 to $47.7 million in the fiscal 2017 second quarter, principally due to a decline in Kirker's current operating results. "During the quarter, our core U.S. consumer businesses, excluding Kirker, performed very well, and capitalized on market share gains, a strengthening domestic housing market and good growth by our retail accounts to deliver solid organic growth. Sales in these businesses were up 6.4%, net of unfavorable currency translation. Supply issues in caulks and sealants were resolved by the end of the quarter, while significant capital investments are in process to increase capacity. Certain inefficiencies lingered in the second quarter that related to the caulks and sealants supply issues, which translated into a less favorable conversion to EBIT than would normally be the case. Both Rust-Oleum and DAP invested heavily in advertising and promotional activities in the quarter to support their brands and new product placements achieved during the past year," stated Sullivan. Cash Flow and Financial Position For the first half of fiscal 2017, cash from operations was $158.7 million, compared to $167.1 million a year ago. Capital expenditures of $48.0 million compared to $31.3 million during the first half of last year. Total debt at November 30, 2016 was $1.64 billion, compared to $1.66 billion at November 30, 2015 and $1.64 billion at May 31, 2016. RPM's net (of cash) debt-to-total capitalization ratio was 52.8%, compared to 53.3% at November 30, 2015. At November 30, 2016, liquidity stood at $956 million, including cash of $206.0 million and $750.0 million in long-term committed available credit. First-Half Sales and Earnings Fiscal 2017 first-half net sales improved 1.8%, to $2.44 billion from $2.40 billion during the first six months of fiscal 2016. Net income declined to $41.8 million from $183.2 million in the fiscal 2016 first half. Diluted earnings per share were $0.32, down from $1.36 a year ago. IBT of $41.6 million declined 84.1% from $262.5 million in the fiscal 2016 first half. EBIT of $81.0 million declined 73.2% from $302.2 million reported last year. Excluding the Kirker items in both years and the Flowcrete charge in fiscal 2017, diluted earnings per share were $1.35, an increase of 4.7% from $1.29 last year and consolidated EBIT was $281.6 million, a decrease of 2.1% from $287.7 million last year. First-Half Segment Sales and Earnings RPM's industrial segment fiscal 2017 first-half sales were up 0.7%, to $1.31 billion from $1.30 billion in the fiscal 2016 first half. Organic sales increased 1.7%, while acquisition growth added 1.6%. Foreign currency translation reduced sales by 2.6%. IBT for the industrial segment declined 6.0% to $139.6 million, from $148.5 million in fiscal 2016. EBIT of $143.3 million declined 5.4% from $151.6 in the first half last year. Excluding the Flowcrete Middle East charge, industrial segment EBIT increased 2.7%, to $155.6 million. Specialty segment sales grew 4.8%, to $359.9 million from $343.5 million in the 2016 first half. Organic growth was 3.9%, while acquisitions added 2.8%. Foreign currency translation reduced sales by 1.9%. IBT for the specialty segment increased 12.6% to $61.7 million, from $54.8 million in fiscal 2016. For the first half of fiscal 2017, specialty segment EBIT increased 13.0%, to $61.4 million from $54.3 million a year ago. First-half sales for the consumer segment improved 2.5%, to $773.7 million from $754.6 million a year ago. Organic sales increased 3.7%, and acquisition growth added 0.8%. Foreign currency translation reduced sales by 2.0%. The segment experienced a loss before income taxes of $70.5 million, as compared to IBT of $131.6 million in fiscal 2016. The consumer segment reported a loss before interest and taxes of $70.5 million, which was a decline from EBIT of $131.5 million in the first half of fiscal 2016. Excluding the Kirker impairment charge from fiscal 2017 and the Kirker earnout reversal in fiscal 2016, consumer segment EBIT increased 0.8%, to $117.8 million during the first half of fiscal 2017 from $117.0 million in the prior period. "In the industrial segment, we expect continued solid growth for those businesses serving the U.S. commercial construction markets to be partially offset by continued global choppiness and a sluggish global energy sector. We are anticipating growth in our international businesses to be in the low-single-digit range. Despite more difficult currency headwinds with the euro and British pound, industrial segment sales growth for the back half of the fiscal year will be in the low-single-digit range, with the help from recent acquisitions," stated Sullivan. "We continue to expect mid-single-digit range growth in our specialty segment by these predominately U.S.-based niche businesses as they gain market share. In the consumer segment, we are expecting a solid back half to fiscal 2017, with overall growth in the mid-single-digit range, including recent acquisitions," he stated. "Due to further declines in the euro and British pound versus the U.S. dollar, we are anticipating an increase in currency headwinds for the fiscal year from our original estimate of $0.06 per share to $0.10 per share, along with an increase in pension expense from our original $0.05 per share to $0.07 per share for the 2017 fiscal year. Recent acquisitions are expected to reduce EPS in the third quarter due to stepped-up inventory and other one-time transaction costs, but be accretive for the fourth quarter. We are anticipating a restructuring charge in Europe in the third quarter of fiscal 2017, which will reduce diluted earnings per share by approximately $0.05 per share. As a result, we are revising our EPS full-year guidance to a range of $1.54 to $1.64 per diluted share, which includes the $0.09 per share Flowcrete Middle East charge, the $0.94 per share Kirker charge, the third-quarter estimated restructuring charge of $0.05 per share, as well as $0.04 per share of higher currency headwinds and $0.02 per share of higher pension expense," Sullivan stated. "Excluding the charge for the Kirker impairment, Flowcrete Middle East exit, and the estimated third-quarter restructuring in Europe, our fiscal 2017 full-year adjusted EPS guidance is $2.62 to $2.72," stated Sullivan. Webcast and Conference Call Information Management will host a conference call to discuss these results beginning at 10:00 a.m. EST today. The call can be accessed by dialing 888-771-4371 or 847-585-4405 for international callers. Participants are asked to call the assigned number approximately 10 minutes before the conference call begins. The call, which will last approximately one hour, will be open to the public, but only financial analysts will be permitted to ask questions. The media and all other participants will be in a listen-only mode. For those unable to listen to the live call, a replay will be available from approximately 12:30 p.m. EST today until 11:59 p.m. EST on January 12, 2017. The replay can be accessed by dialing 888-843-7419 or 630-652-3042 for international callers. The access code is 43806016. The call also will be available both live and for replay, and as a written transcript, via the RPM web site at www.rpminc.com. RPM International Inc. owns subsidiaries that are world leaders in specialty coatings, sealants, building materials and related services across three segments. RPM's industrial products include roofing systems, sealants, corrosion control coatings, flooring coatings and other construction chemicals. Industrial companies include Stonhard, Tremco, illbruck, Carboline, Flowcrete, Euclid Chemical and RPM Belgium Vandex. RPM's consumer products are used by professionals and do-it-yourselfers for home maintenance and improvement and by hobbyists. Consumer brands include Rust-Oleum, DAP, Zinsser, Varathane and Testors. RPM's specialty products include industrial cleaners, colorants, exterior finishes, specialty OEM coatings, edible coatings, restoration services equipment and specialty glazes for the pharmaceutical and food industries. Specialty segment companies include Day-Glo, Dryvit, RPM Wood Finishes, Mantrose-Haeuser, Legend Brands, Kop-Coat and TCI. Additional details can be found at www.rpminc.com and by following RPM on Twitter at www.twitter.com/RPMintl. For more information, contact Barry M. Slifstein, vice president – investor relations, at 330-273-5090 or [email protected]. Use of Non-GAAP Financial Information To supplement the financial information presented in accordance with Generally Accepted Accounting Principles in the United States ("GAAP") in this earnings release, we use EBIT, a non-GAAP financial measure. EBIT is defined as earnings (loss) before interest and taxes. We evaluate the profit performance of our segments based on income before income taxes, but also look to EBIT as a performance evaluation measure because interest expense is essentially related to acquisitions, as opposed to segment operations. For that reason, we believe EBIT is also useful to investors as a metric in their investment decisions. EBIT should not be considered an alternative to, or more meaningful than, income before income taxes as determined in accordance with GAAP, since EBIT omits the impact of interest in determining operating performance, which represent items necessary to our continued operations, given our level of indebtedness. Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community all of whom believe, and we concur, that this measure is critical to the capital markets' analysis of our segments' core operating performance. We also evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing. Our underwriters and bankers consistently require inclusion of this measure in offering memoranda in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results. See the last page of this earnings release for a reconciliation of EBIT to income before income taxes. This press release contains "forward-looking statements" relating to our business. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us, and are subject to uncertainties and factors (including those specified below) which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) global markets and general economic conditions, including uncertainties surrounding the volatility in financial markets, the availability of capital and the effect of changes in interest rates, and the viability of banks and other financial institutions; (b) the prices, supply and capacity of raw materials, including assorted pigments, resins, solvents and other natural gas- and oil-based materials; packaging, including plastic containers; and transportation services, including fuel surcharges; (c) continued growth in demand for our products; (d) legal, environmental and litigation risks inherent in our construction and chemicals businesses and risks related to the adequacy of our insurance coverage for such matters; (e) the effect of changes in interest rates; (f) the effect of fluctuations in currency exchange rates upon our foreign operations; (g) the effect of non-currency risks of investing in and conducting operations in foreign countries, including those relating to domestic and international political, social, economic and regulatory factors; (h) risks and uncertainties associated with our ongoing acquisition and divestiture activities; (i) risks related to the adequacy of our contingent liability reserves; and (j) other risks detailed in our filings with the Securities and Exchange Commission, including the risk factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2016, as the same may be updated from time to time. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this release. IN THOUSANDS, EXCEPT PER SHARE DATA Six Months Ended Selling, general & administrative expenses Goodwill and other intangible asset impairments Investment (income), net Other expense (income), net (Loss) income before income taxes (Benefit) provision for income taxes Net (loss) income Less: Net income attributable to noncontrolling interests Net (loss) income attributable to RPM International Inc. $ (70,926) (Loss) Earnings per share of common stock attributable to RPM International Inc. Stockholders: $ (0.54) Average shares of common stock outstanding - basic Average shares of common stock outstanding - diluted SUPPLEMENTAL SEGMENT INFORMATION IN THOUSANDS Net Sales: Industrial Segment Specialty Segment Consumer Segment Income Before Income Taxes (a): Income Before Income Taxes (b) Interest (Expense), Net (c) EBIT (d) Charge to exit Flowcrete Middle East (e) Adjusted EBIT Interest Income, Net (c) (Loss) Income Before Income Taxes (b) $ (140,575) Interest (Expense) Income, Net (c) Kirker impairment (f) Reversal of Kirker earnout (g) Corporate/Other (Expense) Before Income Taxes (b) Prior period information has been recast to reflect the current period change in reportable segments. The presentation includes a reconciliation of Income (Loss) Before Income Taxes, a measure defined by Generally Accepted Accounting Principles in the United States (GAAP), to EBIT. Interest income (expense), net includes the combination of interest income (expense) and investment income (expense), net. EBIT is defined as earnings (loss) before interest and taxes. We evaluate the profit performance of our segments based on income before income taxes, but also look to EBIT as a performance evaluation measure because interest expense is essentially related to acquisitions, as opposed to segment operations. For that reason, we believe EBIT is also useful to investors as a metric in their investment decisions. EBIT should not be considered an alternative to, or more meaningful than, income before income taxes as determined in accordance with GAAP, since EBIT omits the impact of interest in determining operating performance, which represent items necessary to our continued operations, given our level of indebtedness. Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community all of whom believe, and we concur, that this measure is critical to the capital markets' analysis of our segments' core operating performance. We also evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing. Our underwriters and bankers consistently require inclusion of this measure in offering memoranda in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results. Charges related to Flowcrete decision to exit the Middle East. Reflects the impact of goodwill and other intangible asset impairment charge of $188.3 million related to our Kirker reporting unit. Reflects the reversal of contingent obligations for earnout targets that were not met at our Kirker reporting unit. RECONCILIATION OF "REPORTED" TO "ADJUSTED" AMOUNTS Reconciliation of Reported Earnings (Loss) per Diluted Share to Adjusted Earnings per Diluted Share: Reported (Loss) Earnings per Diluted Share Adjusted Earnings per Diluted Share Fiscal Year Ending Estimated Full-Year Earnings Per Share Reconciliation: Fiscal 2017 EPS issued July 2016 Additional foreign currency headwind Additional pension expense Revised 2017 EPS excluding Kirker, Middle East/Europe charges Kirker impairment charge Flowcrete Middle East charge Estimated third-quarter restructuring charge in Europe Revised 2017 EPS Trade accounts receivable Allowance for doubtful accounts Net trade accounts receivable Property, Plant and Equipment, at Cost Allowance for depreciation Other intangible assets, net of amortization Deferred income taxes, non-current Accrued compensation and benefits Accrued losses Long-Term Liabilities Long-term debt, less current maturities Preferred stock; none issued Common stock (outstanding 133,576; 133,318; 132,944) Paid-in capital Treasury stock, at cost Accumulated other comprehensive (loss) Total RPM International Inc. stockholders' equity Noncontrolling interest Adjustments to reconcile net income to net cash provided by (used for) operating activities: Reversal of contingent consideration obligations Other non-cash interest expense Realized (gain) on sales of marketable securities Changes in assets and liabilities, net of effect from purchases and sales of businesses: Decrease in receivables (Increase) in inventory (Increase) decrease in prepaid expenses and other current and long-term assets (Decrease) in accounts payable (Decrease) in accrued compensation and benefits (Decrease) increase in accrued losses Increase in other accrued liabilities Cash Provided By Operating Activities Acquisition of businesses, net of cash acquired Purchase of marketable securities Proceeds from sales of marketable securities Cash (Used For) Investing Activities Additions to long-term and short-term debt Reductions of long-term and short-term debt Cash dividends Shares of common stock repurchased and returned for taxes Payments of acquisition-related contingent consideration Cash (Used For) Financing Activities Cash and Cash Equivalents at Beginning of Period Cash and Cash Equivalents at End of Period To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/rpm-reports-fiscal-2017-second-quarter-results-300386096.html SOURCE RPM International Inc. See Full Results: RPM Reports Fiscal 2017 Second-Quarter Results Construction Brands Performance Coatings Brands Consumer Brands Specialty Brands Current Dividend Dividend Reinvestment Plan Historical Dividends & Splits Quarterly Results SEC Filings Financials Snapshot Annual Reports & Proxy Statements Investor Overview Why Invest? Frequently Asked Questions Annual Meeting Presentations & Webcasts Email Alerts Analyst Coverage 2628 Pearl Road P.O. Box 777 Medina, OH 44258 | 330-273-5090 | [email protected] © RPM International Inc.

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professional_accounting

KEYCORP /NEW/ Form 10-K PURSUANT TO SECTION 13 OR 15(d) For the fiscal year ended Commission file number: 1-11302 Exact name of Registrant as specified in its charter: State or other jurisdiction of incorporation or organization: IRS Employer Identification Number: 127 Public Square, Cleveland, Ohio Address of Principal Executive Offices: Registrant’s Telephone Number, including area code: SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered Common Shares, $1 par value Depositary Shares (each representing a 1/40th interest in a share of Fixed-to-Floating Rate Perpetual Non-Cumulative Preferred Stock, Series E) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of voting stock held by nonaffiliates of the Registrant was $20,477,922,563 (based on the June 30, 2017, closing price of KeyCorp Common Shares of $18.74 as reported on the New York Stock Exchange). As of February 20, 2018, there were 1,060,687,384 Common Shares outstanding. Certain specifically designated portions of KeyCorp’s definitive Proxy Statement for its 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. From time to time, we have made or will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as “goal,” “objective,” “plan,” “expect,” “assume,” “anticipate,” “intend,” “project,” “believe,” “estimate,” or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements. We may also make forward-looking statements in other documents filed with or furnished to the SEC. In addition, we may make forward-looking statements orally to analysts, investors, representatives of the media and others. Forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause our actual results to differ from those described in forward-looking statements include, but are not limited to: deterioration of commercial real estate market fundamentals; defaults by our loan counterparties or clients; adverse changes in credit quality trends; declining asset prices; our concentrated credit exposure in commercial and industrial loans; the extensive regulation of the U.S. financial services industry; changes in accounting policies, standards, and interpretations; operational or risk management failures by us or critical third parties; breaches of security or failures of our technology systems due to technological or other factors and cybersecurity threats; negative outcomes from claims or litigation; failure or circumvention of our controls and procedures; the occurrence of natural or man-made disasters, conflicts, or terrorist attacks, or other adverse external events; evolving capital and liquidity standards under applicable regulatory rules; disruption of the U.S. financial system; our ability to receive dividends from our subsidiary, KeyBank; unanticipated changes in our liquidity position, including but not limited to, changes in our access to or the cost of funding and our ability to secure alternative funding sources; downgrades in our credit ratings or those of KeyBank; a reversal of the U.S. economic recovery due to financial, political or other shocks; our ability to anticipate interest rate changes and manage interest rate risk; deterioration of economic conditions in the geographic regions where we operate; the soundness of other financial institutions; tax reform and other changes in tax laws, including the impact of the TCJ Act; our ability to attract and retain talented executives and employees and to manage our reputational risks; our ability to timely and effectively implement our strategic initiatives; increased competitive pressure; our ability to adapt our products and services to industry standards and consumer preferences; unanticipated adverse effects of strategic partnerships or acquisitions and dispositions of assets or businesses; our ability to realize the anticipated benefits of the First Niagara merger; and our ability to develop and effectively use the quantitative models we rely upon in our business planning. Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our SEC filings, including this report on Form 10-K and our subsequent reports on Forms 10-Q and 8-K and our registration statements under the Securities Act of 1933, as amended, all of which are or will upon filing be accessible on the SEC’s website at www.sec.gov and on our website at www.key.com/ir. 2017 FORM 10-K ANNUAL REPORT Unresolved Staff Comments Mine Safety Disclosures Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Management’s Annual Report on Internal Control over Financial Reporting Consolidated Financial Statements and Related Notes Consolidated Statements of Income Consolidated Statements of Changes in Equity Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Directors, Executive Officers and Corporate Governance Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules (a) (1) Financial Statements — See listing in Item 8 above (a) (2) Financial Statement Schedules — None required (a) (3) Exhibits Form 10-K Summary ITEM 1. BUSINESS KeyCorp, organized in 1958 under the laws of the State of Ohio, is headquartered in Cleveland, Ohio. We are a BHC under the BHCA and one of the nation’s largest bank-based financial services companies, with consolidated total assets of approximately $137.7 billion at December 31, 2017. KeyCorp is the parent holding company for KeyBank National Association (“KeyBank”), its principal subsidiary, through which most of our banking services are provided. Through KeyBank and certain other subsidiaries, we provide a wide range of retail and commercial banking, commercial leasing, investment management, consumer finance, commercial mortgage servicing and special servicing, and investment banking products and services to individual, corporate, and institutional clients through two major business segments: Key Community Bank and Key Corporate Bank. As of December 31, 2017, these services were provided across the country through KeyBank’s 1,197 full-service retail banking branches and a network of 1,572 ATMs in 15 states, as well as additional offices, online and mobile banking capabilities, and a telephone banking call center. Additional information pertaining to our two business segments is included in the “Line of Business Results” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report, and in Note 25 (“Line of Business Results”) of the Notes to Consolidated Financial Statements presented in Item 8. Financial Statements and Supplementary Data, which are incorporated herein by reference. KeyCorp and its subsidiaries had an average of 18,415 full-time equivalent employees for 2017. In addition to the customary banking services of accepting deposits and making loans, our bank and its trust company subsidiary offer personal and institutional trust custody services, securities lending, personal financial and planning services, access to mutual funds, treasury services, personal property and casualty insurance, and international banking services. Through our bank, trust company, and registered investment adviser subsidiaries, we provide investment management services to clients that include large corporate and public retirement plans, foundations and endowments, high-net-worth individuals, and multi-employer trust funds established for providing pension or other benefits to employees. Key Community Bank also purchases retail auto sales contracts via a network of auto dealerships. The auto dealerships finance the sale of automobiles as the initial lender and then assign the contracts to us pursuant to dealer agreements. We provide other financial services — both within and outside of our primary banking markets — through various nonbank subsidiaries. These services include community development financing, securities underwriting, investment banking and capital markets products, and brokerage. We also provide merchant services to businesses. KeyCorp is a legal entity separate and distinct from its banks and other subsidiaries. Accordingly, the right of KeyCorp, its security holders, and its creditors to participate in any distribution of the assets or earnings of its banks and other subsidiaries is subject to the prior claims of the creditors of such banks and other subsidiaries, except to the extent that KeyCorp’s claims in its capacity as a creditor may be recognized. We derive the majority of our revenues within the United States from customers domiciled in the United States. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to our consolidated financial statements. Important Terms Used in this Report As used in this report, references to “Key,” “we,” “our,” “us” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. KeyCorp refers solely to the parent holding company, and KeyBank refers solely to KeyCorp’s subsidiary bank, KeyBank National Association. KeyBank (consolidated) refers to the consolidated entity consisting of KeyBank and its subsidiaries. The acronyms and abbreviations identified in Part II, Item 7. “Terminology” hereof are used throughout this report, particularly in the Notes to Consolidated Financial Statements as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer to that section as you read this report. We have two major business segments: Key Community Bank and Key Corporate Bank. Key Community Bank serves individuals and small to mid-sized businesses by offering a variety of deposit and investment, lending, mortgage and home equity, credit card, and personalized wealth management products and business advisory services. Key Community Bank offers personal property and casualty insurance, such as home, auto, renters, watercraft, and umbrella policies. Key Community Bank also purchases retail auto sales contracts via a network of auto dealerships. These products and services are provided through our relationship managers and specialists working in our 15-state branch network, which is organized into ten internally defined geographic regions: Washington, Oregon/Alaska, Rocky Mountains, Indiana/Northwest Ohio/Michigan, Central/Southwest Ohio, East Ohio/Western Pennsylvania, Atlantic, Western New York, Eastern New York and New England. In addition, some of these product capabilities are delivered by Key Corporate Bank to clients of Key Community Bank. Key Corporate Bank is a full-service corporate and investment bank focused principally on serving the needs of middle market clients in seven industry sectors: consumer, energy, healthcare, industrial, public sector, real estate, and technology. Key Corporate Bank delivers a broad suite of banking and capital markets products to its clients, including syndicated finance, debt and equity capital markets, commercial payments, equipment finance, commercial mortgage banking, derivatives, foreign exchange, financial advisory, and public finance. Key Corporate Bank is also a significant servicer of commercial mortgage loans and a significant special servicer of CMBS. Key Corporate Bank delivers many of its product capabilities to clients of Key Community Bank. Further information regarding the products and services offered by our Key Community Bank and Key Corporate Bank segments is included in this report in Note 25 (“Line of Business Results”). The following financial data is included in this report in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, and is incorporated herein by reference as indicated below: Description of Financial Data Consolidated Average Balance Sheets, Net Interest Income and Yields/Rates from Continuing Operations Components of Net Interest Income Changes from Continuing Operations Composition of Loans Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest Rates Held-to-Maturity Securities Maturity Distribution of Time Deposits of $100,000 or More Allocation of the Allowance for Loan and Lease Losses Summary of Loan and Lease Loss Experience from Continuing Operations Summary of Nonperforming Assets and Past Due Loans from Continuing Operations Summary of Changes in Nonperforming Loans from Continuing Operations Short-Term Borrowings Our executive offices are located at 127 Public Square, Cleveland, Ohio 44114-1306, and our telephone number is (216) 689-3000. Our website is www.key.com, and the investor relations section of our website may be reached through www.key.com/ir. We make available free of charge, on or through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website, and available in print upon request from any shareholder to our Investor Relations Department, are the charters for our Audit Committee, Compensation and Organization Committee, Executive Committee, Nominating and Corporate Governance Committee, and Risk Committee; our Corporate Governance Guidelines; the Code of Ethics for our directors, officers, and employees; our Standards for Determining Independence of Directors; our policy for Review of Transactions Between KeyCorp and Its Directors, Executive Officers and Other Related Persons; and our Statement of Political Activity. Within the time period required by the SEC and the NYSE, we will post on our website any amendment to the Code of Ethics and any waiver applicable to any senior executive officer or director. We also make available a summary of filings made with the SEC of statements of beneficial ownership of our equity securities filed by our directors and officers under Section 16 of the Exchange Act. The “Regulatory Disclosures and Filings” tab of the investor relations section of our website includes public disclosures concerning our annual and mid-year stress-testing activities under the Dodd-Frank Act and our quarterly regulatory capital disclosures under the third pillar of Basel III. Information contained on or accessible through our website or any other website referenced in this report is not part of this report. References to websites in this report are intended to be inactive textual references only. Shareholders may obtain a copy of any of the above-referenced corporate governance documents by writing to our Investor Relations Department at Investor Relations, KeyCorp, 127 Public Square, Mailcode OH-01-27-0737, Cleveland, Ohio 44114-1306; by calling (216) 689-4221; or by sending an e-mail to [email protected]. The market for banking and related financial services is highly competitive. Key competes with other providers of financial services, such as BHCs, commercial banks, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers, and other local, regional, national, and global institutions that offer financial services. Some of our competitors are larger and may have more financial resources, while some of our competitors enjoy fewer regulatory constraints and may have lower cost structures. The financial services industry has become more competitive as technology advances have lowered barriers to entry, enabling more companies, including nonbank companies, to provide financial services. Technological advances may diminish the importance of depository institutions and other financial institutions. Mergers and acquisitions have also led to increased concentration in the banking industry, placing added competitive pressure on Key’s core banking products and services as we see competitors enter some of our markets or offer similar products. We compete by offering quality products and innovative services at competitive prices, and by maintaining our product and service offerings to keep pace with customer preferences and industry standards. Executive Officers of KeyCorp KeyCorp’s executive officers are principally responsible for making policy for KeyCorp, subject to the supervision and direction of the Board. All executive officers are subject to annual election at the annual organizational meeting of the Board held each May. Set forth below are the names and ages of the executive officers of KeyCorp as of December 31, 2017, the positions held by each at KeyCorp during the past five years, and the year each first became an executive officer of KeyCorp. On January 23, 2018, William Hartmann retired and Mark Midkiff replaced him as KeyCorp’s Chief Risk Officer. Because Messrs. Buffie, Kimble, and Midkiff have been employed at KeyCorp for less than five years, information is being provided concerning their prior business experience. There are no family relationships among the directors or the executive officers. Amy G. Brady (51) - Ms. Brady is KeyCorp’s Chief Information Officer, serving in that role since May 2012. Ms. Brady has been an executive officer of KeyCorp since she joined in 2012. Craig A. Buffie (57) - Mr. Buffie served as KeyCorp’s Chief Human Resources Officer from February 2013 until March 2016, when he stepped out of the Chief Human Resources Officer position to focus on the integration efforts related to the First Niagara merger. He resumed his role as Chief Human Resources Officer and an executive officer of KeyCorp in January 2017. Prior to joining KeyCorp, Mr. Buffie was employed for 27 years with Bank of America (a financial services institution), where he served in numerous human resources positions, including as a human resources executive for technology and operations for consumer and small business, as well as for its corporate and investment bank. Most recently, he was Head of Home Loan Originations for Bank of America. Edward J. Burke (61) - Mr. Burke has been the Co-President, Commercial and Private Banking of Key Community Bank since April 2014 and an executive officer of KeyCorp since May 2014. From 2005 until his election as Co-President, Mr. Burke was an Executive Vice President of KeyBank and head of KeyBank Real Estate Capital and Key Community Development Lending. Robert A. DeAngelis (56) - Mr. DeAngelis has been the Director of Quality and Productivity Management since June 2017. From March 2016 to June 2017, he served as Transition Program Executive and was dedicated to the integration efforts related to KeyCorp’s merger with First Niagara. From November 2011 to March 2016, Mr. DeAngelis was the Director of the Enterprise Program Management Office for KeyCorp. Prior to that, he served as the Consumer Segment Executive. Mr. DeAngelis has been an executive officer of KeyCorp since June 2017 and was also previously an executive officer of KeyCorp from March 2013 to March 2016. Dennis A. Devine (46) - Mr. Devine has been the Co-President, Consumer and Small Business of Key Community Bank since April 2014 and an executive officer of KeyCorp since May 2014. From 2012 to 2014, Mr. Devine served as Executive Vice President of KeyBank in various roles, including as head of the Consumer & Small Business Segment and head of Integrated Channels and Community Bank Strategy for Key Community Bank. Trina M. Evans (53) - Ms. Evans has been the Director of Corporate Center for KeyCorp since August 2012, partnering with Key’s executive leadership team and Board to ensure alignment of strategy, objectives, priorities, and messaging across Key. Prior to this role, Ms. Evans was the Chief Administrative Officer for Key Community Bank and the Director of Client Experience for KeyBank. During her career with KeyCorp, she has served in a variety of senior management roles associated with the call center, internet banking, retail banking, distribution management, and information technology. She became an executive officer of KeyCorp in March 2013. Christopher M. Gorman (57) - In 2017, Mr. Gorman became President of Banking and Vice Chairman of KeyCorp. From 2016 to 2017, he served as Merger Integration Executive responsible for leading the integration efforts related to KeyCorp’s merger with First Niagara. Prior to that, Mr. Gorman was the President of Key Corporate Bank from 2010 to 2016. He previously served as a KeyCorp Senior Executive Vice President and head of Key National Banking during 2010. Mr. Gorman was an Executive Vice President of KeyCorp (2002 to 2010) and served as President of KeyBanc Capital Markets Inc. (2003 to 2010). He became an executive officer of KeyCorp in 2010. Paul N. Harris (59) - Mr. Harris has been the General Counsel and Secretary of KeyCorp since 2003 and an executive officer of KeyCorp since 2004. William L. Hartmann (64) - Mr. Hartmann has been the Chief Risk Officer of KeyCorp since July 2012. Mr. Hartmann joined KeyCorp in 2010 as its Chief Credit Officer. Mr. Hartmann became an executive officer of KeyCorp in 2012. On January 23, 2018, Mr. Hartmann retired from his position as Chief Risk Officer and as an executive officer of KeyCorp. Donald R. Kimble (57) - Mr. Kimble has been the Chief Financial Officer of KeyCorp since June 2013. In 2017, Mr. Kimble was also named Vice Chairman of KeyCorp. Prior to joining KeyCorp, Mr. Kimble served as Chief Financial Officer of Huntington Bancshares Inc., a bank holding company headquartered in Columbus, Ohio, after joining the company in August 2004, and also served as its Controller from August 2004 to November 2009. Mr. Kimble was also President and a director of Huntington Preferred Capital, Inc., a publicly-traded company, from August 2004 until May 2013. Mr. Kimble became an executive officer upon joining KeyCorp in June 2013. Angela G. Mago (52) - Ms. Mago became Co-Head of Key Corporate Bank in 2016. She also serves as Head of Real Estate Capital for Key, a role she has held since 2014. From 2011 to 2014, Ms. Mago was Head of Key’s Commercial Mortgage Group. She became an executive officer of KeyCorp in 2016. Mark W. Midkiff (56) - Mr. Midkiff became Chief Risk Officer of KeyCorp and an executive officer of KeyCorp in January 2018. Prior to joining KeyCorp, he served as the Deputy Chief Credit Officer of BB&T. He also previously served as Chief Risk Officer of MUFG Union Bank and later as Chief Risk Officer of GE Capital. Beth E. Mooney (62) - Ms. Mooney has been the Chairman and Chief Executive Officer of KeyCorp since 2011, and an executive officer of KeyCorp since 2006. Prior to becoming Chairman and Chief Executive Officer, she served in a variety of roles with KeyCorp, including President and Chief Operating Officer and Vice Chair and head of Key Community Bank. She has been a director of AT&T, a publicly-traded telecommunications company, since 2013. Andrew J. Paine III (48) - Mr. Paine became Co-Head of Key Corporate Bank in 2016. He also serves as President of KeyBanc Capital Markets Inc., a role he has held since 2013. From 2010 to 2013, Mr. Paine was the Co-Head of KeyBanc Capital Markets Inc. He became an executive officer of KeyCorp in 2016. Kevin T. Ryan (56) - Mr. Ryan has been the Chief Risk Review Officer and General Auditor of KeyCorp since 2007. He became an executive officer of KeyCorp in 2016. Douglas M. Schosser (47) - Mr. Schosser has been the Chief Accounting Officer and an executive officer of KeyCorp since May 2015. Prior to becoming the Chief Accounting Officer, Mr. Schosser served as an Integration Manager at KeyCorp. From 2010 to 2014, he served as the Chief Financial Officer of Key Corporate Bank. Supervision and Regulation The regulatory framework applicable to BHCs and banks is intended primarily to protect consumers, the DIF, taxpayers and the banking system as a whole, rather than to protect the security holders and creditors of financial services companies. Comprehensive reform of the legislative and regulatory environment for financial services companies occurred in 2010 and remains ongoing. We cannot predict changes in applicable laws, regulations or regulatory agency policies, but any such changes may materially affect our business, financial condition, results of operations, or access to liquidity or credit. Federal law establishes a system of regulation under which the Federal Reserve is the umbrella regulator for BHCs, while their subsidiaries are principally regulated by prudential or functional regulators: (i) the OCC for national banks and federal savings associations; (ii) the FDIC for state non-member banks and savings associations; (iii) the Federal Reserve for state member banks; (iv) the CFPB for consumer financial products or services; (v) the SEC and FINRA for securities broker/dealer activities; (vi) the SEC, CFTC, and NFA for swaps and other derivatives; and (vii) state insurance regulators for insurance activities. Certain specific activities, including traditional bank trust and fiduciary activities, may be conducted in a bank without the bank being deemed a “broker” or a “dealer” in securities for purposes of securities functional regulation. Under the BHCA, BHCs generally may not directly or indirectly own or control more than 5% of the voting shares, or substantially all of the assets, of any bank, without prior approval from the Federal Reserve. In addition, BHCs are generally prohibited from engaging in commercial or industrial activities. However, a BHC that satisfies certain requirements regarding management, capital adequacy, and Community Reinvestment Act performance may elect to be treated as a Financial Holding Company (“FHC”) for purposes of federal law, and as a result may engage in a substantially broader scope of activities that are considered to be financial in nature or complementary to those activities. KeyCorp has elected to be treated as a FHC and, as such, is authorized to engage in securities underwriting and dealing, insurance agency and underwriting, and merchant banking activities. In addition, the Federal Reserve has permitted FHCs, like KeyCorp, to engage in the following activities, under the view that they are complementary to a financial activity: physical commodities trading activities, energy management services, and energy tolling, among others. Under federal law, a BHC also must serve as a source of financial strength to its subsidiary depository institution(s) by providing financial assistance in the event of financial distress. This support may be required when the BHC does not have the resources to, or would prefer not to, provide it. Certain loans by a BHC to a subsidiary bank are subordinate in right of payment to deposits in, and certain other indebtedness of, the subsidiary bank. In addition, federal law provides that in the bankruptcy of a BHC, any commitment by the BHC to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. The Dodd-Frank Act created the FSOC to overlay the U.S. supervisory framework for BHCs, insured depository institutions, and other financial service providers, by serving as a systemic risk oversight body. Specifically, the FSOC is authorized to: (i) identify risks to U.S. financial stability that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected SIFIs, or that could arise outside the financial services marketplace; (ii) promote market discipline by eliminating expectations that the U.S. government will shield shareholders, creditors, and counterparties from losses in the event of failure; and (iii) respond to emerging threats to the stability of the U.S. financial system. The FSOC is responsible for facilitating regulatory coordination; information collection and sharing; designating nonbank financial companies for consolidated supervision by the Federal Reserve; designating systemic financial market utilities and systemic payment, clearing, and settlement activities requiring prescribed risk management standards and heightened federal regulatory oversight; recommending stricter standards for SIFIs; and, together with the Federal Reserve, determining whether action should be taken to break up firms that pose a grave threat to U.S. financial stability. As an FHC, KeyCorp is subject to regulation, supervision, and examination by the Federal Reserve under the BHCA. Our national bank subsidiaries and their subsidiaries are subject to regulation, supervision and examination by the OCC. At December 31, 2017, we operated one full-service, FDIC-insured national bank subsidiary, KeyBank, and one national bank subsidiary that is limited to fiduciary activities. The FDIC also has certain, more limited regulatory, supervisory and examination authority over KeyBank and KeyCorp under the FDIA and the Dodd-Frank Act. We have other financial services subsidiaries that are subject to regulation, supervision and examination by the Federal Reserve, as well as other state and federal regulatory agencies and self-regulatory organizations. Because KeyBank engages in derivative transactions, in 2013 it provisionally registered as a swap dealer with the CFTC and became a member of the NFA, the self-regulatory organization for participants in the U.S. derivatives industry. Our securities brokerage and asset management subsidiaries are subject to supervision and regulation by the SEC, FINRA, and state securities regulators, and our insurance subsidiaries are subject to regulation by the insurance regulatory authorities of the states in which they operate. Our other nonbank subsidiaries are subject to laws and regulations of both the federal government and the various states in which they are authorized to do business. Regulatory capital requirements KeyCorp and KeyBank are subject to regulatory capital requirements that are based largely on the work of an international group of supervisors known as the Basel Committee on Banking Supervision (“Basel Committee”). The Basel Committee is responsible for establishing international bank supervisory standards for implementation in member jurisdictions, to enhance and align bank regulation on a global scale and promote financial stability. The regulatory capital framework developed by the Basel Committee and implemented in the United States is a predominately risk-based capital framework that establishes minimum capital requirements based on the amount of regulatory capital a banking organization maintains relative to the amount of its total assets, adjusted to reflect credit risk (“risk-weighted assets”). Each banking organization subject to this regulatory capital framework is required to satisfy certain minimum risk-based capital measures (e.g., a tier 1 risk-based capital ratio requirement of tier 1 capital to total risk-weighted assets), and in the United States, a minimum leverage ratio requirement of tier 1 capital to average total on-balance sheet assets, which serves as a backstop to the risk-based measures. A capital instrument is assigned to one of two tiers based on the relative strength and ability of that instrument to absorb credit losses on a going concern basis. Capital instruments with relatively robust loss-absorption capacity are assigned to tier 1, while other capital instruments with relatively less loss-absorption capacity are assigned to tier 2. A banking organization’s total capital equals the sum of its tier 1 and tier 2 capital. The Basel Committee also developed a market risk capital framework (that also has been implemented in the United States) to address the substantial exposure to market risk faced by banking organizations with significant trading activity and augment the credit risk-based capital requirements described above. For example, the minimum total risk-based capital ratio requirement for a banking organization subject to the market risk capital rule equals the ratio of the banking organization’s total capital to the sum of its credit risk-weighted assets and market risk-weighted assets. Only KeyCorp is subject to the market risk capital rule, as KeyBank does not engage in substantial trading activity. To address deficiencies in the international regulatory capital standards identified during the 2007-2009 global financial crisis, in 2010 the Basel Committee released comprehensive revisions to the international regulatory capital framework, commonly referred to as “Basel III.” The Basel III revisions are designed to strengthen the quality and quantity of regulatory capital, in part through the introduction of a Common Equity Tier 1 capital requirement; provide more comprehensive and robust risk coverage, particularly for securitization exposures, equities, and off-balance sheet positions; and address pro-cyclicality concerns through the implementation of capital buffers. The Basel Committee also released a series of revisions to the market risk capital framework to address deficiencies identified during its initial implementation (e.g., arbitrage opportunities between the credit risk-based and market risk capital rules) and in connection with the global financial crisis. In July 2013, the U.S. banking agencies adopted a final rule to implement Basel III with an effective date of January 1, 2015, and a multi-year transition period ending on December 31, 2018 (“Regulatory Capital Rules”). Consistent with the international framework, the Regulatory Capital Rules further restrict the type of instruments that may be recognized in tier 1 and tier 2 capital (including the phase out of trust preferred securities from tier 1 capital for BHCs above a certain asset threshold, like KeyCorp); establish a minimum Common Equity Tier 1 capital ratio requirement of 4.5% and capital buffers to absorb losses during periods of financial stress while allowing an institution to provide credit intermediation as it would during a normal economic environment; and refine several of the methodologies used for determining risk-weighted assets. The Regulatory Capital Rules provide additional requirements for large banking organizations with over $250 billion in total consolidated assets or $10 billion in foreign exposure, but those additional requirements do not apply to KeyCorp or KeyBank. Accordingly, for purposes of the Regulatory Capital Rules, KeyCorp and KeyBank are treated as “standardized approach” banking organizations. Under the Regulatory Capital Rules, standardized approach banking organizations are required to meet the minimum capital and leverage ratios set forth in the following table. At December 31, 2017, Key had an estimated Common Equity Tier 1 Capital Ratio of 10.05% under the fully phased-in Regulatory Capital Rules. Also at December 31, 2017, based on the fully phased-in Regulatory Capital Rules, Key estimates that its capital and leverage ratios, after adjustment for market risk, would be as set forth in the following table. Estimated Ratios vs. Minimum Capital Ratios Calculated Under the Fully Phased-In Regulatory Capital Rules Ratios (including Capital conservation buffer) Key December 31, 2017 Pro Forma Minimum January 1, 2015 Phase-in Common Equity Tier 1 (a) Capital conservation buffer (b) Common Equity Tier 1 + Capital conservation buffer Tier 1 Capital Tier 1 Capital + Capital conservation buffer Total Capital Total Capital + Capital conservation buffer Leverage (c) See Figure 4 entitled “GAAP to Non-GAAP Reconciliations,” which presents the computation of Common Equity Tier 1 under the fully-phased in regulatory capital rules. Capital conservation buffer must consist of Common Equity Tier 1 capital. As a standardized approach banking organization, KeyCorp is not subject to the countercyclical capital buffer of up to 2.5% imposed upon an advanced approaches banking organization under the Regulatory Capital Rules. As a standardized approach banking organization, KeyCorp is not subject to the 3% supplemental leverage ratio requirement, which became effective January 1, 2018. Revised prompt corrective action framework The federal prompt corrective action framework established under the FDIA groups FDIC-insured depository institutions into one of five prompt corrective action capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” In addition to implementing the Basel III capital framework in the U.S., the Regulatory Capital Rules also revised the prompt corrective action capital category threshold ratios applicable to FDIC-insured depository institutions such as KeyBank, with an effective date of January 1, 2015. The Revised Prompt Corrective Action Framework table below identifies the capital category threshold ratios for a “well capitalized” and an “adequately capitalized” institution under the Prompt Corrective Action Framework. “Well Capitalized” and “Adequately Capitalized” Capital Category Ratios under Prompt Corrective Action Capital Category Well Capitalized (a) Adequately Capitalized Common Equity Tier 1 Risk-Based Tier 1 Risk-Based Total Risk-Based Tier 1 Leverage (b) A “well capitalized” institution also must not be subject to any written agreement, order or directive to meet and maintain a specific capital level for any capital measure. As a standardized approach banking organization, KeyBank is not subject to the 3% supplemental leverage ratio requirement, which became effective January 1, 2018. We believe that, as of December 31, 2017, KeyBank (consolidated) satisfied the risk-based and leverage capital requirements necessary to be considered “well capitalized” for purposes of the revised prompt corrective action framework. However, investors should not regard this determination as a representation of the overall financial condition or prospects of KeyBank because the prompt corrective action framework is intended to serve a limited supervisory function. Moreover, it is important to note that the prompt corrective action framework does not apply to BHCs, like KeyCorp. Recent regulatory capital-related developments On September 27, 2017, the federal banking agencies issued a joint proposal to simplify certain aspects of the Regulatory Capital Rules for standardized approach banking organizations (the “Simplification Proposal”), including Key. In anticipation of the Simplification Proposal, on August 22, 2017, the agencies issued a proposal to extend the current capital treatment for certain items that are part of the Simplification Proposal and also subject to the multi-year transition period for the Regulatory Capital Rules, which ends on December 31, 2018 (the “Transitions Proposal”). The Transitions Proposal was published as a final rule in the Federal Register on November 21, 2017, and is expected to alleviate the burden that would have resulted from the continued phase-in of those capital requirements as the agencies seek public comment on and work to finalize the Simplification Proposal. The Simplification Proposal would amend the Regulatory Capital Rules by: (1) replacing the definition for “high volatility commercial real estate” exposures with a simpler definition called, “high volatility acquisition, development, or construction” (“HVADC”) exposures, and requiring a banking organization to assign a 130 percent risk weight to HVADC exposures; (2) simplifying the thresholds deductions for mortgage servicing assets, temporary difference deferred tax assets that are not realizable through carryback, and investments in the capital of unconsolidated financial institutions, together with revisions to the risk-weight treatment for investments in the capital of unconsolidated financial institutions; and (3) simplifying the limitations on the amount of a third-party minority interest in a consolidated subsidiary that is includable in regulatory capital. These revisions would apply only to standardized approach banking organizations. The Simplification Proposal also sets forth clarifying revisions to miscellaneous sections of the Regulatory Capital Rules. If the Simplification Proposal is adopted in its current form as final, it would likely have a neutral-to-low impact on Key’s capital requirements, but it would meaningfully alleviate the compliance burden associated with the Regulatory Capital Rules. Comments on the Simplification Proposal were due December 26, 2017. In December 2017, the Basel Committee released its final revisions to Basel III. The revisions seek to restore credibility in the calculation of risk-weighted assets (“RWAs”) and improve the comparability of regulatory capital ratios across banking organizations by: (1) enhancing the robustness and risk-sensitivity of the standardized approach for credit risk, credit valuation adjustment, and operational risk; (2) constraining the use of internal models by placing limits on certain inputs used to calculate capital requirements under the internal ratings-based approach for credit risk (used by advanced approaches banking organizations) and removing the ability to use an internal model for purposes of determining the capital charge for credit valuation adjustment (“CVA”) risk and operational risk; (3) introducing a leverage ratio buffer to further limit the leverage of global systemically-important banks; and (4) replacing the existing Basel II output floor with a more robust, risk-sensitive floor based on the Basel III standardized approach. The U.S. federal banking agencies released a statement announcing their support for the Basel Committee’s efforts, but cautioned that they will consider how to appropriately incorporate these revisions into the Regulatory Capital Rules, and that any proposed changes based on the Basel Committee revisions would be subject to notice-and-comment rulemaking. In view of the prohibition under the Dodd-Frank Act on the use of credit ratings in federal regulation, there is some uncertainty as to whether or how the agencies would implement the ratings-based aspects of the Basel Committee revisions to Basel III, as well as any other aspect of the Basel Committee revisions that permit the U.S. agencies to exercise home-country discretion, for example, due to differences in accounting or market practices, and legal requirements. Liquidity requirements KeyCorp is subject to regulatory liquidity requirements based on international liquidity standards established by the Basel Committee in 2010, and subsequently revised between 2013 and 2014 (as revised, the “Basel III liquidity framework”). The Basel III liquidity framework establishes quantitative standards designed to ensure that a banking organization is appropriately positioned, from a balance sheet perspective, to satisfy its short- and long-term funding needs. To address short-term liquidity risk, the Basel III liquidity framework established a liquidity coverage ratio (“Basel III LCR”), calculated as the ratio of a banking organization’s high-quality liquid assets to its total net cash outflows over 30 consecutive calendar days. In addition, to address long-term liquidity risk, the Basel III liquidity framework established a net stable funding ratio (“Basel III NSFR”), calculated as the ratio of the amount of stable funding available to a banking organization to its required amount of stable funding. Banking organizations must satisfy minimum Basel III LCR and NSFR requirements of at least 100%. In October 2014, the federal banking agencies published a final rule to implement the Basel III LCR for U.S. banking organizations (the “Liquidity Coverage Rules”). Consistent with the Basel III LCR, the U.S. Liquidity Coverage Rules establish a minimum LCR for certain internationally active bank and nonbank financial companies (excluding KeyCorp), and a modified version of the LCR (“Modified LCR”) for BHCs and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp). KeyBank will not be subject to the LCR or the Modified LCR under the Liquidity Coverage Rules unless the OCC affirmatively determines that application to KeyBank is appropriate in light of KeyBank’s asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system. Under the Liquidity Coverage Rules, KeyCorp must calculate a Modified LCR on a monthly basis, and is required to satisfy a minimum Modified LCR requirement of 100%. At December 31, 2017, KeyCorp’s Modified LCR was above 100%. In the future, KeyCorp may change the composition of our investment portfolio, increase the size of the overall investment portfolio, and modify product offerings to enhance or optimize our liquidity position. In December 2016, the Federal Reserve adopted a final rule to implement public disclosure requirements for the LCR and Modified LCR. Under the final rule, each calendar quarter KeyCorp must publicly disclose certain quantitative information regarding its Modified LCR calculation, together with a discussion of the factors that have a significant effect on its Modified LCR. That discussion may include the main drivers of the Modified LCR; changes in the Modified LCR over time and the cause(s) of such changes; the composition of eligible high-quality liquid assets; concentration of funding sources; derivative exposures and potential capital calls; any currency mismatch; and the centralized liquidity management function of the organization and its interaction with other functional areas. KeyCorp must comply with these disclosure requirements for the calendar quarter beginning October 1, 2018, and subsequent quarters. The federal banking agencies commenced implementation of the Basel III NSFR in the United States in April and May 2016, with the release of a proposed rule to implement a minimum net stable funding ratio (“NSFR”) requirement for certain internationally active banking organizations (excluding KeyCorp) and a modified version of the minimum NSFR requirement (“Modified NSFR”) for BHCs and other depository institution holding companies with over $50 billion in consolidated assets that are not internationally active (including KeyCorp), together with quarterly public disclosure requirements. The proposed rule would require banking organizations to satisfy a minimum NSFR requirement of 1.0 on an ongoing basis. However, banking organizations subject to the Modified NSFR (like KeyCorp) would be required to maintain a lower minimum amount of available stable funding, equal to 70% of the required stable funding under the NSFR. The comment period for the NPR expired on August 5, 2016. If the proposed NSFR requirement is adopted as a final rule, then similar to actions taken in connection with the implementation of the Liquidity Coverage Rules, KeyCorp may adjust its balance sheet or modify product offerings to enhance its liquidity position. Capital planning and stress testing The Federal Reserve’s capital plan rule requires each U.S.-domiciled, top-tier BHC with total consolidated assets of at least $50 billion (like KeyCorp) to develop and maintain a written capital plan supported by a robust internal capital adequacy process. The capital plan must be submitted annually to the Federal Reserve for supervisory review in connection with its annual CCAR (described below). The supervisory review includes an assessment of many factors, including KeyCorp’s ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the planning horizon. KeyCorp is also subject to the Federal Reserve’s supervisory expectations for capital planning and capital positions as a large, noncomplex BHC, as set forth in a Federal Reserve guidance document issued on December 18, 2015 (“SR Letter 15-19”). Under SR Letter 15-19, the Federal Reserve identifies its core capital planning expectations regarding governance; risk management; internal controls; capital policy; capital positions; incorporating stressful conditions and events; and estimating impact on capital positions for large and noncomplex firms building upon the capital planning requirements under its capital plan and stress test rules. SR Letter 15-19 also provides detailed supervisory expectations on such a firm’s capital planning processes. The Federal Reserve’s annual CCAR is an intensive assessment of the capital adequacy of large U.S. BHCs and of the practices these BHCs use to assess their capital needs. The Federal Reserve expects BHCs subject to CCAR to have and maintain regulatory capital in an amount that is sufficient to withstand a severely adverse operating environment and, at the same time, be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and provide credit intermediation. As part of the annual CCAR, the Federal Reserve conducts an annual supervisory stress test on KeyCorp, pursuant to which the Federal Reserve projects revenue, expenses, losses, and resulting post-stress capital levels and regulatory capital ratios under conditions that affect the U.S. economy or the financial condition of KeyCorp, including supervisory baseline, adverse, and severely adverse scenarios, that are determined annually by the Federal Reserve. KeyCorp filed its 2017 CCAR capital plan on April 5, 2017. The 2017 CCAR results, which included the annual supervisory stress test methodology and certain firm-specific results for the participating covered companies (including KeyCorp), were publicly released by the Federal Reserve on June 28, 2017. That same day, the Federal Reserve announced that it did not object to our 2017 capital plan. KeyCorp and KeyBank must also conduct their own company-run stress tests to assess the impact of stress scenarios (including supervisor-provided baseline, adverse, and severely adverse scenarios and, for KeyCorp, one KeyCorp-defined baseline scenario and at least one KeyCorp-defined stress scenario) on their consolidated earnings, losses, and capital over a nine-quarter planning horizon, taking into account their current condition, risks, exposures, strategies, and activities. While KeyBank must only conduct an annual stress test, KeyCorp must conduct both an annual and a mid-cycle stress test. KeyCorp and KeyBank are required to report the results of their annual stress tests to the Federal Reserve and OCC. KeyCorp is required to report the results of its mid-cycle stress test to the Federal Reserve. KeyCorp and KeyBank published the results of their company-run annual stress test on June 22, 2017. KeyCorp published the results of its company-run mid-cycle stress test on October 26, 2017. Summaries of the results of these company-run stress tests are disclosed each year under the “Regulatory Disclosures and Filings” tab of Key’s Investor Relations website: http://www.key.com/ir. Recent developments in capital planning and stress testing On January 30, 2017, the Federal Reserve released a final rule to revise the capital plan and stress test rules as they apply to large, noncomplex BHCs and U.S. intermediaries of foreign banks. Under the final rule, a large noncomplex BHC is one with total consolidated assets of more than $50 billion but less than $250 billion, and nonbank assets of less than $75 billion (“covered BHCs”). This includes KeyCorp. The final rule provides relief from the compliance requirements associated with the Federal Reserve’s capital plan and stress test rules. Specifically, the final rule relieves covered BHCs from the qualitative assessment portion of the Federal Reserve’s CCAR program and modifies the reporting requirements for these organizations by reducing the reporting requirements applicable to covered BHCs under the FR Y-14A and raising the materiality thresholds for specific portfolio reporting requirements. Going forward, the Federal Reserve will assess the capital planning practices of covered BHCs in a manner similar to existing supervisory programs, which typically include the distribution of a first day letter in advance of the start date of the review, standard communication during the exam, lead time to meet requests for additional information, and sufficient time frames to address the findings of the review. The final rule also limits the amount of capital a covered BHC is authorized to distribute in excess of the amount set forth in its capital plan without Federal Reserve approval (the “de minimis exception”), and establishes a one-quarter blackout period during which a BHC is not permitted to submit a notice to use the de minimis exception or seek prior approval to make a capital distribution in an amount that exceeds the de minimis exception level. If exigent circumstances arise during the blackout period that require a capital distribution, a covered BHC may resubmit its capital plan and request expedited review from the Federal Reserve; however, the Federal Reserve is not required to expedite the review process. The final rule also requires covered BHCs to measure nonbank assets on a monthly basis and report the average throughout the quarter to the Federal Reserve on a quarterly basis beginning March 31, 2017. The final rule became effective 30 days after publication in the Federal Register, and therefore, the relief provided under the final rule from the qualitative assessment portion of the CCAR program was effective for the 2017 CCAR cycle. On December 7, 2017, the Federal Reserve released for public comment a package of proposals that would increase the transparency of its stress test program while maintaining the Federal Reserve’s ability to test the resilience of the nation’s largest, most complex banks. The proposals responded to public and industry calls for more transparency around the CCAR program. One of the proposals, titled “Enhanced Disclosure of the Models Used in the Federal Reserve’s Supervisory Stress Tests,” sets forth a process for the release of more information regarding the models used by the Federal Reserve to estimate hypothetical losses in stress tests, including as applied in the CCAR context. For the first time, this would make the following information available to the public: (1) a range of loss rates, estimated using Federal Reserve models, for loans held by CCAR firms; (2) portfolios of hypothetical loans with loss rates estimated by Federal Reserve models; and (3) more detailed descriptions of the Federal Reserve’s models, such as certain equations and key variables that influence the results of those models. The Federal Reserve was also seeking comment on a proposed Stress Testing Policy Statement. The Policy Statement describes the principles, policies, and procedures that guide the development, implementation and validation of the Federal Reserve’s supervisory stress test models, and would complement the Federal Reserve’s Policy Statement on Scenario Design (discussed below). Finally, the Federal Reserve is proposing to amend its Policy Statement on the Scenario Design Framework for Stress Testing. The proposed amendments would (1) clarify when the Federal Reserve may adopt a change in the unemployment rate in the severely adverse scenario of less than four percentage points; (2) institute a counter-cyclical guide for the change in the house price index in the severely adverse scenario; (3) and provide notice that the Federal Reserve plans to incorporate wholesale funding costs for banking organizations in the scenarios. The Federal Reserve would continue to use the Policy Statement to develop the macroeconomic scenarios and additional scenario components that are used in the supervisory and company-run stress tests conducted under the Federal Reserve’s stress tests rules. Comments on these proposals were due January 22, 2018. Dividend restrictions Federal law and regulation impose limitations on the payment of dividends by our national bank subsidiaries, like KeyBank. Historically, dividends paid by KeyBank have been an important source of cash flow for KeyCorp to pay dividends on its equity securities and interest on its debt. Dividends by our national bank subsidiaries are limited to the lesser of the amounts calculated under an earnings retention test and an undivided profits test. Under the earnings retention test, without the prior approval of the OCC, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years. Under the undivided profits test, a dividend may not be paid in excess of a bank’s undivided profits. Moreover, under the FDIA, an insured depository institution may not pay a dividend if the payment would cause it to be less than “adequately capitalized” under the prompt corrective action framework or if the institution is in default in the payment of an assessment due to the FDIC. Similarly, under the Regulatory Capital Rules, a banking organization that fails to satisfy the minimum capital conservation buffer requirement will be subject to certain limitations, which include restrictions on capital distributions. For more information about the payment of dividends by KeyBank to KeyCorp, please see Note 4 (“Restrictions on Cash, Dividends, and Lending Activities”) in this report. FDIA, Resolution Authority and Financial Stability Deposit insurance and assessments The DIF provides insurance coverage for domestic deposits funded through assessments on insured depository institutions like KeyBank. The amount of deposit insurance coverage for each depositor’s deposits is $250,000 per depository. The FDIC must assess the premium based on an insured depository institution’s assessment base, calculated as its average consolidated total assets minus its average tangible equity. KeyBank’s current annualized premium assessments can range from $.025 to $.45 for each $100 of its assessment base. The rate charged depends on KeyBank’s performance on the FDIC’s “large and highly complex institution” risk-assessment scorecard, which includes factors such as KeyBank’s regulatory rating, its ability to withstand asset and funding-related stress, and the relative magnitude of potential losses to the FDIC in the event of KeyBank’s failure. As required under the Dodd-Frank Act, in March 2015, the FDIC approved a final rule to impose a surcharge on the quarterly deposit insurance assessments of insured depository institutions having total consolidated assets of at least $10 billion (like KeyBank). The surcharge is 4.5 cents per $100 of the institution’s assessment base (after making certain adjustments). The final rule became effective on July 1, 2016. As of July 1, 2016, KeyBank must pay a surcharge to assist in bringing the reserve ratio to the statutory minimum of 1.35%. Surcharges will continue through the quarter that the DIF reserve ratio reaches or exceeds 1.35%, but not later than December 31, 2018. If the reserve ratio does not reach 1.35% by December 31, 2018 (provided it is at least 1.15%), the FDIC will impose a shortfall assessment on March 31, 2019, on insured depository institutions with total consolidated assets of $10 billion or more (like KeyBank). In December 2016, the FDIC issued a final rule that imposes recordkeeping requirements on insured depository institutions with two million or more deposit accounts (including KeyBank), to facilitate rapid payment of insured deposits to customers if such an institution were to fail. The rule requires those insured depository institutions to: (i) maintain complete and accurate data on each depositor’s ownership interest by right and capacity for all of the institution’s deposit accounts; and (ii) develop the capability to calculate the insured and uninsured amounts for each deposit owner within 24 hours of failure. The FDIC will conduct periodic testing of compliance with these requirements, and institutions subject to the rule must submit to the FDIC a certification of compliance, signed by the KeyBank CEO, and deposit insurance coverage summary report on or before the mandatory compliance date and annually thereafter. The final rule became effective on April 1, 2017, with a mandatory compliance date of April 1, 2020. Conservatorship and receivership of insured depository institutions Upon the insolvency of an insured depository institution, the FDIC will be appointed as receiver or, in rare circumstances, conservator for the insolvent institution under the FDIA. In an insolvency, the FDIC may repudiate or disaffirm any contract to which the institution is a party if the FDIC determines that performance of the contract would be burdensome and that disaffirming or repudiating the contract would promote orderly administration of the institution’s affairs. If the contractual counterparty made a claim against the receivership (or conservatorship) for breach of contract, the amount paid to the counterparty would depend upon, among other factors, the receivership (or conservatorship) assets available to pay the claim and the priority of the claim relative to others. In addition, the FDIC may enforce most contracts entered into by the insolvent institution, notwithstanding any provision that would terminate, cause a default, accelerate or give other rights under the contract solely because of the insolvency, the appointment of the receiver (or conservator), or the exercise of rights or powers by the receiver (or conservator). The FDIC may also transfer any asset or liability of the insolvent institution without obtaining approval or consent from the institution’s shareholders or creditors. These provisions would apply to obligations and liabilities of KeyCorp’s insured depository institution subsidiaries, such as KeyBank, including obligations under senior or subordinated debt issued to public investors. Receivership of certain SIFIs The Dodd-Frank Act created a new resolution regime, as an alternative to bankruptcy, known as the “orderly liquidation authority” (“OLA”) for certain SIFIs, including BHCs and their affiliates. Under the OLA, the FDIC would generally be appointed as receiver to liquidate and wind down a failing SIFI. The determination that a SIFI should be placed into OLA receivership is made by the U.S. Treasury Secretary, who must conclude that the SIFI is in default or in danger of default and that the SIFI’s failure poses a risk to the stability of the U.S. financial system. This determination must come after supermajority recommendations by the Federal Reserve and the FDIC, and consultation between the U.S. Treasury Secretary and the President. If the FDIC is appointed as receiver under the OLA, its powers and the rights and obligations of creditors and other relevant parties would be determined exclusively under the OLA. The powers of a receiver under the OLA are generally based on the FDIC’s powers as receiver for insured depository institutions under the FDIA. Certain provisions of the OLA were modified to reduce disparate treatment of creditors’ claims between the U.S. Bankruptcy Code and the OLA. However, substantial differences between the two regimes remain, including the FDIC’s right to disregard claim priority in some circumstances, the use of an administrative claims procedure under OLA to determine creditors’ claims (rather than a judicial procedure in bankruptcy), the FDIC’s right to transfer claims to a bridge entity, and limitations on the ability of creditors to enforce contractual cross-defaults against potentially viable affiliates of the entity in receivership. OLA liquidity would be provided through credit support from the U.S. Treasury and assessments made, first, on claimants against the receivership that received more in the OLA resolution than they would have received in ordinary liquidation (to the full extent of the excess), and second, if necessary, on SIFIs like KeyCorp utilizing a risk-based methodology. In December 2013, the FDIC published a notice for comment regarding its “single point of entry” resolution strategy under the OLA. This strategy involves the appointment of the FDIC as receiver for the SIFI’s top-level U.S. holding company only, while permitting the operating subsidiaries of the failed holding company to continue operations uninterrupted. As receiver, the FDIC would establish a bridge financial company for the failed holding company and would transfer the assets and a very limited set of liabilities of the receivership estate. The claims of unsecured creditors and other claimants in the receivership would be satisfied by the exchange of their claims for the securities of one or more new holding companies emerging from the bridge company. The FDIC has not taken any subsequent regulatory action relating to this resolution strategy under OLA since the comment period ended in March 2014. Depositor preference The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of its depositors (including claims of its depositors that have subrogated to the FDIC) and certain claims for administrative expenses of the FDIC as receiver have priority over other general unsecured claims. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will be placed ahead of unsecured, nondeposit creditors, including the institution’s parent BHC and subordinated creditors, in order of priority of payment. Resolution and recovery plans BHCs with at least $50 billion in total consolidated assets, like KeyCorp, are required to periodically submit to the Federal Reserve and FDIC a plan discussing how the company could be rapidly and orderly resolved if the company failed or experienced material financial distress. Insured depository institutions with at least $50 billion in total consolidated assets, like KeyBank, are also required to submit a resolution plan to the FDIC. These plans are due annually, usually by December 31 of each year. For 2015, these resolution plans, the third required from KeyCorp and KeyBank, were submitted on December 1, 2015. KeyCorp and KeyBank were not required to submit resolution plans for 2016 because the FDIC and Federal Reserve deferred such requirement (for 38 firms, including KeyCorp) until December 2017 and the FDIC deferred such requirement (for a number of insured depository institutions, including KeyBank) until July 1, 2018. The Federal Reserve and FDIC make available on their websites the public sections of resolution plans for the companies, including KeyCorp and KeyBank, after they are submitted. The public section of the resolution plans of KeyCorp and KeyBank is available at http://www.federalreserve.gov/bankinforeg/resolution-plans.htm and https://www.fdic.gov/regulations/reform/resplans/. On September 28, 2016, the OCC released final guidelines that establish standards for recovery planning by certain large OCC-regulated institutions, including KeyBank. The guidelines require such institutions to establish a comprehensive framework for evaluating the financial effects of severe stress events, and recovery actions an institution may pursue to remain a viable, going concern during a period of severe financial stress. Under the final guidelines, an institution’s recovery plan must include triggers to alert the institution of severe stress events, escalation procedures, recovery options, and a process for periodic review and approval by senior management and the board of directors. The recovery plan should be tailored to the complexity, scope of operations, and risk profile of the institution. Because KeyBank had average total consolidated assets of greater than $100 billion but less than $750 billion as reported on KeyBank’s Consolidated Reports of Condition and Income for the four most recent consecutive quarters as of January 1, 2017, it was required to be in compliance with the guidelines no later than January 1, 2018. We believe that KeyBank is in compliance with the guidelines. The Bank Secrecy Act The BSA requires all financial institutions (including banks and securities broker-dealers) to, among other things, maintain a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. It includes a variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting) as well as due diligence and know-your-customer documentation requirements. Key has established and maintains an anti-money laundering program to comply with the BSA’s requirements. Other Regulatory Developments under the Dodd-Frank Act Title X of the Dodd-Frank Act created the CFPB, a consumer financial services regulator with supervisory authority over banks and their affiliates with assets of more than $10 billion, like Key, to carry out federal consumer protection laws. The CFPB also regulates financial products and services sold to consumers and has rulemaking authority with respect to federal consumer financial laws. Any new regulatory requirements promulgated by the CFPB or modifications in the interpretations of existing regulations could require changes to Key’s consumer-facing businesses. The Dodd-Frank Act also gives the CFPB broad data collecting powers for fair lending for both small business and mortgage loans, as well as extensive authority to prevent unfair, deceptive and abusive practices. Volcker Rule The Volcker Rule implements Section 619 of the Dodd-Frank Act, which prohibits “banking entities,” such as KeyCorp, KeyBank and their affiliates and subsidiaries, from owning, sponsoring, or having certain relationships with hedge funds and private equity funds (referred to as “covered funds”) and engaging in short-term proprietary trading of financial instruments, including securities, derivatives, commodity futures and options on these instruments. The Volcker Rule excepts certain transactions from the general prohibition against proprietary trading, including transactions in government securities (e.g., U.S. Treasuries or any instruments issued by the GNMA, FNMA, FHLMC, a Federal Home Loan Bank, or any state or a political division of any state, among others); transactions in connection with underwriting or market-making activities; and, transactions as a fiduciary on behalf of customers. A banking entity may also engage in risk-mitigating hedging activity if it can demonstrate that the hedge reduces or mitigates a specific, identifiable risk or aggregate risk position of the entity. The banking entity is required to conduct an analysis supporting its hedging strategy and the effectiveness of the hedges must be monitored and, if necessary, adjusted on an ongoing basis. Banking entities with more than $50 billion in total consolidated assets and liabilities, like Key, that engage in permitted trading transactions are required to implement enhanced compliance programs, to regularly report data on trading activities to the regulators, and to provide a CEO attestation that the entity’s compliance program is reasonably designed to comply with the Volcker Rule. Although the Volcker Rule became effective on April 1, 2014, the Federal Reserve exercised its unilateral authority to extend the compliance deadline until July 21, 2017, with respect to covered funds. In addition, on December 12, 2016, the Federal Reserve released additional guidelines regarding how banking entities may seek an extension of the conformance period for certain legacy covered fund investments. Under the Dodd-Frank Act, the Federal Reserve is authorized to provide a banking entity up to an additional five years to conform legacy investments (i.e., contractual commitments of a banking organization on or before May 1, 2010, to make an investment) in “illiquid” covered funds. Key does not anticipate that the proprietary trading restrictions in the Volcker Rule will have a material impact on its business, but it may be required to divest certain fund investments as discussed in more detail under the heading “Other investments” in Item 7 of this report. On January 13, 2017, Key filed for an additional extension for illiquid funds, to retain certain indirect investments until the earlier of the date on which the investment is conformed or is expected to mature or July 21, 2022. The application for an extension was approved on February 14, 2017. As of December 31, 2017, we have not committed to a plan to sell these investments. Therefore, these investments continue to be valued using the net asset value per share methodology. Enhanced prudential standards and early remediation requirements Under the Dodd-Frank Act, the Federal Reserve must impose enhanced prudential standards and early remediation requirements upon BHCs, like KeyCorp, with at least $50 billion in total consolidated assets. Prudential standards must include enhanced risk-based capital requirements and leverage limits, liquidity requirements, risk-management and risk committee requirements, resolution plan requirements, credit exposure report requirements, single counterparty credit limits (“SCCL”), supervisory and company-run stress test requirements and, for certain financial companies, a debt-to-equity limit. Early remediation requirements must include limits on capital distributions, acquisitions, and asset growth in early stages of financial decline and capital restoration plans, capital raising requirements, limits on transactions with affiliates, management changes, and asset sales in later stages of financial decline, which are to be triggered by forward-looking indicators including regulatory capital and liquidity measures. The resolution plan requirements applicable to KeyCorp were implemented by a joint final rule adopted by the Federal Reserve and FDIC in 2011. That same year, the Federal Reserve issued a proposal to implement the stress test, early remediation, and SCCL requirements. However, when that proposal was adopted as a final rule in 2012, it included only the stress test requirements and not the SCCL or early remediation requirements. In March 2014, the Federal Reserve published a final rule to implement certain of the enhanced prudential standards required under the Dodd-Frank Act, including: (1) the incorporation of the Regulatory Capital Rules through the Federal Reserve’s previously finalized rules on capital planning and stress tests; (2) liquidity requirements relating to cash flow projections, a contingency funding plan, liquidity risk limits, monitoring liquidity risks (with respect to collateral, legal entities, currencies, business lines, and intraday exposures), liquidity stress testing, and a liquidity buffer; (3) the risk management framework, the risk committee, and the chief risk officer as well as the corporate governance requirements as they relate to liquidity risk management, including the requirements that apply to the board of directors, the risk committee, senior management, and the independent review function; and (4) a 15-to-1 debt-to-equity limit for companies that the FSOC determines pose a “grave threat” to U.S. financial stability. KeyCorp was required to comply with the final rule starting on January 1, 2015. In March 2016, the Federal Reserve issued an NPR proposing to establish a minimum SCCL for BHCs with total consolidated assets of $50 billion or more, like KeyCorp. This proposal would implement a provision in the Dodd-Frank Act and replaces proposals on this subject issued by the Federal Reserve in 2011 and 2012. Under the proposal, a covered BHC (including KeyCorp) would not be allowed to have an aggregate net credit exposure to any unaffiliated counterparty that exceeds 25% of the consolidated capital stock and surplus of the covered BHC. Global systemically-important banks and certain other large BHCs (excluding KeyCorp) would be subject to stricter limits under the proposal. A covered BHC such as KeyCorp would be required to comply with the proposed limits and quarterly reporting to show such compliance starting two years after the effective date of a final rule. The comment period for the NPR expired on June 3, 2016. KeyCorp does not expect to be materially impacted by this proposal if it is adopted as a final rule. The Federal Reserve has taken no further action on the early remediation requirements proposed in 2011. Bank transactions with affiliates Federal banking law and regulation imposes qualitative standards and quantitative limitations upon certain transactions by a bank with its affiliates, including the bank’s parent BHC and certain companies the parent BHC may be deemed to control for these purposes. Transactions covered by these provisions must be on arm’s-length terms, and cannot exceed certain amounts that are determined with reference to the bank’s regulatory capital. Moreover, if the transaction is a loan or other extension of credit, it must be secured by collateral in an amount and quality expressly prescribed by statute, and if the affiliate is unable to pledge sufficient collateral, the BHC may be required to provide it. These provisions significantly restrict the ability of KeyBank to fund its affiliates, including KeyCorp, KBCM, and KeyCorp’s nonbanking subsidiaries engaged in making merchant banking investments (and certain companies in which these subsidiaries have invested). Provisions added by the Dodd-Frank Act expanded the scope of: (1) the definition of affiliate to include any investment fund having any bank or BHC-affiliated company as an investment adviser; (2) credit exposures subject to the prohibition on the acceptance of low-quality assets or securities issued by an affiliate as collateral, the quantitative limits, and the collateralization requirements to now include credit exposures arising out of derivative, repurchase agreement, and securities lending/borrowing transactions; and (3) transactions subject to quantitative limits to now also include credit collateralized by affiliate-issued debt obligations that are not securities. In addition, these provisions require that a credit extension to an affiliate remain secured in accordance with the collateral requirements at all times that it is outstanding, rather than the previous requirement of only at the inception or upon material modification of the transaction. These provisions also raise significantly the procedural and substantive hurdles required to obtain a regulatory exemption from the affiliate transaction requirements. While these provisions became effective on July 21, 2012, the Federal Reserve has not yet issued a proposed rule to implement them. Supervision and governance On August 3, 2017, the Federal Reserve published an NPR to align its supervisory rating system for large financial institutions, including KeyCorp, with the post-crisis supervisory programs for these firms (the “LFI Rating System”). If adopted in final form, the LFI Rating System would provide a supervisory evaluation of whether an institution possesses sufficient operational strength and resilience to maintain safe and sound operations through a range of conditions, and assess an institution’s capital planning and positions, liquidity risk management and positions, and governance and controls. Institutions subject to the LFI Rating System would be rated using the following scale: Satisfactory, Satisfactory Watch, Deficient-1, and Deficient-2, with the Satisfactory Watch rating intended to be used as a transitory rating to allow an institution time to remediate a concern identified during the supervisory evaluation. The governance and controls component of the LFI Rating System is the subject of two separate, but related proposals: (1) proposed guidance regarding supervisory expectations for boards of directors of large financial institutions; and (2) proposed guidance regarding core principles for effective senior management, business management, and independent risk management and controls for large financial institutions. The proposed guidance regarding supervisory expectations for boards of directors identifies the attributes of effective boards of directors that would be used by an examiner to evaluate an institution’s governance and controls. The proposal also clarifies that for all institutions supervised by the Federal Reserve, most supervisory findings should be communicated to the organization’s senior management for corrective action and not its board of directors. In addition, the proposal identifies existing supervisory expectations for boards of directors set forth in Federal Reserve SR Letters that could be eliminated or revised. The Federal Reserve extended the comment period for the proposed LFI Rating System and the guidance regarding supervisory expectations for boards of directors until February 15, 2018. On January 4, 2018, the Federal Reserve released the final component of the proposed LFI Rating System — the proposed guidance regarding core principles for effective senior management, business management, and independent risk management and controls for large financial institutions. This guidance would support the supervisory evaluation under the governance and controls component of the LFI Rating System, together with the above-mentioned guidance regarding the effectiveness of a firm’s board of directors. In general, the guidance proposes core principles for effective senior management, business line management, and the independent risk management and control function. The guidance encourages firms to establish a governance structure with appropriate levels of independence and stature, by appointing a Chief Risk Officer and a Chief Audit Officer. Finally, the guidance emphasizes the importance of independent risk management, internal controls, and internal audit, and establishes principles that firms should use to establish or augment those management and control frameworks. Comments on this proposal are due by March 15, 2018. ERISA fiduciary standard In April 2016, the Department of Labor published final rules and amendments to certain prohibited transaction exemptions regarding which service providers would be regarded as fiduciaries under ERISA for making investment advice recommendations to: (i) certain retirement plan fiduciaries, participants or beneficiaries, and (ii) owners or beneficiaries of individual retirement accounts and health savings accounts, among other retirement plans. The purpose of the rules is to place fiduciary obligations, rather than the lesser legal obligations that currently apply, on these service providers. Accordingly, the rules subject any financial institution making recommendations for either the purchase or sale of investments in or rollover of the respective retirement plan to certain fiduciary obligations under ERISA, such as an impartial conduct standard and not selling certain investment products whose compensation may raise a conflict of interest for the advisor without entering into a contract providing certain disclosures and legal remedies to the customer. Under the Department of Labor’s original rules, the impartial standard requirement for financial institutions and their advisors was to become effective April 10, 2017. However, in response to a Presidential Order, the Department of Labor extended the effective date to June 9, 2017. The contract provisions were to be in place by January 1, 2018. However, on November 29, 2017, the Department of Labor extended the applicability of the contract rules until July 1, 2019, while it continues to review requested comments concerning whether to modify, further delay, or rescind these rules in whole or in part. As a financial services organization, we are subject to a number of risks inherent in our transactions and present in the business decisions we make. Described below are the primary risks and uncertainties that if realized could have a material and adverse effect on our business, financial condition, results of operations or cash flows, and our access to liquidity. The risks and uncertainties described below are not the only risks we face. Our ERM program incorporates risk management throughout our organization to identify, understand, and manage the risks presented by our business activities. Our ERM program identifies Key’s major risk categories as: credit risk, compliance risk, operational risk, liquidity risk, market risk, reputation risk, strategic risk, and model risk. These risk factors, and other risks we may face, are discussed in more detail in other sections of this report. I. Credit Risk We have concentrated credit exposure in commercial and industrial loans, commercial real estate loans, and commercial leases. As of December 31, 2017, approximately 73% of our loan portfolio consisted of commercial and industrial loans, commercial real estate loans, including commercial mortgage and construction loans, and commercial leases. These types of loans are typically larger than residential real estate loans and consumer loans, and have a different risk profile. The deterioration of a larger loan or a group of these loans could cause a significant increase in nonperforming loans, which could result in net loss of earnings from these loans, an increase in the provision for loan and lease losses, and an increase in loan charge-offs. Should the fundamentals of the commercial real estate market deteriorate, our financial condition and results of operations could be adversely affected. The strong recovery in commercial real estate over the past several years, in particular the multifamily property sector, has contributed to a surge in investment and development activity. As a result, property values are elevated and oversupply is a concern in certain markets. Substantial deterioration in property market fundamentals could have an impact on our portfolio, with a large portion of our clients active in real estate and specifically multifamily real estate. A correction in the real estate markets could impact the ability of borrowers to make debt service payments on loans. A portion of our commercial real estate loans are construction loans. Typically these properties are not fully leased at loan origination; the borrower may require additional leasing through the life of the loan to provide cash flow to support debt service payments. If property market fundamentals deteriorate sharply, the execution of new leases could slow, compromising the borrower’s ability to cover the debt service payments. We are subject to the risk of defaults by our loan counterparties and clients. Many of our routine transactions expose us to credit risk in the event of default of our counterparty or client. Our credit risk may be exacerbated when the collateral held cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the loan or derivative exposure due to us. In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of counterparties and clients, including financial statements, credit reports and other information. We may also rely on representations of those counterparties, clients, or other third parties as to the accuracy and completeness of that information. The inaccuracy of that information or those representations affects our ability to accurately evaluate the default risk of a counterparty or client. Given the Dodd-Frank legislative mandate to centrally clear eligible derivative contracts, we rely on central clearing counterparties to remain open and operationally viable at all times. The possibility of a large member failure or a cybersecurity breach could result in a disruption in this market. Various factors may cause our allowance for loan and lease losses to increase. We maintain an ALLL (a reserve established through a provision for loan and lease losses charged to expense) that represents our estimate of losses based on our evaluation of risks within our existing portfolio of loans. The level of the allowance reflects our ongoing evaluation of industry concentrations; specific credit risks; loan and lease loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and incurred losses inherent in the current loan portfolio. The determination of the appropriate level of the ALLL inherently involves a degree of subjectivity and requires that we make significant estimates of current credit risks and current trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, the softening of certain economic indicators that we are more susceptible to, such as unemployment and real estate values, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may indicate the need for an increase in the ALLL. Bank regulatory agencies periodically review our ALLL and, based on judgments that can differ somewhat from those of our own management, may necessitate an increase in the provision for loan and lease losses or the recognition of further loan charge-offs. In addition, if charge-offs outpace the estimate in our current methodology used to establish our ALLL (i.e., if the loan and lease allowance is inadequate), we will need additional loan and lease loss provisions to increase the ALLL, which would decrease our net income and capital. Declining asset prices could adversely affect us. During the Great Recession, the volatility and disruption that the capital and credit markets experienced reached extreme levels. This severe market disruption led to the failure of several substantial financial institutions, which caused the credit markets to constrain and also caused a widespread liquidation of assets. These asset sales, along with asset sales by other leveraged investors, including some hedge funds, rapidly drove down prices and valuations across a wide variety of traded asset classes. Asset price deterioration has a negative effect on the valuation of certain of the asset categories represented on our balance sheet, and reduces our ability to sell assets at prices we deem acceptable. Although the recovery has been in place for some time, a new recession would likely reverse recent positive trends in asset prices. II. Compliance Risk We are subject to extensive government regulation and supervision. As a financial services institution, we are subject to extensive federal and state regulation and supervision, which previously increased in recent years due to the implementation of the Dodd-Frank Act and other financial reform initiatives. Banking regulations are primarily intended to protect depositors’ funds, the DIF, consumers, taxpayers, and the banking system as a whole, not our debtholders or shareholders. These regulations increase our costs and affect our lending practices, capital structure, investment practices, dividend policy, ability to repurchase our common shares, and growth, among other things. KeyBank has faced scrutiny from our bank supervisors in the examination process and aggressive enforcement of regulations at the federal and state levels, particularly due to KeyBank’s and KeyCorp’s status as covered institutions under the Dodd-Frank Act’s heightened prudential standards and regulations, including its provisions designed to protect consumers from financial abuse. Although many parts of the Dodd-Frank Act are now in effect, other parts continue to be implemented, as well as other significant regulations which have been enacted with upcoming effective dates. As a result, some uncertainty remains as to the aggregate impact upon Key of the Dodd-Frank Act and other significant regulations. Changes to existing statutes, regulations or regulatory policies or their interpretation or implementation could affect us in substantial and unpredictable ways. These changes may subject us to additional costs and increase our litigation risk should we fail to appropriately comply. Such changes may also limit the types of financial services and products we may offer, affect the investments we make, and change the manner in which we operate. Additionally, federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and affiliated parties. These enforcement actions may be initiated for violations of laws and regulations, for practices determined to be unsafe or unsound, or for practices or acts that are determined to be unfair, deceptive, or abusive. For more information, see “Supervision and Regulation” in Item 1 of this report. Changes in accounting policies, standards, and interpretations could materially affect how we report our financial condition and results of operations. The FASB periodically changes the financial accounting and reporting standards governing the preparation of Key’s financial statements. Additionally, those bodies that establish and/or interpret the financial accounting and reporting standards (such as the FASB, SEC, and banking regulators) may change prior interpretations or positions on how these standards should be applied. These changes can be difficult to predict and can materially affect how Key records and reports its financial condition and results of operations. In some cases, Key could be required to retroactively apply a new or revised standard, resulting in changes to previously reported financial results. III. Operational Risk We are subject to a variety of operational risks. In addition to the other risks discussed in this section, we are subject to operational risk, which represents the risk of loss resulting from human error, inadequate or failed internal processes, internal controls, systems, and external events. Operational risk includes the risk of fraud by employees, clerical and record-keeping errors, nonperformance by vendors, threats to cybersecurity, and computer/telecommunications malfunctions. Operational risk also encompasses compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, laws, rules, regulations, prescribed practices or ethical standards, as well as the risk of our noncompliance with contractual and other obligations. We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business, such as certain loan processing functions. For example, breakdowns or failures of our vendors’ systems or employees could be a source of operational risk to us. Resulting losses from operational risk could take the form of explicit charges, increased operational costs, harm to our reputation, inability to secure insurance, litigation, regulatory intervention or sanctions or foregone business opportunities. Our information systems may experience an interruption or breach in security. We rely heavily on communications, information systems (both internal and provided by third parties) and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory, and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications. In the event of a failure, interruption, or breach of our information systems, we may be unable to avoid impact to our customers. Such a failure, interruption, or breach could result in legal liability, remediation costs, regulatory action, or reputational harm. Other U.S. financial service institutions and companies have reported breaches, some severe, in the security of their websites or other systems and several financial institutions, including Key, experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other potential attacks have attempted to obtain unauthorized access to confidential information, hold for ransom, or alter or destroy data, often through the introduction of computer viruses or malware, phishing, cyberattacks, and other means. To date, none of these efforts has had a material adverse effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers, or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. Our security systems may not be able to protect our information systems from similar attacks due to the rapid evolution and creation of sophisticated cyberattacks. We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information. An interception, misuse or mishandling of personal, confidential, or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action, and reputational harm. We rely on third parties to perform significant operational services for us. Third parties perform significant operational services on our behalf. These third parties are subject to similar risks as Key relating to cybersecurity, breakdowns or failures of their own systems or employees. One or more of these third parties may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by such third party. Certain of these third parties may have limited indemnification obligations or may not have the financial capacity to satisfy their indemnification obligations. Financial or operational difficulties of a third party could also impair our operations if those difficulties interfere with such third party’s ability to serve us. Additionally, some of our outsourcing arrangements are located overseas and, therefore, are subject to risks unique to the regions in which they operate. If a critical third party is unable to meet our needs in a timely manner or if the services or products provided by such third party are terminated or otherwise delayed and if we are not able to develop alternative sources for these services and products quickly and cost-effectively, it could have a material adverse effect on our business. Additionally, regulatory guidance adopted by federal banking regulators related to how banks select, engage and manage their third parties affects the circumstances and conditions under which we work with third parties and the cost of managing such relationships. We are subject to claims and litigation, which could result in significant financial liability and/or reputational risk. From time to time, customers, vendors, or other parties may make claims and take legal action against us. We maintain reserves for certain claims when deemed appropriate based upon our assessment that a loss is probable, estimable, and consistent with applicable accounting guidance. At any given time we have a variety of legal actions asserted against us in various stages of litigation. Resolution of a legal action can often take years. Whether any particular claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in our favor, they may result in significant financial liability and adversely affect how the market perceives us and our products and services as well as impact customer demand for those products and services. We are also involved, from time to time, in other reviews, investigations, and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, including, among other things, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions, or other relief. The number and risk of these investigations and proceedings has increased in recent years with regard to many firms in the financial services industry due to legal changes to the consumer protection laws provided for by the Dodd-Frank Act and the creation of the CFPB. There have also been a number of highly publicized legal claims against financial institutions involving fraud or misconduct by employees, and we run the risk that employee misconduct could occur. It is not always possible to deter or prevent employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Our controls and procedures may fail or be circumvented, and our methods of reducing risk exposure may not be effective. We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. We also maintain an ERM program designed to identify, measure, monitor, report, and analyze our risks. Any system of controls and any system to reduce risk exposure, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Additionally, instruments, systems, and strategies used to hedge or otherwise manage exposure to various types of market compliance, credit, liquidity, operational, and business risks and enterprise-wide risk could be less effective than anticipated. As a result, we may not be able to effectively mitigate our risk exposures in particular market environments or against particular types of risk. Climate change, severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business. Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us or our customers. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue, or cause us to incur additional expenses. IV. Liquidity Risk Capital and liquidity requirements imposed by the Dodd-Frank Act require banks and BHCs to maintain more and higher quality capital and more and higher quality liquid assets than has historically been the case. Evolving capital standards resulting from the Dodd-Frank Act and the Regulatory Capital Rules adopted by our regulators have had and will continue to have a significant impact on banks and BHCs, including Key. For a detailed explanation of the capital and liquidity rules that became effective for us on a phased-in basis on January 1, 2015, see the section titled “Regulatory capital requirements” under the heading “Supervision and Regulation” in Item 1 of this report. The Federal Reserve’s capital standards require Key to maintain more and higher quality capital and could limit our business activities (including lending) and our ability to expand organically or through acquisitions. They could also result in our taking steps to increase our capital that may be dilutive to shareholders or limit our ability to pay dividends or otherwise return capital to shareholders. In addition, the new liquidity standards required us to increase our holdings of higher-quality liquid assets, may require us to change our future mix of investment alternatives, and may impact future business relationships with certain customers. Additionally, support of liquidity standards may be satisfied through the use of term wholesale borrowings, which tend to have a higher cost than that of traditional core deposits. Further, the Federal Reserve requires BHCs to obtain approval before making a “capital distribution,” such as paying or increasing dividends, implementing common stock repurchase programs, or redeeming or repurchasing capital instruments. The Federal Reserve has detailed the processes that BHCs should maintain to ensure they hold adequate capital under severely adverse conditions and have ready access to funding before engaging in any capital activities. These rules could limit Key’s ability to make distributions, including paying out dividends or buying back shares. For more information, see the section titled “Regulatory capital requirements” under the heading “Supervision and Regulation” in Item 1 of this report. Federal agencies may take actions that disrupt the stability of the U.S. financial system. Since 2008, the federal government has taken unprecedented steps to provide stability to and confidence in the financial markets. For example, the Federal Reserve maintains a variety of stimulus policy measures designed to maintain a low interest rate environment. In light of recent moderate improvements in the U.S. economy, federal agencies may no longer support such initiatives. The discontinuation of such initiatives may have unanticipated or unintended impacts, perhaps severe, on the financial markets. These effects could include higher debt yields, a flatter or steeper slope to the yield curve, or unanticipated changes to quality spread premiums that may not follow historical relationships or patterns as the Federal Reserve gradually reverses quantitative easing and reduces the size of its balance sheet. In addition, new initiatives or legislation may not be implemented, or, if implemented, may not be adequate to counter any negative effects of discontinuing programs or, in the event of an economic downturn, to support and stabilize the economy. We rely on dividends by our subsidiaries for most of our funds. We are a legal entity separate and distinct from our subsidiaries. With the exception of cash that we may raise from debt and equity issuances, we receive substantially all of our funding from dividends by our subsidiaries. Dividends by our subsidiaries are the principal source of funds for the dividends we pay on our common and preferred stock and interest and principal payments on our debt. Federal banking law and regulations limit the amount of dividends that KeyBank (KeyCorp’s largest subsidiary) can pay. For further information on the regulatory restrictions on the payment of dividends by KeyBank, see “Supervision and Regulation” in Item 1 of this report. In the event KeyBank is unable to pay dividends to us, we may not be able to service debt, pay obligations, or pay dividends on our common or preferred stock. Such a situation could result in Key losing access to alternative wholesale funding sources. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. We are subject to liquidity risk, which could negatively affect our funding levels. Market conditions or other events could negatively affect our access to or the cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, or fund asset growth and new business initiatives at a reasonable cost, in a timely manner and without adverse consequences. Although we maintain a liquid asset portfolio and have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned as well as unanticipated changes in assets, liabilities, and off-balance sheet commitments under various economic conditions (including a reduced level of wholesale funding sources), a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a material adverse effect on us. If the cost effectiveness or the availability of supply in these credit markets is reduced for a prolonged period of time, our funding needs may require us to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, extending the maturity of wholesale borrowings, borrowing under certain secured borrowing arrangements, using relationships developed with a variety of fixed income investors, and further managing loan growth and investment opportunities. These alternative means of funding may result in an increase to the overall cost of funds and may not be available under stressed conditions, which would cause us to liquidate a portion of our liquid asset portfolio to meet any funding needs. Our credit ratings affect our liquidity position. The rating agencies regularly evaluate the securities issued by KeyCorp and KeyBank, and their ratings of our long-term debt and other securities are based on a number of factors, including our financial strength, ability to generate earnings, and other factors. Some of these factors are not entirely within our control, such as conditions affecting the financial services industry and the economy and changes in rating methodologies. Changes in any of these factors could impact our ability to maintain our current credit ratings. A rating downgrade of the securities of KeyCorp or KeyBank could adversely affect our access to liquidity and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us, reducing our ability to generate income. V. Market Risk A reversal of the U.S. economic recovery and a return to volatile or recessionary conditions in the U.S. or abroad could negatively affect our business or our access to capital markets. A worsening of economic and market conditions, downside shocks, or a return to recessionary economic conditions could result in adverse effects on Key and others in the financial services industry. The prolonged low-interest rate environment, despite a generally improving economy, has presented a challenge for the industry, including Key, and affects business and financial performance. In particular, we could face some of the following risks, and other unforeseeable risks, in connection with a downturn in the economic and market environment or in the face of downside shocks or a recession, whether in the United States or internationally: A loss of confidence in the financial services industry and the debt and equity markets by investors, placing pressure on the price of Key’s common shares or decreasing the credit or liquidity available to Key; A decrease in consumer and business confidence levels generally, decreasing credit usage and investment or increasing delinquencies and defaults; A decrease in household or corporate incomes, reducing demand for Key’s products and services; A decrease in the value of collateral securing loans to Key’s borrowers or a decrease in the quality of Key’s loan portfolio, increasing loan charge-offs and reducing Key’s net income; A decrease in our ability to liquidate positions at acceptable market prices; The extended continuation of the current low-interest rate environment, continuing or increasing downward pressure to our net interest income; An increase in competition or consolidation in the financial services industry; Increased concern over and scrutiny of the capital and liquidity levels of financial institutions generally, and those of our transaction counterparties specifically; A decrease in confidence in the creditworthiness of the United States or other governments whose securities we hold; and An increase in limitations on or the regulation of financial services companies like Key. We are subject to interest rate risk, which could adversely affect net interest income. Our earnings are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products, and policies of various governmental and regulatory agencies, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rate controls being applied by the Federal Reserve, could influence the amount of interest we receive on loans and securities, the amount of interest we pay on deposits and borrowings, our ability to originate loans and obtain deposits, and the fair value of our financial assets and liabilities. As the Federal Reserve continues to raise interest rates and begins to reverse quantitative easing, the behavior of national money market rate indices, the correlation of consumer deposit rates to financial market interest rates, and the setting of LIBOR rates may not follow historical relationships, which could influence net interest income and net interest margin. Moreover, if the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on loans and other investments, net interest income, and therefore our earnings, would be adversely affected. Conversely, earnings could also be adversely affected if the interest we receive on loans and other investments falls more quickly than the interest we pay on deposits and other borrowings. Our profitability depends upon economic conditions in the geographic regions where we have significant operations and on certain market segments in which we conduct significant business. We have concentrations of loans and other business activities in geographic regions where our bank branches are located — Washington; Oregon/Alaska; Rocky Mountains; Indiana/Northwest Ohio/Michigan; Central/Southwest Ohio; East Ohio/Western Pennsylvania; Atlantic; Western New York; Eastern New York; and New England — and additional exposure to geographic regions outside of our branch footprint. The moderate U.S. economic recovery in the various regions where we operate has been uneven, and continued improvement in the overall U.S. economy may not result in similar improvement, or any improvement at all, in the economy of any particular geographic region. Adverse conditions in a geographic region such as inflation, unemployment, recession, natural disasters, or other factors beyond our control could impact the ability of borrowers in these regions to repay their loans, decrease the value of collateral securing loans made in these regions, or affect the ability of our customers in these regions to continue conducting business with us. Additionally, a significant portion of our business activities are concentrated within the real estate and healthcare market segments. The profitability of some of these market segments depends upon the health of the overall economy, seasonality, the impact of regulation, and other factors that are beyond our control and may be beyond the control of our customers in these market segments. An economic downturn in one or more geographic regions where we conduct our business, or any significant or prolonged impact on the profitability of one or more of the market segments with which we conduct significant business activity, could adversely affect the demand for our products and services, the ability of our customers to repay loans, the value of the collateral securing loans, and the stability of our deposit funding sources. The soundness of other financial institutions could adversely affect us. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. We have exposure to many different industries and counterparties in the financial services industries, and we routinely execute transactions with such counterparties, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. Defaults by one or more financial services institutions have led to, and may cause, market-wide liquidity problems and losses. Many of our transactions with other financial institutions expose us to credit risk in the event of default of a counterparty or client. In addition, our credit risk may be affected when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure due us. Tax reform is anticipated to have an impact on our tax liabilities, the tax liabilities of our clients, and how we do business. On December 22, 2017, the TCJ Act was signed into law. This comprehensive tax legislation provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, that impact corporate taxation requirements, such as the reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The TCJ Act retains the low-income housing and research and development credits and repeals the corporate alternative minimum tax. Other relevant corporate changes include earlier recognition of certain revenue; accelerating expensing of investments in tangible property, including leasing assets; and limiting several deductions such as FDIC premiums, certain executive compensation, and meals and entertainment expense. Key is currently assessing the overall impact of the TCJ Act on the future expected federal income tax obligations of both Key and our clients. We expect that Key’s future federal income tax liabilities will overall benefit from the provisions in the TCJ Act. However, we also expect that certain aspects of our business may change over time; both as to the investments we may make as a result of tax reform and in response to how the provisions in the TCJ Act may affect our customers and influence how we offer and deliver our products and services in the future. Refer to Note 14, Income Taxes, for information on the impact of the TCJ Act to our 2017 financial results. VI. Reputation Risk Damage to our reputation could significantly harm our businesses. Our ability to attract and retain customers, clients, investors, and highly-skilled management and employees is affected by our reputation. Public perception of the financial services industry has declined as a result of the Great Recession. We face increased public and regulatory scrutiny resulting from the financial crisis and economic downturn. Significant harm to our reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and quality, compliance failures, disclosure of confidential information, significant or numerous failures, interruptions or breaches of our information systems, failure to meet external commitments and goals, and the activities of our clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by certain members or individuals in the industry may have a significant adverse effect on our reputation. We could also suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interests is complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The actual or perceived failure to adequately address conflicts of interest could affect the willingness of clients to deal with us, which could adversely affect our businesses. VII. Strategic Risk We may not realize the expected benefits of our strategic initiatives. Our ability to compete depends on a number of factors, including among others our ability to develop and successfully execute our strategic plans and initiatives. Our strategic priorities include growing profitably and maintaining financial strength; effectively managing risk and reward; engaging a high-performing, talented, and diverse workforce; embracing the changes required by our clients and the marketplace; and acquiring and expanding targeted client relationships. Our inability to execute on or achieve the anticipated outcomes of our strategic priorities may affect how the market perceives us and could impede our growth and profitability. We operate in a highly competitive industry. We face substantial competition in all areas of our operations from a variety of competitors, some of which are larger and may have more financial resources than us. Our competitors primarily include national and super-regional banks as well as smaller community banks within the various geographic regions in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, investment banking firms, broker-dealers and other local, regional, national, and global financial services firms. In addition, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks. We expect the competitive landscape of the financial services industry to become even more intense as a result of legislative, regulatory, structural, and technological changes. Our ability to compete successfully depends on a number of factors, including: our ability to develop and execute strategic plans and initiatives; our ability to develop, maintain, and build long-term customer relationships based on quality service and competitive prices; our ability to develop competitive products and technologies demanded by our customers, while maintaining our high ethical standards and keeping our assets safe and sound; our ability to attract, retain, and develop a highly competent employee workforce; and industry and general economic trends. Increased competition in the financial services industry, or our failure to perform in any of these areas, could significantly weaken our competitive position, which could adversely affect our growth and profitability. Maintaining or increasing our market share depends upon our ability to adapt our products and services to evolving industry standards and consumer preferences, while maintaining competitive prices. The continuous, widespread adoption of new technologies, including internet services and mobile devices (including smartphones and tablets), requires us to evaluate our product and service offerings to ensure they remain competitive. Our success depends, in part, on our ability to adapt our products and services, as well as our distribution of them, to evolving industry standards and consumer preferences. New technologies have altered consumer behavior by allowing consumers to complete transactions such as paying bills or transferring funds directly without the assistance of banks. New products allow consumers to maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and related income generated from those deposits. The increasing pressure from our competitors, both bank and nonbank, to keep pace and adopt new technologies and products and services requires us to incur substantial expense. We may be unsuccessful in developing or introducing new products and services, modifying our existing products and services, adapting to changing consumer preferences and spending and saving habits, achieving market acceptance or regulatory approval, sufficiently developing or maintaining a loyal customer base, or offering products and services at prices lower than the prices offered by our competitors. These risks may affect our ability to achieve growth in our market share and could reduce both our revenue streams from certain products and services and our revenues from our net interest income. We may not be able to attract and retain skilled people. Our success depends, in large part, on our ability to attract, retain, motivate, and develop key people. Competition for the best people in most of our business activities is ongoing and can be intense, and we may not be able to retain or hire the people we want or need to serve our customers. To attract and retain qualified employees, we must compensate these employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense. Various restrictions on compensation of certain executive officers were imposed under the Dodd-Frank Act and other legislation and regulations. In addition, our incentive compensation structure is subject to review by our regulators, who may identify deficiencies in the structure of or issue additional guidance on our compensation practices, causing us to make changes that may affect our ability to offer competitive compensation to these individuals or that place us at a disadvantage to non-financial service competitors. Our ability to attract and retain talented employees may be affected by these developments, or any new executive compensation limits and regulations. Acquisitions or strategic partnerships may disrupt our business and dilute shareholder value. Acquiring other banks, bank branches, or other businesses involves various risks commonly associated with acquisitions or partnerships, including exposure to unknown or contingent liabilities of the acquired company; diversion of our management’s time and attention; significant integration risk with respect to employees, accounting systems, and technology platforms; increased regulatory scrutiny; and, the possible loss of key employees and customers of the acquired company. We regularly evaluate merger and acquisition and strategic partnership opportunities and conduct due diligence activities related to possible transactions. As a result, mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions may involve the payment of a premium over book and market values. Therefore, some dilution of our tangible book value and net income per common share could occur in connection with any future transaction. We may fail to realize the anticipated benefits of the merger with First Niagara. KeyCorp consummated its merger with First Niagara on August 1, 2016. The success of the merger, including anticipated benefits and cost savings, will depend on, among other things, our ability to combine the businesses of KeyCorp and First Niagara in a manner that permits growth opportunities, including, among other things, enhanced revenues and revenue synergies, an expanded market reach and operating efficiencies, and that does not materially disrupt the existing customer relationships of KeyCorp or First Niagara nor result in decreased revenues due to loss of customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could have an adverse effect on the surviving corporation’s business, financial condition, operating results, and prospects. In addition, it is possible that the integration process could result in the disruption of our ongoing businesses or cause inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger. VIII. Model Risk We rely on quantitative models to manage certain accounting, risk management, and capital planning functions. We use quantitative models to help manage certain aspects of our business and to assist with certain business decisions, including estimating incurred loan losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, managing risk, and for capital planning purposes (including during the CCAR capital planning process). Our modeling methodologies rely on many assumptions, historical analyses and correlations. These assumptions may be incorrect, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, bad data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design. As a result, our models may not capture or fully express the risks we face, may suggest that we have sufficient capitalization when we do not, or may lead us to misjudge the business and economic environment in which we will operate. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Furthermore, strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable, and as a result, we may realize losses or other lapses. Banking regulators continue to focus on the models used by banks and bank holding companies in their businesses. The failure or inadequacy of a model may result in increased regulatory scrutiny on us or may result in an enforcement action or proceeding against us by one of our regulators. ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 2. PROPERTIES The headquarters of KeyCorp and KeyBank are located in Key Tower at 127 Public Square, Cleveland, Ohio 44114-1306. At December 31, 2017, Key leased approximately 477,744 square feet of the complex, encompassing the first 12 floors and the 54th through 56th floors of the 57-story Key Tower. In addition, Key owned two buildings in Brooklyn, Ohio, with office space that it operated from and leased out totaling approximately 563,458 square feet at December 31, 2017. Our office space is used by all of our segments. As of the same date, KeyBank owned 520 branches and leased 677 branches. The lease terms for applicable branches are not individually material, with terms ranging from month-to-month to 99 years from inception. The information presented in the Legal Proceedings section of Note 22 (“Commitments, Contingent Liabilities, and Guarantees”) of the Notes to Consolidated Financial Statements is incorporated herein by reference. On at least a quarterly basis, we assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, we have not accrued legal reserves, consistent with applicable accounting guidance. Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established reserves are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition. We note, however, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution will not exceed established reserves. As a result, the outcome of a particular matter or a combination of matters may be material to our results of operations for a particular period, depending upon the size of the loss or our income for that particular period. ITEM 4. MINE SAFETY DISCLOSURES ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The dividend restrictions discussion in the “Supervision and Regulation” section in Item 1. Business of this report, and the disclosures included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to Consolidated Financial Statements contained in Item 8 of this report, are incorporated herein by reference: Discussion of our common shares, shareholder information and repurchase activities in the section captioned “Capital — Common shares outstanding” Presentation of annual and quarterly market price and cash dividends per common share and discussion of dividends in the section captioned “Capital — Dividends” Discussion of dividend restrictions in the sections captioned “Supervision and Regulation — Regulatory capital requirements — Dividend restrictions,” “Liquidity risk management — Liquidity for KeyCorp,” Note 4 (“Restrictions on Cash, Dividends, and Lending Activities”), and Note 24 (“Shareholders’ Equity”) 14, 75, 117, 182 KeyCorp common share price performance (2013-2017) graph From time to time, KeyCorp or its principal subsidiary, KeyBank, may seek to retire, repurchase, or exchange outstanding debt of KeyCorp or KeyBank, and capital securities or preferred stock of KeyCorp, through cash purchase, privately negotiated transactions, or otherwise. Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, and other factors. The amounts involved may be material. As previously reported and as authorized by the Board and pursuant to our 2017 capital plan (which is effective through the second quarter of 2018) submitted to and not objected to by the Federal Reserve on June 28, 2017, we have authority to repurchase up to $800 million of our common shares, which includes repurchases to offset issuances of common shares under our employee compensation plans. During 2017, we repurchased $254 million of common shares under our 2016 capital plan authorization and $476 million under our 2017 capital plan authorization. The following table summarizes our repurchases of our common shares for the three months ended December 31, 2017. Calendar month Total number of shares repurchased(a) Average price paid Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased as part of publicly announced plans or programs(b) November 1-30 Includes common shares repurchased in the open market and common shares deemed surrendered by employees in connection with our stock compensation and benefit plans to satisfy tax obligations. Calculated using the remaining general repurchase amount divided by the closing price of KeyCorp common shares as follows: on October 31, 2017, at $18.25; on November 30, 2017, at $18.98; and on December 31, 2017, at $20.17. ITEM 6. SELECTED FINANCIAL DATA The information included under the caption “Selected Financial Data” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 35 is incorporated herein by reference. Long-term financial targets Strategic developments Provision for credit losses Noninterest income Noninterest expense Line of Business Results Key Community Bank summary of operations Key Corporate Bank summary of operations Other Segments Financial Condition Loans and loans held for sale Deposits and other sources of funds Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Off-balance sheet arrangements Contractual obligations Market risk management Liquidity risk management Operational and compliance risk management Fourth Quarter Results Provision for loan and lease losses Critical Accounting Policies and Estimates Valuation methodologies Derivatives and hedging Contingent liabilities, guarantees and income taxes European Sovereign and Non-Sovereign Debt Exposure This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for each of the past three years. Some tables include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections that we refer to are presented in the table of contents. Throughout this discussion, references to “Key,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. “KeyCorp” refers solely to the parent holding company, and “KeyBank” refers solely to KeyCorp’s subsidiary bank, KeyBank National Association. KeyBank (consolidated) refers to the consolidated entity consisting of KeyBank and its subsidiaries. We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows. We use the phrase continuing operations in this document to mean all of our businesses other than the education lending business, Victory, and Austin. The education lending business and Austin have been accounted for as discontinued operations since 2009. Victory was classified as a discontinued operation in our first quarter 2013 financial reporting as a result of the sale of this business as announced on February 21, 2013, and closed on July 31, 2013. Our exit loan portfolios are separate from our discontinued operations. These portfolios, which are in a run-off mode, stem from product lines we decided to cease because they no longer fit with our corporate strategy. These exit loan portfolios are included in Other Segments. We engage in capital markets activities primarily through business conducted by our Key Corporate Bank segment. These activities encompass a variety of products and services. Among other things, we trade securities as a dealer, enter into derivative contracts (both to accommodate clients’ financing needs and to mitigate certain risks), and conduct transactions in foreign currencies (both to accommodate clients’ needs and to benefit from fluctuations in exchange rates). For regulatory purposes, capital is divided into two classes. Federal regulations currently prescribe that at least one-half of a bank or BHC’s total risk-based capital must qualify as Tier 1 capital. Both total and Tier 1 capital serve as bases for several measures of capital adequacy, which is an important indicator of financial stability and condition. As described under the heading “Regulatory capital requirements — Capital planning and stress testing” in the section entitled “Supervision and Regulation” in Item 1 of this report, the regulators are required to conduct a supervisory capital assessment of all BHCs with assets of at least $50 billion, including KeyCorp. As part of this capital adequacy review, banking regulators evaluated a component of Tier 1 capital, known as Common Equity Tier 1, under the Regulatory Capital Rules. The “Capital” section of this report under the heading “Capital adequacy” in the MD&A provides more information on total capital, Tier 1 capital, and the Regulatory Capital Rules, including Common Equity Tier 1, and describes how the these measures are calculated. The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer back to this page as you read this report. ABO: Accumulated benefit obligation. ALCO: Asset/Liability Management Committee. ALLL: Allowance for loan and lease losses. A/LM: Asset/liability management. AOCI: Accumulated other comprehensive income (loss). APBO: Accumulated postretirement benefit obligation. ASC: Accounting Standards Codification. ASU: Accounting Standards Update. ATMs: Automated teller machines. Austin: Austin Capital Management, Ltd. BSA: Bank Secrecy Act. BHCA: Bank Holding Company Act of 1956, as amended. BHCs: Bank holding companies. Board: KeyCorp Board of Directors. CCAR: Comprehensive Capital Analysis and Review. Cain Brothers: Cain Brothers & Company, LLC. CFPB: Consumer Financial Protection Bureau. CFTC: Commodities Futures Trading Commission. CMBS: Commercial mortgage-backed securities. CMO: Collateralized mortgage obligation. Common Shares: KeyCorp common shares, $1 par value. DIF: Deposit Insurance Fund of the FDIC. Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. EBITDA: Earnings before interest, taxes, depreciation, and amortization. EPS: Earnings per share. ERISA: Employee Retirement Income Security Act of 1974. ERM: Enterprise risk management. EVE: Economic value of equity. FASB: Financial Accounting Standards Board. FDIA: Federal Deposit Insurance Act, as amended. FDIC: Federal Deposit Insurance Corporation. Federal Reserve: Board of Governors of the Federal Reserve FHLB: Federal Home Loan Bank of Cincinnati. FHLMC: Federal Home Loan Mortgage Corporation. FICO: Fair Isaac Corporation FINRA: Financial Industry Regulatory Authority. First Niagara: First Niagara Financial Group, Inc. FNMA: Federal National Mortgage Association. FSOC: Financial Stability Oversight Council. FVA: Fair value of employee benefit plan assets. GAAP: U.S. generally accepted accounting principles. GNMA: Government National Mortgage Association. HelloWallet: HelloWallet, LLC. IRS: Internal Revenue Service. ISDA: International Swaps and Derivatives Association. KAHC: Key Affordable Housing Corporation. KBCM: KeyBanc Capital Markets, Inc. KCC: Key Capital Corporation. KCDC: Key Community Development Corporation. KEF: Key Equipment Finance. KPP: Key Principal Partners. KMS: Key Merchant Services, LLC. LCR: Liquidity coverage ratio. LIBOR: London Interbank Offered Rate. LIHTC: Low-income housing tax credit. Moody’s: Moody’s Investor Services, Inc. MRM: Market Risk Management group. N/A: Not applicable. Nasdaq: The Nasdaq Stock Market LLC. NFA: National Futures Association. N/M: Not meaningful. NOW: Negotiable Order of Withdrawal. NPR: Notice of proposed rulemaking. NYSE: New York Stock Exchange. OCC: Office of the Comptroller of the Currency. OCI: Other comprehensive income (loss). OREO: Other real estate owned. OTTI: Other-than-temporary impairment. PBO: Projected benefit obligation. PCCR: Purchased credit card relationship. PCI: Purchased credit impaired. S&P: Standard and Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc. SEC: U.S. Securities & Exchange Commission. Series A Preferred Stock: KeyCorp’s 7.750% Noncumulative Perpetual Convertible Preferred Stock, Series A. SIFIs: Systemically important financial institutions, including BHCs with total consolidated assets of at least $50 billion and nonbank financial companies designated by FSOC for supervision by the Federal Reserve. TCJ Act: Tax Cuts and Jobs Act. TDR: Troubled debt restructuring. TE: Taxable-equivalent. U.S. Treasury: United States Department of the Treasury. VaR: Value at risk. VEBA: Voluntary Employee Beneficiary Association. Victory: Victory Capital Management and/or Victory Capital Advisors. VIE: Variable interest entity. Figure 1. Selected Financial Data dollars in millions, except per share amounts of Change YEAR ENDED DECEMBER 31, Income (loss) from continuing operations before income taxes Income (loss) from continuing operations attributable to Key Income (loss) from discontinued operations, net of taxes (29.4 Net income (loss) attributable to Key Income (loss) from continuing operations attributable to Key common shareholders Net income (loss) attributable to Key common shareholders PER COMMON SHARE (.04 Net income (loss) attributable to Key common shareholders (a) Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution Income (loss) from discontinued operations, net of taxes — assuming dilution Net income (loss) attributable to Key common shareholders — assuming dilution (a) Cash dividends paid Book value at year end Tangible book value at year end Market price at year end Weighted-average common shares outstanding (000) Weighted-average common shares and potential common shares outstanding (000) (b) AT DECEMBER 31, Earning assets Key common shareholders’ equity Key shareholders’ equity PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS Return on average total assets Return on average common equity Return on average tangible common equity (c) Net interest margin (TE) Cash efficiency ratio (c) PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS Loan to deposit (d) CAPITAL RATIOS AT DECEMBER 31, Key shareholders’ equity to assets Key common shareholders’ equity to assets Tangible common equity to tangible assets (c) Common Equity Tier 1 Tier 1 common equity TRUST ASSETS Average full-time-equivalent employees EPS may not foot due to rounding. Assumes conversion of common share options and other stock awards and/or convertible preferred stock, as applicable. See Figure 2 entitled “GAAP to Non-GAAP Reconciliations,” which presents the computations of certain financial measures related to “tangible common equity” and “cash efficiency.” The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons. Represents period-end consolidated total loans and loans held for sale (excluding education loans in securitizations trusts for periods prior to 2014) divided by period-end consolidated total deposits (excluding deposits in foreign office). Figure 2 presents certain non-GAAP financial measures related to “tangible common equity,” “return on tangible common equity,” “cash efficiency ratio,” “pre-provision net revenue,” certain financial measures excluding notable items, and “Common Equity Tier 1 under the Regulatory Capital Rules” Notable items include certain revenue or expense items that may occur in a reporting period which management does not consider indicative of ongoing financial performance. Management believes it is useful to consider certain financial metrics with and without merger-related charges and/or other notable items, including the impact of tax reform and related actions, in order to enable a better understanding of our results, increase comparability of period-to-period results, and to evaluate and forecast those results. As disclosed in Note 2 ("Business Combination") and Note 15 (“Acquisitions, Divestiture, and Discontinued Operations”), we completed the purchase of First Niagara on August 1, 2016. The definitive agreement and plan of merger to acquire First Niagara was originally announced on October 30, 2015. As a result of this transaction, we have recognized merger-related charges which are included in the total for “notable items.” Figure 2 shows the computation of “return on average tangible common equity excluding notable items,” “pre-provision net revenue excluding notable items,” “cash efficiency ratio excluding notable items,” and “return on average assets from continuing operations excluding notable items.” The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes that these ratios may assist investors in analyzing Key’s capital position without regard to the effects of intangible assets and preferred stock. Since analysts and banking regulators may assess our capital adequacy using tangible common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases. Figure 2 reconciles the GAAP performance measures to the corresponding non-GAAP measures. Figure 2 also shows the computation for and reconciliation of pre-provision net revenue, which is not formally defined by GAAP. We believe that eliminating the effects of the provision for credit losses makes it easier to analyze our results by presenting them on a more comparable basis. The cash efficiency ratio is a ratio of two non-GAAP performance measures. Accordingly, there is no directly comparable GAAP performance measure. The cash efficiency ratio excludes the impact of our intangible asset amortization from the calculation. We also disclose the cash efficiency ratio excluding notable items. We believe these ratios provide greater consistency and comparability between our results and those of our peer banks. Additionally, these ratios are used by analysts and investors as they develop earnings forecasts and peer bank Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, nor as a substitute for analyses of results as reported under GAAP. Figure 2. GAAP to Non-GAAP Reconciliations dollars in millions Tangible common equity to tangible assets at period end Key shareholders’ equity (GAAP) Intangible assets (a) Preferred Stock (b) Tangible common equity (non-GAAP) Total assets (GAAP) Tangible assets (non-GAAP) Tangible common equity to tangible assets ratio (non-GAAP) Merger-related charges Estimated impacts of tax reform and related actions Merchant services gain Purchase accounting finalization, net Total notable items Reevaluation of certain tax related assets Total notable items, after tax Average tangible common equity Average Key shareholders’ equity (GAAP) Intangible assets (average) (c) Preferred Stock (average) Average tangible common equity (non-GAAP) Return on average tangible common equity from continuing operations Income (loss) from continuing operations attributable to Key common shareholders (GAAP) Notable items (after-tax) Income (loss) from continuing operations attributable to Key common shareholders excluding notable items (non-GAAP) Return on average tangible common equity from continuing operations (non-GAAP) Return on average tangible common equity from continuing operations excluding notable items (non-GAAP) Return on average tangible common equity consolidated Net income (loss) attributable to Key common shareholders (GAAP) Return on average tangible common equity consolidated (non-GAAP) Pre-provision net revenue Net interest income (GAAP) TE adjustment Noninterest income (GAAP) Noninterest expense (GAAP) Pre-provision net revenue from continuing operations (non-GAAP) Pre-provision net revenue from continuing operations excluding notable items (non-GAAP) Cash efficiency ratio Intangible asset amortization (GAAP) Adjusted noninterest expense (non-GAAP) Notable items (d) Adjusted noninterest expense excluding notable items (non-GAAP) Total TE revenue (non-GAAP) Notable items (e) Adjusted total TE revenue excluding notable items (non-GAAP) Cash efficiency ratio (non-GAAP) Cash efficiency ratio excluding notable items (non-GAAP) Return on average total assets from continuing operations excluding notable items Income from continuing operations attributable to Key (GAAP) Notable items, after tax Income from continuing operations attributable to Key excluding notable items, after tax (non-GAAP) Average total assets from continuing operations (GAAP) Return on average total assets from continuing operations excluding notable items (non-GAAP) Figure 2. GAAP to Non-GAAP Reconciliations (Continued) Common Equity Tier 1 under the Regulatory Capital Rules Common Equity Tier 1 under current Regulatory Capital Rules Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules: Deferred tax assets and other intangible assets (f) Common Equity Tier 1 anticipated under the fully phased-in Regulatory Capital Rules(g) Net risk-weighted assets under current Regulatory Capital Rules Mortgage servicing assets (h) All other assets Total risk-weighted assets anticipated under the fully phased-in Regulatory Capital Rules(g) Common Equity Tier 1 ratio under the fully phased-in Regulatory Capital Rules(g) For the years ended December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014, and December 31, 2013, intangible assets exclude $26 million, $42 million, $45 million, $68 million, and $92 million, respectively, of period-end purchased credit card relationships. Net of capital surplus. For the years ended December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014, and December 31, 2013, average intangible assets exclude $34 million, $43 million, $55 million, $79 million, and $107 million, respectively, of average purchased credit card relationships. Notable items for the year ended December 31, 2017, include $217 million of merger-related charges, a $20 million charitable contribution, $30 million of estimated impacts of tax reform and related actions and a credit of approximately $5 million related to purchase accounting finalization. Notable items for the year ended December 31, 2017, include $59 million related to the merchant services acquisition gain, $39 million related to purchase accounting finalization, and $1 million related to the impacts of tax reform and related actions. Includes the deferred tax assets subject to future taxable income for realization, primarily tax credit carryforwards, as well as intangible assets (other than goodwill and mortgage servicing assets) subject to the transition provisions of the final rule. The anticipated amount of regulatory capital and risk-weighted assets is based upon the federal banking agencies’ Regulatory Capital Rules (as fully phased-in on January 1, 2019); we are subject to the Regulatory Capital Rules under the “standardized approach.” Item is included in the 10%/15% exceptions bucket calculation and is risk-weighted at 250%. Figure 3 shows the evaluation of our long-term financial targets for the year ended December 31, 2017. Figure 3. Evaluation of Our Long-Term Targets Key Metrics (a) Year Ended Positive operating leverage Cash efficiency ratio (b) Cash efficiency ratio excluding notable items (b) Moderate risk profile Net loan charge-offs to average loans .40 - .60 % Financial Returns 13.00 - 15.00 % Return on average tangible common equity excluding notable items (c) Calculated from continuing operations, unless otherwise noted. Excludes intangible asset amortization; non-GAAP measure: see Figure 2 for reconciliation. Non-GAAP measure: see Figure 2 for reconciliation. As we have now reached our existing long-term goals in 2017, beginning in 2018, we have revised our long-term financial targets as follows: Generate positive operating leverage and a cash efficiency ratio in the range of 54% to 56%; Maintain a moderate risk profile by targeting a net loan charge-offs to average loans ratio in the range of .40% to .60%; and A return on tangible common equity ratio in the range of 15% to 18%. We remain committed to enhancing long-term shareholder value by continuing to execute our relationship-oriented business model, growing our franchise, and being disciplined in our capital management. Our strategic focus is to deliver ease, value, and expertise to help our clients make better financial decisions and build enduring relationships. We intend to pursue this strategy by growing profitably; acquiring and expanding targeted client relationships; effectively managing risk and rewards; maintaining financial strength; and engaging, retaining, and inspiring our diverse and high-performing workforce. These strategic priorities for enhancing long-term shareholder value are described in more detail below. Grow profitably — We will continue to focus on generating positive operating leverage by growing revenue and creating a more efficient operating environment. We expect our relationship business model to keep generating organic growth as it helps us expand engagement with existing clients and attract new customers. We will leverage our continuous improvement culture to maintain an efficient cost structure that is aligned, sustainable, and consistent with the current operating environment and that supports our relationship business model. Acquire and expand targeted client relationships — We seek to be client-centric in our actions and have taken purposeful steps to enhance our ability to acquire and expand targeted relationships. For example, in commercial banking, our ability to deliver a broad product set and industry expertise allows us to match client needs and market conditions to deliver attractive solutions to clients. Effectively manage risk and rewards — Our risk management activities are focused on ensuring we properly identify, measure, and manage risks across the entire company to maintain safety and soundness and maximize profitability. Maintain financial strength — With the foundation of a strong balance sheet, we will remain focused on sustaining strong reserves, liquidity and capital. We will work closely with our Board and regulators to manage capital to support our clients’ needs and drive long-term shareholder value. Our capital remains a competitive advantage for us. Engage a high-performing, talented, and diverse workforce — Every day our employees provide our clients with great ideas, extraordinary service, and smart solutions. We will continue to engage our high-performing, talented, and diverse workforce to create an environment where they can make a difference, own their careers, be respected, and feel a sense of pride. We took the following actions during 2017 to support our corporate strategy: We continued to generate positive operating leverage versus the prior year. Our cash efficiency ratio, excluding notable items, was 60.2% for 2017, an improvement of 410 basis points compared to the prior year. We generated revenue synergies from our recent acquisitions, which we expect will continue to provide significant upside over the next several years. Revenue for 2017 grew 25.4% from 2016, driven by an increase in net interest income reflecting the full year benefit from the First Niagara acquisition in addition to higher interest rates, low deposit betas, and growth in our core earning asset balances. We also continued to experience growth in our fee-based businesses. The primary driver of the growth in noninterest income was investment banking and debt placement fees, which reached a new record level for the year of $603 million, driven by organic growth of almost 20%. Cards and payments also added to our growth in noninterest income, increasing 23.2% from the prior year. In 2017, we reached over $400 million in annual run rate cost savings from the First Niagara merger, with another $50 million expected to be realized by early 2018. Expenses for the year were elevated as a result of the full-year impact of the First Niagara acquisition, as well as higher expenses related to acquisitions completed in 2017. Expenses for 2017 also included a number of notable items including merger-related charges and the impact of tax reform and related actions. We saw continued strength in our credit quality trends during the year. For 2017, net loan charge-offs were .24% of average loans, down from .29% one year ago, and below our targeted range. Over the past 12 months, net loan charge-offs increased $3 million. This increase is attributable to the growth in our loan portfolio and higher charge-offs in our consumer loan portfolios partially offset by an increase in recoveries in our commercial and industrial loan portfolio. Capital management remained a priority in 2017. On June 28, 2017, the Federal Reserve announced that it did not object to our 2017 capital plan submitted as part of the annual CCAR process. The 2017 capital plan included share repurchases of up to $800 million, which is effective through the second quarter of 2018. During the third and fourth quarters of 2017, we completed $476 million of Common Share repurchases, including $469 million of Common Share repurchases in the open market and $7 million of Common Share repurchases related to employee equity compensation programs under the authorization. Over the past five years, we have repurchased over $2.2 billion in Common Shares. Consistent with our 2016 capital plan, the Board declared a quarterly dividend of $.085 per Common Share for the first quarter of 2017, and $.095 per Common Share for the second quarter of 2017. The Board declared a quarterly dividend of $.095 per Common Share for the third quarter of 2017, and a quarterly dividend of $.105 per Common Share for the fourth quarter of 2017, consistent with our 2017 capital plan. These quarterly dividend payments brought our annual dividend to $.38 per Common Share for 2017. Our 2017 capital plan proposed an increase in our quarterly Common Share dividend, up to $.12 per share, which will be considered by the Board for the second quarter of 2018. One of our principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including: the volume, pricing, mix, and maturity of earning assets and interest-bearing liabilities; the volume and value of net free funds, such as noninterest-bearing deposits and equity capital; the use of derivative instruments to manage interest rate risk; interest rate fluctuations and competitive conditions within the marketplace; asset quality; and fair value accounting of acquired earning assets and interest-bearing liabilities. To make it easier to compare results among several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a “TE basis” (i.e., as if it were all taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $154, an amount that — if taxed at the 2017 statutory federal income tax rate of 35% — would yield $100. Figure 4 shows the various components of our balance sheet that affect interest income and expense, and their respective yields or rates over the past five years. This figure also presents a reconciliation of TE net interest income to net interest income reported in accordance with GAAP for each of those years. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing taxable-equivalent net interest income by average earning assets. TE net interest income for 2017 was $3.8 billion, and the net interest margin was 3.17%, compared to TE net interest income of $3.0 billion and a net interest margin of 2.92% for the prior year. 2017 reflects the full year benefit from the First Niagara acquisition, including purchase accounting accretion, higher interest rates, low deposit betas, and growth in our core earning asset balances. TE net interest income for 2016 increased $577 million from 2015 and the net interest margin increase by 4 basis points, reflecting the benefit from the First Niagara acquisition and growth in our core earning asset balances and yields. In 2018, we expect net interest income to be in the range of $3.9 billion to $4.0 billion, with our outlook assuming one additional rate increase in June 2018. Average deposits for the years ended December 31, 2015, December 31, 2014, and December 31, 2013, exclude deposits in foreign office. Average loans totaled $86.4 billion for 2017, compared to $71.1 billion in 2016. This increase reflected the impact of the First Niagara acquisition and growth in commercial and industrial loans. For 2018, we anticipate average loans to be in the range of $88.5 billion to $89.5 billion. Average earning assets totaled $120.8 billion for 2017, compared to $101.3 billion in 2016, reflecting the full year impact of the First Niagara acquisition, as well as growth in commercial and industrial loans. At December 31, 2017, the remaining fair value discount on the First Niagara acquired loan portfolio was $266 million. Average deposits totaled $102.9 billion for 2017, an increase of $16.6 billion compared to 2017, primarily reflecting the full year impact of the First Niagara acquisition. In addition, we realized core deposit growth in 2017 driven by the strength of our retail banking franchise and from commercial clients, partly offset by the managed exit of higher cost corporate and public sector deposits. For 2018, we anticipate average deposits to be in the range of $104.5 billion to $105.5 billion. Figure 4. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates from Continuing Operations Interest (a) Yield/ Rate (a) Loans (b), (c) Commercial and industrial (d) Real estate — commercial mortgage Real estate — construction Commercial lease financing Total commercial loans Real estate — residential mortgage Consumer direct loans Consumer indirect loans Total consumer loans Securities available for sale (b), (e) Held-to-maturity securities (b) Trading account assets Other investments (e) Total earning assets Accrued income and other assets Discontinued assets NOW and money market deposit accounts Certificates of deposit ($100,000 or more)(f) Other time deposits Deposits in foreign office Total interest-bearing deposits Federal funds purchased and securities sold under repurchase agreements Bank notes and other short-term borrowings Long-term debt (f), (g) Total interest-bearing liabilities Noninterest-bearing deposits Accrued expense and other liabilities Discontinued liabilities (g) Interest rate spread (TE) Net interest income (TE) and net interest margin (TE) Less: TE adjustment (b) Net interest income, GAAP basis Results are from continuing operations. Interest excludes the interest associated with the liabilities referred to in (g) below, calculated using a matched funds transfer pricing methodology. Interest income on tax-exempt securities and loans has been adjusted to a TE basis using the statutory federal income tax rate in effect that calendar year. For purposes of these computations, nonaccrual loans are included in average loan balances. Commercial and industrial average balances include $117 million, $99 million, $88 million, $93 million, and $95 million of assets from commercial credit cards for the years ended December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014, and December 31, 2013, respectively. Figure 4. Consolidated Average Balance Sheets, Net Interest Income, and Yields/Rates from Continuing Operations (Continued) Compound Annual Rate of Change (2013-2017)

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Our regularly updated newsletter provides timely articles to help you achieve your financial goals. Please come back and visit often. Important Tax Changes for Individuals and Businesses Identity Protection PIN Available To All Taxpayers Credit Reports: What You Should Know The COVID-related Tax Relief Act of 2020 Standard Mileage Rates for 2021 Understanding the Excise Tax Protecting Business Taxpayers From Identity Theft Employee Business Expense Deductions: Who Qualifies? New to QuickBooks? Try These Five Activities to subscribe to our monthly newsletter. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services. Every year, it's a sure bet that there will be changes to current tax law and this year is no different. From standard deductions to health savings accounts and tax rate schedules, here's a checklist of tax changes to help you plan the year ahead. In 2021, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion. The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2020; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise, and as a reminder, personal exemptions have been eliminated through tax year 2025. In 2021, the standard deduction increases to $12,550 for individuals (up from $12,400 in 2020) and to $25,100 for married couples (up from $24,800 in 2020). In 2021, AMT exemption amounts increase to $73,600 for individuals (up from $72,900 in 2020) and $114,600 for married couples filing jointly (up from $113,400 in 2020). Also, the phaseout threshold increases to $523,600 ($1,047,200 for married filing jointly). Both the exemption and threshold amounts are indexed annually for inflation. "Kiddie Tax" For taxable years beginning in 2021, the amount that can be used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax," is $1,100. The same $1,100 amount is used to determine whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax." For example, one of the requirements for the parental election is that a child's gross income for 2021 must be more than $1,100 but less than $11,000. Health Savings Accounts (HSAs) Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return. A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care. For calendar year 2021, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $7,000 for self-only coverage and $14,000 for family coverage. Medical Savings Accounts (MSAs) There are two types of Medical Savings Accounts (MSAs): The Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high-deductible health plan (HDHP). Self-only coverage. For taxable years beginning in 2021, the term "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,400 ($2,350 in 2020) and not more than $3,600 (up $50 from 2020), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,800 (up $50 from 2020). Family coverage. For taxable years beginning in 2021, the term "high deductible health plan" means, for family coverage, a health plan that has an annual deductible that is not less than $4,800 and not more than $7,150, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,750. AGI Limit for Deductible Medical Expenses In 2021, the deduction threshold for deductible medical expenses is 7.5 percent of adjusted gross income (AGI), made permanent by the Consolidated Appropriations Act, 2021. Eligible Long-Term Care Premiums Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2021, the limitation is $450. Persons more than 40 but not more than 50 can deduct $850. Those more than 50 but not more than 60 can deduct $1,690 while individuals more than 60 but not more than 70 can deduct $4,520. The maximum deduction is $5,640 and applies to anyone more than 70 years of age. Medicare Taxes The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly) remains in effect for 2021, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the tax. For 2021, the foreign earned income exclusion amount is $108,700 up from $107,600 in 2020. Long-Term Capital Gains and Dividends In 2021 tax rates on capital gains and dividends remain the same as 2020 rates (0%, 15%, and a top rate of 20%); however, threshold amounts have increased: the maximum zero percent rate amounts are $40,400 for individuals and $80,800 for married filing jointly. For an individual taxpayer whose income is at or above $445,850 ($501,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $40,400 and below $445,850 for single filers). Estate and Gift Taxes For an estate of any decedent during calendar year 2021, the basic exclusion amount is $11.70 million, indexed for inflation (up from $11.58 million in 2020). The maximum tax rate remains at 40 percent. The annual exclusion for gifts remains at $15,000. Individuals - Tax Credits Adoption Credit In 2021, a non-refundable (only those individuals with tax liability will benefit) credit of up to $14,440 is available for qualified adoption expenses for each eligible child. For tax year 2021, the maximum Earned Income Tax Credit (EITC) for low and moderate-income workers and working families rises to $6,728 up from $6,660 in 2020. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children. For tax years 2020 through 2025, the child tax credit is $2,000 per child. The refundable portion of the credit is $1,400 so that even if taxpayers do not owe any tax, they can still claim the credit. A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older). Child and Dependent Care Tax Credit The Child and Dependent Care Tax Credit also remained under tax reform. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2021. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable. Individuals - Education American Opportunity Tax Credit and Lifetime Learning Credit The maximum credit is $2,500 per student for the American Opportunity Tax Credit. The Lifetime Learning Credit remains at $2,000 per return. To claim the full credit for either, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). Prior to the passage of the Consolidated Appropriations Act, 2021, taxpayers with MAGI of $139,000 (joint filers) or $69,500 (single filers) were not able to claim the Lifetime Learning Credit. While the phaseout limits for Lifetime Learning Credit increased, taxpayers should note that the qualified tuition and expenses deduction has been repealed starting in 2021. Interest on Educational Loans In 2021, the maximum deduction for interest paid on student loans is $2,500. The deduction begins to be phased out for higher-income taxpayers with modified adjusted gross income of more than $70,000 ($140,000 for joint filers) and is completely eliminated for taxpayers with modified adjusted gross income of $85,000 ($170,000 joint filers). Individuals - Retirement The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains at $19,500. Contribution limits for SIMPLE plans also remain at $13,500. The maximum compensation used to determine contributions increases to $290,000 (up from $285,000 in 2020). Income Phase-out Ranges The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $66,000 and $76,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $105,000 to $125,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple's modified AGI is between $198,000 and $208,000. The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $13999,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000. Saver's Credit In 2021, the AGI limit for the Saver's Credit (also known as the Retirement Savings Contribution Credit) for low and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000 in 2020; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500 in 2020. Standard Mileage Rates In 2021, the rate for business miles driven is 56 cents per mile, down one half of a cent from the rate for 2020. Section 179 Expensing In 2021, the Section 179 expense deduction increases to a maximum deduction of $1,050,000 of the first $2,620,000 of qualifying equipment placed in service during the current tax year. This amount is indexed to inflation for tax years after 2018. The deduction was enhanced under the TCJA to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems. Also, of note is that costs associated with the purchase of any sport utility vehicle, treated as a Section 179 expense, cannot exceed $26,200. Bonus Depreciation Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and years beyond. Qualified Business Income Deduction Eligible taxpayers are able to deduct up to 20 percent of certain business income from qualified domestic businesses, as well as certain dividends. To qualify for the deduction business income must not exceed a certain dollar amount. In 2021, these threshold amounts are $164,900 for single and head of household filers and $329,800 for married taxpayers filing joint returns. Research & Development Tax Credit Starting in 2018, businesses with less than $50 million in gross receipts can use this credit to offset alternative minimum tax. Certain start-up businesses that might not have any income tax liability will be able to offset payroll taxes with the credit as well. Work Opportunity Tax Credit (WOTC) Extended through 2025 (The Consolidated Appropriations Act, 2021), the Work Opportunity Tax Credit is available for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Employee Health Insurance Expenses For taxable years beginning in 2021, the dollar amount of average wages is $27,800 ($27,600 in 2020). This amount is used for limiting the small employer health insurance credit and for determining who is an eligible small employer for purposes of the credit. Business Meals and Entertainment Expenses Taxpayers who incur food and beverage expenses associated with operating a trade or business are able to deduct 100 percent (50 percent for tax years 2018-2020) of these expenses for tax years 2021 and 2022 (The Consolidated Appropriations Act, 2021) as long as the meal is provided by a restaurant. Employer-provided Transportation Fringe Benefits If you provide transportation fringe benefits to your employees in 2021, the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $270. The monthly limitation for qualified parking is $270. While this checklist outlines important tax changes for 2021, additional changes in tax law are likely to arise during the year ahead. Don't hesitate to call if you have any questions or want to get a head start on tax planning for the year ahead. Starting in January 2021, the IRS Identity Protection PIN Opt-In Program will be expanded to all taxpayers who can properly verify their identity. Previously, IP PINs were only available to identity theft victims. What is an Identity Protection PIN? An identity protection personal identification number (IP PIN) is a six-digit number assigned to eligible taxpayers to help prevent their Social Security number from being used to file fraudulent federal income tax returns. This number helps the IRS verify a taxpayer's identity and accept their tax return. Taxpayers with either a Social Security Number or Individual Tax Identification Number who can verify their identity are eligible for the program and the number is valid for one year. Each January, the taxpayer must get a new one. How to get an IP PIN The preferred method of obtaining an IP PIN - and the only one that immediately reveals the PIN to the taxpayer - is the Get an IP PIN tool located on the IRS website. The tool is available starting mid-January 2021 and uses Secure Access authentication to verify a person's identity. If someone is unable to pass the Secure Access authentication, there are two alternate ways to get an IP PIN. Taxpayers with income of $72,000 or less should complete Form 15227,Application for an Identity Protection Personal Identification Number, and mail or fax it to the IRS. An IRS employee will call the taxpayer to verify their identity using a series of questions. Those who pass authentication will receive an IP PIN the following tax year. Taxpayers who cannot verify their identities remotely or who are ineligible to file Form 15277 should make an appointment for in-person identity verification at an IRS Taxpayer Assistance Center and bring two forms of picture identification. After the taxpayer passes authentication, an IP PIN will be mailed to them within three weeks. What else taxpayers need to know before applying: The IP PIN must be entered correctly on electronic and paper tax returns to avoid rejections and delays. Any primary or secondary taxpayer or dependent can get an IP PIN if they can prove their identity. Taxpayers who want to voluntarily opt into the IP PIN program don't need to file a Form 14039, Identity Theft Affidavit. The IRS plans to offer an opt-out feature to the IP PIN program in 2022. Confirmed victims of tax-related identity theft For confirmed victims of tax-related identity theft, there is no change in the IP PIN Program. These taxpayers should still file a Form 14039,Identity Theft Affidavit if their e-filed tax return is rejected because of a duplicate SSN filing. The IRS will investigate their case and once the fraudulent tax return is removed from their account, they will automatically receive an IP PIN by mail at the start of the next calendar year. IP PINs will be mailed annually to confirmed victims and participants enrolled before 2019. For security reasons, confirmed identity theft victims can't opt-out of the IP PIN program. Confirmed victims also can use the IRS Get an IP PIN tool to retrieve lost IP PINs assigned to them. As a reminder, taxpayers should never share their IP PIN with anyone but their tax provider. The IRS will never call to request the taxpayer's IP PIN, and taxpayers must be alert to potential IP PIN scams. If you have any questions about the IP PIN, don't hesitate to call. Creditors keep their evaluation standards secret, making it difficult to know just how to improve your credit rating. Nonetheless, it is still important to understand the factors that determine creditworthiness. Periodically reviewing your credit report can also help you protect your credit rating from fraud - and you from identity theft. Credit Evaluation Factors Many factors are used in determining credit decisions. Here are some of them: Payment history/late payments Charge-offs (Forgiven debt) Closed accounts and inactive accounts Recent loans Cosigning an account Debt/income ratios Obtaining Your Credit Reports Credit reports are records of consumers' bill-paying habits but do not include FICO credit scores. Also referred to as credit records, credit files, and credit histories, they are collected, stored, and sold by three credit bureaus, Experian, Equifax, and TransUnion. The Fair Credit Reporting Act (FCRA) requires that each of the three credit bureaus provides you with a free copy of your credit report, at your request, every 12 months. If you have been denied credit or believe you've been denied employment or insurance because of your credit report, you can request that the credit bureau involved provide you with a free copy of your credit report - but you must request it within 60 days of receiving the notification. You can check your credit report three times a year for free by requesting a credit report from a different agency every four months. This federal law was passed in 1970 to give consumers easier access to, and more information about, their credit files. The FCRA gives you the right to find out the information in your credit file, to dispute information you believe inaccurate or incomplete, and to find out who has seen your credit report in the past six months. Credit reports contain symbols and codes that are abstract to the average consumer. Every credit bureau report also includes a key that explains each code. Some of these keys decipher the information, but others just cause more confusion. Read your report carefully, making a note of anything you do not understand. The credit bureau is required by law to provide trained personnel to explain it to you. If accounts are identified by code number, or if there is a creditor listed on the report that you do not recognize, ask the credit bureau to supply you with the name and location of the creditor so you can ascertain if you do indeed hold an account with that creditor. If the report includes accounts that you do not believe are yours, it is extremely important to find out why they are listed on your report. It is possible they are the accounts of a relative or someone with a name similar to yours. Less likely, but more importantly, someone may have used your credit information to apply for credit in your name. This type of fraud can cause a great deal of damage to your credit report, so investigate the unknown account as thoroughly as possible. In light of numerous credit card and other breaches, it is recommended that you conduct an annual review of your credit report. You must understand every piece of information on your credit report so that you can identify possible errors or omissions. Disputing Errors The Fair Credit Reporting Act (FCRA) protects consumers in the case of inaccurate or incomplete information in credit files. The FCRA requires credit bureaus to investigate and correct any errors in your file. If you find any incorrect or incomplete information in your file, write to the credit bureau and ask them to investigate the information. Under the FCRA, they have about thirty days to contact the creditor and find out whether the information is correct. If not, it will be deleted. Be aware that credit bureaus are not obligated to include all of your credit accounts in your report. If, for example, the credit union that holds your credit card account is not a paying subscriber of the credit bureau, the bureau is not obligated to add that reference to your file. Some may do so, however, for a small fee. If you need help obtaining your credit reports or need assistance in understanding what your credit report means, don't hesitate to call. The Consolidated Appropriations Act, 2021, H.R. 133 included funding for the government, extensions for expiring tax extenders, tax relief under the COVID-related Tax Relief Act of 2020, and many more items. Passed by both the House and Senate, it was signed into law by President Trump on December 27, 2020. Let's take a look at a few of the highlights related to pandemic taxpayer relief under the COVID-Related Tax Relief Act of 2020: Economic impact payments. $600 per taxpayer ($1,200 for married taxpayers filing jointly) and an additional $600 per qualifying child (under age 17). The recovery rebate payment begins to phase out starting at $75,000 of modified adjusted gross income for single filers, $112,500 for heads of household, and $150,000 for married taxpayers filing jointly. These payments are similar to the ones many taxpayers received earlier this year under the CARES Act. Unemployment benefits. Additional unemployment insurance in the amount of $300 has been extended for an 11-week period beginning from December 26, 2020. Educator expenses. Clarification that Personal Protective Equipment (PPE) used for the prevention and spread of COVID-19 will be treated as a deductible expense, retroactive to March 12, 2020. Charitable contributions - Nonitemizers. The $300 above-the-line deduction for cash contributions given to a qualified charitable organization is extended through 2021 and increases to $600 for married taxpayers filing joint returns. In 2020, the maximum amount was $300. Charitable contributions - Itemizers. The increased contribution limit to qualified charities that was specified in the CARES Act is extended through 2021 and applies to individuals and corporations. Amounts of up to 100 percent of adjusted gross income (AGI) are allowed as deductions (same as 2020). In 2019, the limit for the deduction for cash contributions was 60% of AGI. Earned Income. For the 2020 tax year, taxpayers may use earned income amounts from the immediately preceding tax year when figuring the Earned Income Tax Credit and the Additional Child Tax Credit. Flexible spending arrangements. Taxpayers can rollover unused amounts from 2020 to 2021 and from 2021 to 2022 and employers may allow employees to make a contribution change mid-year in 2021. Money purchase pension plans. The COVID-related Tax Relief Act of 2020 also allows money purchase pension plans to be included as a qualified retirement plan, retroactive to the CARES Act. The CARES Act allowed taxpayers to make penalty-free withdrawals of up to $100,000 from certain retirement plans for coronavirus-related expenses, with the option to pay tax on that income over a three-year period or recontribute withdrawn funds. Paycheck Protection Program (PPP) Loans. Retroactive to the effective date of the CARES Act, PPP loans that are forgiven will be treated as tax-exempt income. Gross income does not include loan forgiveness for Economic Injury Recovery Loans (EIDLs) and certain other loans or loan repayment assistance. Under the CARES Act, taxpayers receiving an EIDL were required to reduce any PPP loan forgiveness by the amount of the EIDL. In addition, businesses with 300 or fewer employees with a gross revenue loss of 25 percent in any quarter of 2020 compared to the same quarter in 2019 are eligible for a second round of PPP loans. Deductible expenses. Deductions are also allowed for deductible expenses (that would otherwise be deductible) paid for with the proceeds of a forgiven PPP loan. This reverses earlier IRS guidance that stated no deduction would be allowed. This tax provision applies to the second round of PPP loans as well. Payroll tax credits. Refundable payroll tax credits for paid sick and family (Families First Coronavirus Response Act) leave are extended through March 2021. Employers are not required to provide paid leave after December 31, 2020; however, employers may still claim the credit if the employee would have qualified for paid leave if the mandate had been extended beyond December 31, 2020, and the employer provides paid leave. Employee retention tax credits. Implemented as a refundable credit under the CARES Act, the employee retention tax credit (ERTC) is extended through June 30, 2021. The following also applies for calendar quarters beginning after December 31, 2020: The credit rate is increased from 50 to 70 percent of qualified wages. The limit on per-employee creditable wages is increased from $10,000 for the year to $10,000 for each quarter. The required reduction in a year-over-year decline in gross receipts on a quarterly basis is reduced from 50 to 20 percent. When determining the relevant wage base, the definition of a "large employer" that can only claim the credit for employees that are not working because of the COVID pandemic increases from more than 100 to more than 500 employees. Certain government employers are now allowed to claim the ERTC. Safe harbor allowing employers to use prior-quarter gross receipts to figure eligibility. New employers in 2020 (i.e., those not in existence in 2019) can claim the credit. Furthermore and retroactive to the date of the CARES Act, the ERTC is expanded to allow employers who receive PPP loans to qualify for the credit with respect to wages that are not paid with forgiven PPP proceeds. It also clarifies that group health plan expenses can be considered qualified wages even if no other wages are paid to an employee. Employee portion of payroll tax deferral. The repayment period for deferral of payroll tax is extended through December 31, 2021. Starting January 1, 2021, the standard mileage rates for the use of a car, van, pickup, or panel truck are as follows: 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020 16 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, down 1 cent from the rate for 2020, and 14 cents per mile driven in service of charitable organizations. The charitable rate is set by statute and remains unchanged. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law. Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates. Before tax reform, these optional standard mileage rates were used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. However, it is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station. Taxpayers can use the standard mileage rate but must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles. Typically, if the standard mileage rate is chosen, then leased vehicles must use the standard mileage rate method for the entire lease period (including renewals). Due to the COVID-19 pandemic, however, the IRS is allowing employers to switch from the vehicle lease valuation method to the cents-per-mile method (56 cents for 2021 and 57.5 cents for 2020) when determining the value of an employee's personal use of a vehicle during the pandemic, and is effective as of March 13, 2020. If you have any questions about standard mileage rates or which driving activities you should keep track of as the new tax year begins, do not hesitate to contact the office. An excise tax is a tax that is generally imposed on the sale of specific goods or services, or on certain uses. Examples of things a federal excise tax is usually imposed on include the sale of fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, and tobacco, as well as other goods and services. Excise taxes are imposed on a wide variety of goods, services and activities and may be imposed at the time of: Sale by the manufacturer Sale by the retailer Use by the manufacturer or consumer Many excise taxes go into trust funds for projects related to the taxed product or service, such as highway and airport improvements. Excise taxes are independent of income taxes. Often, the retailer, manufacturer or importer must pay the excise tax to the IRS and file the Form 720. They may pass the cost of the excise tax on to the buyer. Some excise taxes are collected by a third party. The third party then sends the tax to the IRS and files the Form 720. For example, the tax on an airline ticket generally is paid by the purchaser and collected by the airline. Businesses must file the form for each quarter of the calendar year. Here are the due dates: Quarter 1 – January, February, March: deadline, April 30 Quarter 2 – April, May, June: deadline, July 31 Quarter 3 – July, August, September: deadline, Oct. 31 Quarter 4 – October, November, December: deadline, Jan. 31 If the due date for filing a return falls on a Saturday, Sunday or legal holiday, the due date is the next business day. Businesses that are subject to excise tax generally must file a Form 720, Quarterly Federal Excise Tax Return to report this tax to the IRS. The IRS does accept paper excise tax returns; however, electronic filing is strongly encouraged, when possible. To make this process easier for taxpayers, the contact information for all approved e-file transmitters of excise forms is listed on IRS.gov. Businesses can submit forms online 24 hours a day. When businesses e-file, they get confirmation that the IRS received their form. Also, e-filing reduces processing time and errors. To electronically file, business taxpayers will have to pay the provider's fee for online submission. Excise tax forms available for electronic filing are: Form 720, Quarterly Federal Excise Tax. Form 2290, Heavy Highway Vehicle Use Tax. Form 8849, Claim for Refund of Excise Taxes, Schedules 1, 2, 3, 5, 6 and 8. Please call the office if you have any questions or would like more information about federal or state excise taxes. Starting December 13, 2020, the IRS began masking sensitive data on business tax transcripts. Previously, only sensitive data on individual tax transcripts was masked. Here's what you need to know about this new initiative to protect business taxpayers from identity theft: What is a tax transcript? A tax transcript is a summary of a tax return and is often used by tax professionals to prepare prior year tax returns or when representing a client before the IRS. Lenders and others use tax transcripts for income verification purposes. What is visible on the new tax transcript? Last four digits of any Employer Identification Number listed on the transcript: XX-XXX1234 Last four digits of any Social Security number or Individual Tax Identification Number listed on the transcript: XXX-XX-1234 Last four digits of any account or telephone number First four characters of the first, and last name for any individual (first three characters if the name has only four letters) First four characters of any name on the business name line First six characters of the street address, including spaces All money amounts, including wage and income, balance due, interest and penalties Customer File Number For both the individual and business tax transcript, there is space for a Customer File Number. The Customer File Number is an optional 10-digit number that can be created usually by third parties that allow them to match a transcript to a taxpayer. The Customer File Number field will appear on the transcript when that number is entered on Line 5 of Form 4506-T, Request for Transcript of Tax Return, and Form 4506T-EZ. What happens when a taxpayer seeks to verify income for a lender? The lender will assign a 10-digit number, for example, a loan number, to Form 4506-T. The Form 4506-T may be signed and submitted by the taxpayer or signed by the taxpayer and submitted by the lender. The Customer File Number assigned by the requestor on Form 4506-T will populate on the transcript. The requestor may assign any number except the taxpayer's Social Security number or Employer Identification Number. Once received by the requester, the transcript's Customer File Number serves as the tracking number to match it to the taxpayer. If you have any questions or need more information about this topic, please contact the office. Prior to tax reform, an employee was able to deduct unreimbursed job expenses, along with certain other miscellaneous expenses, that was more than two percent of adjusted gross income (AGI) as long as they itemized instead of taking the standard deduction. Starting in 2018, however, most taxpayers can no longer claim unreimbursed employee expenses as miscellaneous itemized deductions unless they are a qualified employee or an eligible educator. No other type of employee is eligible to claim a deduction for unreimbursed employee expenses. In other words, employee business expenses can be deducted as an adjustment to income only for eligible educators and specific employment categories such as: Armed Forces reservists Qualified performing artists Fee-basis state or local government officials Employees with impairment-related work expenses Qualified Expenses A qualified expense is one that is: Paid or billed during the tax year Used for carrying on a trade or business of being an employee, and Ordinary and necessary Nondeductible Expenses Taxpayers should also know there are nondeductible expenses as well. Examples of nondeductible expenses include club dues, commuting expenses, fees and licenses, such as car licenses, lunches with co-workers, meals while working late, expenses to improve professional reputation, and capital expenses. A full list of nondeductible expenses can be found in Publication 529, Miscellaneous Deductions. Please call if you have any questions. Tackling any new piece of software can be daunting. Add a complex process like accounting to the mix, as QuickBooks does, and you may feel apprehensive about your ability to learn how to use it. But QuickBooks was designed for small business people, not for accountants or technical wizards. It uses familiar language and forms, and it works like other Windows programs. That doesn't mean, though, that you'll be able to just jump in and start completing your accounting tasks. Once you've created your company file, here are five steps to familiarize yourself with QuickBooks to get the software up and running in no time. Of course, if you need help creating a company file, don't hesitate to call. 1. Open a sample file. While you're exploring QuickBooks, it's a good idea to work with a sample file. That way, you can look around and practice without risking compromising your company file. You'll be able to see how completed records and transactions should look and try your hand at entering sample data of your own. Figure 1: QuickBooks comes with sample files that allow you to practice entering data without harming your own company file. Before you open a sample file, you'll need to close your current company. Click on File in the upper left to open that menu and then select Close Company. A window will open that should have your company file in its list. Below that, you'll see three boxes containing different options. Click on the down arrow next to Open a sample file, as pictured above (this may look slightly different in your version). Choose the one you want to open and click on it. QuickBooks will load again with that file open. When you're done looking at the sample file, go to File | Close Company again. The No Company Open window should appear again. Click on your company file name and then on Open to return to your file. 2. Learn where your lists are. You'll be storing a great deal of information in lists. QuickBooks maintains these automatically sometimes when you enter information in a record or transaction. For example, when you create a record for a product or service you sell, it goes into a master list that you can access by opening the Lists menu at the top of the screen and clicking on Item List. You'll also open the Lists menu when you want to add options to an existing type of list, like Class List (QuickBooks allows you to assign Classes to transactions so you can group related information, like New Construction or Remodel if you're a contractor). Figure 2: You'll sometimes select from lists of commands in QuickBooks. This is the menu for the Item List. 3. Try a Transaction. There are two transactions you'll probably be using the most: invoices and sales receipts. QuickBooks comes with templates that resemble these sales forms' paper counterparts. You simply fill in the blanks by entering data and selecting options from drop-down lists. Open the Customers menu and select Create Invoices. Click the back arrow above Find in the upper left corner to see sample invoices. Then click the right arrow to get back to a blank form and create an invoice by clicking the down arrows in blank fields to see your sample lists. 4. Explore Snapshots. Once you start entering records and transactions, you'll want to be able to access that information in ways that provide insight into how your company is doing. You'll eventually start running reports in QuickBooks, but the software also accomplishes this through its Snapshots. There are three of them, and they all provide these overviews by using data tables and charts. Open the Company menu and click on Company Snapshot, then click the tabs to move between Company, Payments, and Customer. You'll learn how QuickBooks provides real-time information about your finances. 5. Look at the Income Tracker. It's easy to see the status of your invoices (and estimates) in QuickBooks. Open the Customers menu and select Income Tracker. Colored bars at the top of the screen show you what's outstanding and what's been paid. A list of the related transactions appears below these bars. Figure 3: This partial view of the Income Tracker tells you how much money is tied up in unbilled Time & Expenses and unpaid Invoices. QuickBooks can be overwhelming when you first start to use it, but a QuickBooks professional can help you ease the transition through training. If you need assistance transferring your existing accounting information to the software or have any questions about QuickBooks software, don't hesitate to call. Stay healthy and best wishes for a more prosperous 2021. Tax Due Dates for January 2021 During January All employers - Give your employees their copies of Form W-2 for 2020 by February 1, 2021. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting. Employees - who work for tips. If you received $20 or more in tips during December 2020, report them to your employer. You can use Form 4070, Employee's Report of Tips to Employer. Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2020. Individuals - Make a payment of your estimated tax for 2020 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2020 estimated tax. However, you do not have to make this payment if you file your 2020 return (Form 1040 or Form 1040-SR) and pay any tax due by February 1, 2021. Employers - Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2020. Farmers and Fisherman - Pay your estimated tax for 2020 using Form 1040-ES. You have until April 15 to file your 2020 income tax return (Form 1040 or Form 1040-SR). If you do not pay your estimated tax by January 15, you must file your 2020 return and pay any tax due by March 1, 2021, to avoid an estimated tax penalty. Employers - Give your employees their copies of Form W-2 for 2020. If an employee agreed to receive Form W-2 electronically, have it posted on a website and notify the employee of the posting. File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2020. Employers - Federal unemployment tax. File Form 940 for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 10 to file the return. Farm Employers - File Form 943 to report social security and Medicare taxes and withheld income tax for 2020. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return. Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2020. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2020 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 10 to file the return. Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2020. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2020 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return. Payers of Gambling Winnings - If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G. Payers of nonemployee compensation - File Form 1099-NEC for nonemployee compensation paid in 2020. Businesses - Give annual information statements to recipients of certain payments made during 2020. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date only applies to certain types of payments. Individuals - who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040 or Form 1040-SR) for 2020 by February 1. Filing your return and paying any tax due by February 1, 2021, prevents any penalty for late payment of the last installment. If you cannot file and pay your tax by February 1, file and pay your tax by April 15. Copyright © 2021 All materials contained in this document are protected by U.S. and international copyright laws. All other trade names, trademarks, registered trademarks and service marks are the property of their respective owners.

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professional_accounting

Deducting losses after an S corporation terminates Editor: Linda Markwood, CPA S Corporation Income Taxation Election, Termination & Conversion Generally, unused losses caused by lack of basis are not available after the S corporation election terminates. However, a special relief provision allows a shareholder to deduct those losses under certain conditions for one year (or more) during the post-termination transition period (PTTP). Also, the corporation can make nontaxable cash distributions to the extent of the accumulated adjustments account (AAA), limited to the amount of stock basis. The PTTP is: The period beginning on the day after the last day of the corporation's last S corporation tax year and ending on the later of— One year after the last day, or The due date, including extensions, of that last year's tax return; The 120-day period beginning on the date of a determination that the corporation's S election had terminated for a previous tax year; and The 120-day period beginning on the date of any determination pursuant to an IRS audit occurring after the termination of the S election, if an S corporation item of income, loss, or deduction is adjusted (Sec. 1377(b)). Per Sec. 1377(b)(2), "determination" means (1) a Tax Court decision or a judgment, decree, or other order by any court that has become final; (2) a closing agreement; or (3) an agreement between the corporation and the IRS that the corporation failed to qualify as an S corporation. While the date that a court decision becomes "final" has not been clarified by the IRS, it presumably is the date after which the decision can no longer be modified or appealed. The PTTP applies when the S ­election terminates, regardless of whether the termination occurs voluntarily because the corporation revokes its S election or involuntarily (e.g., an ineligible shareholder acquires stock in the corporation). Measurement of the PTTP is illustrated in the following examples. Example 1. Measuring the PTTP by the due date of the tax return: A calendar-year S corporation involuntarily terminates its S election on April 10, 2019. The final S corporation tax return (Form 1120S, U.S. Income Tax Return for an S Corporation) is due on March 15, 2020, but can be extended to Sept. 15. Assuming the corporation extends the due date of the return, the PTTP will begin on April 10, 2019, and end on Sept. 15, 2020 (even if the return is filed prior to Sept. 15). Example 2. Measuring the PTTP by the expiration of one year after the S election terminates: A calendar-year S corporation voluntarily terminates its S election on Nov. 10, 2019. The final S corporation tax return is due on March 15, 2020, but can be extended to Sept. 15. The PTTP will begin on Nov. 10, 2019, and end on Nov. 9, 2020. Example 3. Measuring the PTTP when the corporation is audited: J is the sole shareholder in K Corp., an S corporation. K Corp. voluntarily revokes its S election on Dec. 31, 2017, when the AAA balance is $25,000 and J's stock basis is $32,000. J withdraws $25,000 in cash from the corporation on March 15, 2018. Since the withdrawal is made during the PTTP, it is a distribution of AAA and reduces the AAA to zero and J's stock basis to $7,000. On Feb. 3, 2019, the IRS begins an audit of K Corp.'s prior returns. The auditor finds the S corporation's depreciation deduction was overstated by $5,000. On March 18, 2019, J signs a closing agreement showing an assessment of additional tax on a prior Form 1040, U.S. Individual Income Tax Return, because of the error on K Corp.'s return. J's stock basis and the AAA will increase by the additional income, $5,000, and J can withdraw the AAA in cash tax-free if the withdrawal is made by July 15, 2019 (i.e., the end of the 120-day PTTP that begins on March 18, 2019). Treating losses as incurred on the last day of the PTTP Losses that have not been used when the S election terminates are treated as incurred on the last day of the PTTP. Thus, the shareholder can increase stock basis by making contributions to capital during the PTTP, and losses can be deducted against this additional basis. However, losses suspended on the date the S election ends can be deducted only to the extent of the shareholders' stock basis, as determined at the close of the last day of the PTTP (Sec. 1366(d)(3); Regs. Sec. 1.1366-2(b)). Increasing debt basis during that period does not allow the deduction of losses. Unused losses cannot be deducted after the end of the PTTP. Caution: Losses that are unused at the date the S election terminates are considered to be incurred on the last day of the PTTP, and shareholder basis is determined at the close of that day. Thus, the use of suspended losses after the S corporation has terminated its S status is available only to those shareholders remaining at the close of the PTTP. Example 4. Deducting losses during the PTTP: J is the sole shareholder of a calendar-year S corporation. On Feb. 5, 2019, he sells 75% of his stock to a partnership, causing the immediate termination of the S election. On Dec. 31, 2018, J had a $5,000 suspended passthrough loss attributable to his stock basis. The corporation incurred an additional $3,000 loss from Jan. 1 through Feb. 4, resulting in a suspended passthrough loss of $8,000 due to lack of basis on the date the S status terminated. J has until March 15, 2020, (the due date of the final S corporation return) to inject $8,000 of capital to deduct the $8,000 suspended passthrough loss (Sec. 1377(b)(1)(A)). If the due date of the corporate tax return is extended, J will have until the extended due date to contribute the additional capital. Example 5. Timing loss deductions by using the PTTP: On Dec. 1, the tax practitioner projects that V Co., a calendar-year S corporation, will have a loss of approximately $25,000 for the current year. W, the sole shareholder, materially participates in the operations of the corporation. Before considering the expected loss, he has $2,000 in stock basis. On Jan. 1 of the next year, W will sell a portion of his stock to a nonqualified shareholder. Consequently, the S corporation election will terminate as of Dec. 31, the day before the disqualifying event takes place. W believes the corporation at some point will become profitable again, and he wants to make a loan to the corporation to provide working capital. He feels that his personal income will be greater in the following year and that the loss may be more valuable then. W can take the loss in either year, depending on when his basis increases. He can increase his stock or debt basis before Dec. 31 and deduct the loss in the current year. If he waits until the termination is effective, he can increase his stock basis during the subsequent year and deduct the loss in the following year (i.e., at the end of the PTTP). Methods of increasing stock basis during the PTTP A shareholder may increase stock basis during the PTTP by making capital contributions to the corporation or ­purchasing stock in the corporation (see Field Service Advice 200207015). Also, stock basis is increased if the shareholder is allocated additional passthrough income from the S corporation due to an IRS audit. At-risk losses Losses of an S corporation suspended under the at-risk rules of Sec. 465 are carried forward to the S corporation's PTTP. The losses can be deducted at the end of the PTTP to the extent stock basis and at-risk limits increase by capital contributions during the PTTP (Sec. 1366(d)(3)). This case study has been adapted from PPC's Tax Planning Guide: S Corporations, 33d edition (March 2019), by Andrew R. Biebl, Gregory B. McKeen, and George M. Carefoot. Published by Thomson Reuters, Carrollton, Texas, 2018 (800-431-9025; tax.thomsonreuters.com). Linda Markwood, CPA, is an executive editor with Thomson Reuters Checkpoint. For more information about this column, contact [email protected].

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professional_accounting

Tagged: Capabilities Toggle Comment Threads | Keyboard Shortcuts @fintechna 12:18 pm on March 22, 2018 Permalink | Reply Tags: banking ( 207 ), Capabilities, Deal ( 17 ), Enhances, Mulesoft, Open ( 62 ), salesforce ( 3 ), technology ( 854 ) Salesforce Enhances Open Banking Capabilities with Mulesoft Deal The acquisition of software provider #Mulesoft by financial #technology provider #Salesforce will go a long way towards opening the #banking ecosystem in the United States, as Salesforce integrates the former’s API #capabilities into its platform. The acquisition, with a potential $ 6.5 billion value, will give Salesforce the ability to use Mulesoft’s API integration engine, which …Read More @fintechna 12:18 pm on September 28, 2017 Permalink | Reply Tags: account ( 7 ), Added, Capabilities, fintech ( 1,093 ), Health ( 9 ), investment ( 35 ), Kind ( 4 ), Lively, savings ( 8 ), Startup ( 73 ) A New Kind of Fintech: Why Health Savings Account Startup Lively Added Investment Capabilities EXCLUSIVE- #Health #Savings #Account #Startup, #Lively wants to be more than a HSA vehicle. Right now, more means giving its account holders the option to invest their HSA funds. Launched on March 1 this year, the company was started by two friends, Alex Cyriac, and Shobin Uralil, with the vision to help people manage their healthcare [&#8230;] @fintechna 3:35 pm on June 24, 2016 Permalink | Reply Tags: Audit ( 3 ), Auditing, bitcoin ( 241 ), Blockchain ( 836 ), Capabilities, fintech ( 1,093 ), Real ( 14 ), Revolution ( 8 ), technology ( 854 ), time ( 17 ), Within ( 4 ) Blockchain and the Auditing Revolution – Real Time Audit within the Capabilities of Blockchain #Auditing is the process of conducting an independent examination of an organization’s accounts, books and/or documents in order to determine whether the organization’s financial statements present a fair view of the business. It is based on a set of pre-determined guidelines, normally the International Accounting Standards, or GAAP (generally accepted accounting principles). Auditors themselves are normally independent third-party intermediaries who are employed to verify the accuracy of companies’ financial statements. Indeed, the financial statements themselves can be viewed as a summation of what happened in a company’s ledger throughout the accounting period. Ultimately, the auditor then decides that either the financial statements make sense, or they is a discrepancy between what the company’s management has provided and what the true numbers should be. Auditor and Client relationship Because the client is responsible for paying the auditor, an inherent bias emerges. This pecuniary relationship between auditor and client could tempt the auditor to provide a false (or rosier) assessment of its client&#8217;s accounts, for the chance of repeat business from the client at the end of the next accounting period. Moreover, the client may also present the auditor with false or exaggerated figures to inflate the company’s true value &#8211; this is known as ‘cooking the books’. Whether the auditor can detect this or not is largely immaterial – the fact that potential exists for compromising the accuracy of the financial statements at the expense of the public is of grave concern. This has significant implications for how internal and external parties &8211; including regulators &8211; perceive the quality of the auditing process. There have been high-profile cases where poor standards of auditing have been uncovered, and which have had significant consequences on the accounting industry. Enron is arguably the most high profile example. Arthur Andersen, the firm responsible for auditing Enron’s books since it started doing business in 1985, played a significant role in the scandal, particularly once it was revealed that the accountancy firm was guilty of obstructing justice by playing an influential part in the shredding of a huge number of incriminating documents just before the investigations commenced. The scandal was just one in a number of cases involving auditing incompetency where corporate accounts were misrepresented, including the UK’s Polly Peck International, Germany’s Metallgesellschaft, and Cendant Corp and Sunbeam Corp in the US. Indeed, by the #time Enron collapsed in early 2002, it was revealed that 700 US companies had to restate accounts in the previous 4 years alone. The collapse of Enron The fall of Andersen highlighted the pressure on accountancy firms to boost profits, while the company itself compromised the integrity of the auditor’s role as an independent third-party by making partners effectively become salespeople. This made auditors agenda-driven, as they began empathising more with their clients, and in doing so, destroyed the auditor’s dual function of servicing its clients but also equally looking out for the public interest. Indeed, the basis for many auditing failures since then has been the questionable business relationship between auditor and client, which has generated much conflict of interest. Instead of a company’s auditors being appointed independently by shareholders, many were chosen by the company&8217;s internal management, or even worse, they were hired to senior management positions, often with the intention of saving costs. Perhaps in the wake of the Enron scandal, the biggest fallout experienced by the global auditing industry was the loss in public trust. Auditors are trusted upon to issue their opinion as accurately as possible, while the public also trusts that the company has not tried to cook the books. According to Ellen Masterson, former global head of #audit methodology at PwC, moreover, the priority for client management was to reduce the cost of the audit, meaning that auditors were “pressured to do the minimum”. In the aftermath of Enron, the Sarbanes Oxley Act was implemented which required that top executives sign off on audits, fully in the knowledge that they would be held criminally responsible if the books had been cooked. Furthermore, auditors now have to report to an audit committee, which has widened the gap between a company’s management and the auditing firm. Audit-committee members can also be prosecuted by regulators for fraudulently influencing a company&8217;s auditors. While Sarbanes-Oxley has decisively improved the auditing process, there is still no guarantee that executives who sign off on audited accounts know for certain that what they are approving is 100% accurate. Auditing today, therefore, is still lumbered with such inefficiencies, remains based on ‘reasonable assurance’, and is broadly unchanged from what has been practised for decades, meaning that the process is now ripe for a new, innovative transformation. At present, each account (such as assets, revenues or liabilities) is viewed as a set of combined transactions, which produces a final balance at the end of the period. During the audit, the auditor will verify a certain number of these accounts with the trading parties and determine the accuracy of the balance using a sample of previous accounting entries. They may also, on occasion, speak to employees to detect whether ethical accounting practices have been followed or not. Trust – the auditors most expensive good Therefore, trust of the auditor and the company still remains at the core of the auditing process, and thus is still potentially subject to fraud and manipulation. Further still, there may very well be another auditor verifying the very same transactions at the other end. As such, the entire process remains inefficient, while the quality of the audit still largely depends on judgement calls by the auditor, meaning that it remains subject to accuracy disputes. Despite Sarbanes-Oxley, moreover, auditors still have the pressure of generating repeat business from clients, so the temptation to stray from objective analysis still exists. Some studies have even shown that firms are reporting downward pressure on audit fees due to clients questioning the value of audit services, especially given that they are now increasingly ‘commoditised’ as a result of being heavily regulated, and thus there is little differentiation among the services being offered by various auditors. Many believe that #blockchain could transform this process, in part because the #technology removes the need for auditing to depend on trust. Blockchain provides a globally distributed, decentralized ledger of which everyone has the exact same copy. Whereas auditing at present entails the confirmation of transactions and balances on a company’s accounting ledger at the end of the period, a transaction on the blockchain would provide a permanent and immutable record of the transaction almost immediately. In effect, blockchain allows the recording of the transaction to take place at the same time as the transaction itself. All that would be required at the time of the transaction would be for the two trading parties to compare accounting entries while maintaining data privacy. To ensure the data can’t be changed, digital signatures would be used, whereby companies would publish their keys to a public authority who would verify their identities. “The existence of digital signatures from both parties implies that the transaction data is agreed upon” explains Roger Willis, former member of Ernst & Young’s (EY) forensic data analytics and audit teams. Once posted to the blockchain, the transaction is time stamped and exists forever. As described by prominent #Bitcoin proponent and investor Trace Mayer, “Everyone agrees on consensus that those transactions actually happened, and boom you have that verification. You have the debit, the credit, and the confirmation by the network”. CPA at Xen Accounting, Ryan Lazanis believes that “everything that is on the books of the company and therefore everything comprising a company’s financial statements could occur on the blockchain”. If true, then the blockchain’s existence would not require the employment of a third-party auditor for verification purposes; instead, everything is recorded and verified in #real-time. The redundancy (or indeed, the wholesale elimination) of the auditor’s role, therefore, could transform the entire accounting industry. This would have a whole range of benefits. Charles Hoskinson, former CEO of revolutionary blockchain company Ethereum, for example, attests that because blockchain provides transaction histories that go back to their inception, the auditing process would be immune to manipulation, as “every single penny could be accounted for by this incorruptible entity”. And what are the big-4 doing today The ‘big four’ accounting firms – Deloitte, PWC, KPMG and EY &8211; are also investigating how blockchain can improve the auditing process. Deloitte, for example, is currently focused on developing automation for some of its audit processing. According to Deloitte Consulting principal Eric Piscini, the solution his company is developing will allow the company to post every transaction onto the blockchain in real-time. To audit the company then, Deloitte would simply look at the blockchain and all its transactions. There would be no need for external verification of the records “because the blockchain is immutable and time-stamped&#8221;. Piscini also believes that blockchain will make the auditing process quicker, cheaper and more transparent for regulators, thereby substantially improving accessibility. EY’s Willis agrees with this sentiment, suggesting that auditing all revenues and expenses for multiple companies could be conducted “in literally a split second because the companies are capturing, signing and agreeing all the data at the time of transaction”. This would ostensibly be good news for the Securities & Exchange Commission (SEC), who recently expressed the urgent need for a Consolidated Audit Trail (CAT), which would create a system that would enable the regulator to comprehensively track markets across various venues and systems, providing increased transparency and better access to critical data. Given the immutability and decentralized accessibility of blockchain, however, the access and accountability of the SEC’s audit trail could be wholly improved. As highlighted by McKinsey, “blockchains contain detailed and precise histories of asset movements, which has the additional benefit of being attractive to regulators”, suggesting that consolidated audit trails could very well use blockchains for the purposes of capital market transparency. The post Blockchain and the Auditing Revolution &8211; Real Time Audit within the Capabilities of Blockchain appeared first on Fintech Schweiz Digital Finance News – FintechNewsCH. Fintech Schweiz Digital Finance News – FintechNewsCH

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professional_accounting

Balance sheet presents the financial position of an entity by reporting assets, liabilities and stockholders’ equity. Balance sheet is also called as the statement of financial position. Income statement presents net income for a period by subtracting expenses from revenues. Under International Financial Reporting Standards (IFRS), the statement of profit or loss is equivalent to the income statement. Statement of cash flows reports the sources and uses of cash flows by operating, investing and financing activities. Statement of stockholders’ equity presents the changes in the components of stockholders’ equity during a period. Statement of comprehensive income reports which items affected the comprehensive income of an entity. Comprehensive income represents the change in stockholders’ equity, not including the equity investment by stockholders and the distributions to stockholders. Statement of comprehensive income begins with net income and lists the items classified as other comprehensive income (OCI). Other comprehensive income items affect stockholders’ equity, but not a revenue or an expense. Examples of other comprehensive income include the actuarial gains or losses in the defined benefit pension plans, effective portion of gains or losses on hedging instruments in the cash flow hedges, and unrealized holding gains or loss on the available for sale securities. Statement of comprehensive income and the income statement can be presented either as a combined statement or as two separate, but consecutive statements.

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professional_accounting

Blog & Press Releases Digital Solutions FAQ Review, Compilation & AUP Retirement Plan Audits Personal Tax Services Tax Services for Banks Not-for-Profit Tax Preparation Outsourced CFO QuickBooks ProAdvisor Retirement Plan Admin. Estate & Trust Planning & Admin. Fraud Investigation Family Legacy Services Health Care Organizations Non-Profit & Governmental Consulting for Nonprofit and Government Agencies Tax Preparation for Nonprofit Organizations Audit | Attest Services Vineyards and Breweries College & Entry Level Life @ YHB Client Collaboration Sign Up Grow Confidently Advice that helps achieve your goals Operating a successful nonprofit or government agency requires more than just adequate funding and good management. It takes the assistance of professionals who can advise you about ways to control costs and maximize the effectiveness of your financial and human resources. At Yount, Hyde & Barbour, we’re strongly committed to helping 501(c) nonprofit and governmental organizations carry out their missions and achieve their objectives. We realize that both of our organizations are part of the same community. So we treat you like a member of the YHB community and measure our success by how much we increase yours. We bring to our relationship the insight that comes from having worked with not-for-profits of all types and sizes for many years. This deep experience enables us to better understand your challenges, anticipate your needs and develop solutions that help move your organization ahead. We offer a wide array of consulting services aimed at helping your organization operate more efficiently and successfully, including assistance with: IT software selection and implementation Internal controls setup and review Management and benefits consulting Charitable trusts and donor-advised funds Obtaining and maintaining nonprofit status Protecting your organization against fraud Lease vs. purchase decisions Board governance and conflict of interest Policies, procedures and operational reviews Bond compliance Contact us when it’s time to move forward. Katrina Gochenour Audit & Attest Katrina graduated from the University of Virginia with an undergraduate degree in Accounting in May 2011 and graduated from James Madison University with her Masters of Science in Accounting in August 2012. Katrina joined YHB in January 2012 and became a licensed CPA in 2013. In 2015, Katrina was nominated and won an opportunity to be part of the Virginia Society of CPA’s Leadership Academy. This is an exclusive opportunity only given to a handful of CPA’s across Virginia. Since joining YHB, her career focus has been on nonprofit organizations such as private schools, colleges, foundations, religious organizations, museums, and other nonprofit entities. Her service to those organizations include audit and attest as well as tax services. Recent CPE includes the Not-for-Profit Conference held by the AICPA as well as the NFP Certificate Program I. Katrina has previously presented at YHB’s annual nonprofit symposium on the financing reporting standard updates for nonprofit organizations. She has also given a presentation on internal controls at a seminar hosted jointly by YHB and Evangelical Council for Financial Accountability. Katrina gives back to her local community by volunteering at a local healthcare facility where she assists the Activities Director with various activities for the residents. Tammy Ramsey Tammy graduated from West Liberty University with a Bachelor of Science in Accounting in December 2000. Tammy joined YHB in 2019 with over 17 years’ experience in both the public and private sector. Her industry expertise includes not-for-profits, government contracting and closely held entities. Her service to these industries includes audit and consulting services as well as internal control implementation. Andy Boyles Andy graduated with a Bachelor’s degree in Accounting in May 1999 from James Madison University. He has worked in public accounting his entire career at firms serving the Washington DC and Richmond metropolitan areas. His experience includes working with closely held businesses and organizations in a variety of industries including real estate and construction, transportation, nonprofit, and manufacturing. His experiences in these industries include working with businesses of all sizes in both the assurance and tax fields. He also has an in-depth understanding auditing employee benefit plans. Andy has presented on topics including Computer Assisted Audit Techniques for the annual “Virginia Society of CPA’s Audit and Accounting Conference” and been a guest speaker for several construction industry associations presenting on topics including understanding construction contractor financial statements and fraud issues for construction contractors. Andy has been honored in Virginia Business as a Super CPA in the Young CPAs category. He currently serves on the Executive Committee and is Treasurer of the nonprofit organization Rebuilding Together Richmond. He is a member of both the Associated Builders and Contractors Virginia Chapter and the Associated General Contractors of Virginia and currently is on the membership committee and young leader’s council for these organizations. Bachelor’s degree in Accounting in 1999 from James Madison University Jennifer Files CPA, CFE, CVA Jennifer joined Yount, Hyde & Barbour in 2003 and holds a B.S. degree in accounting from Robert Morris University. She is a member of numerous organizations within the community, including the American Institute of Certified Public Accountants, the Virginia Society of Certified Public Accountants, the Association of Certified Fraud Examiners, the National Association of Certified Valuators and Analysts and is also on the Special Review Committee of the Government Finance Officers Association. Throughout her career, she has worked on a variety of audit, tax, and consulting engagements for clients across many industries. She continues to lead our clients Single Audit compliance, Federal Acquisition Regulation (FAR) and governmental audit needs. Since discovering her passion for internal controls and fraud prevention, she has performed numerous forensic accounting and litigation support engagements, including conducting forensic analysis and investigation and interviews of witnesses and potential persons of interest. Working in conjunction with YHB’s niche specialists, she is able to assist with internal control, fraud and litigation support needs across various industries. She enjoys working with clients to identify deficiencies in their internal control environment, to find efficiencies in their processes, and to help clients defend and protect their bottom line. Jennifer specializes in the design and implementation of internal controls to help prevent fraud. Because of her specialized knowledge, Jennifer is often invited to speak to audiences regarding internal controls, fraud and forensic accounting. She has expanded her expertise by becoming a Certified Fraud Examiner (CFE) and Certified Valuation Analyst (CVA). Every client, every company, every control environment is unique. Jennifer takes the time to thoroughly understand her client’s needs and objectives. The result is a customized solution. No two businesses (or fraud cases) are alike, and for that reason, no two internal control structures should be either. [testimonial_rotator id=”6956″] Jacob Pendergraft Jacob graduated from Shenandoah University with a Bachelor’s degree in Business Administration (focus in accounting) in 2012 and a Masters of Business Administration in 2013. He became a licensed CPA in 2015. Jacob joined YHB in 2013. His career focus has been in the audit of construction, nonprofit and governmental organizations. INVOLVEMENT & MEMBERSHIPS Virginia Society of Certified Public Accountants (VSCPA) Virginia Government Finance Officer’s Association (VGFOA) Associated Builders and Contractors (ABC) Associated General Contractors (AGC Allison Shrader About Allison Allison joined YHB in 2015 after earning both her Bachelor of Business Administration in Accounting and Master of Science in Accounting from James Madison University. Allison completed her testing to become a Certified Public Accountant in 2016. During her time at YHB, Allison has focused on providing services to not-for-profits and closely held businesses, providing a range of audit and tax services. Allison is an active member in the Virginia Society of Certified Public Accountants (VSCPA), American Institute of Certified Public Accountants (AICPA) and the Top of Virginia Chamber of Commerce. Claire Manspile Claire graduated from West Virginia University with a Bachelor’s of Science degree in Accounting in 2009 and a Master of Professional Accountancy in 2010. She became a licensed CPA in 2012. Prior to joining YHB, Claire was an Audit Supervisor with Ernst & Young, LLP in Pittsburgh, Pennsylvania. She joined YHB in 2013. Her career focus has been in the audit of nonprofit and governmental organizations. Recent presentations include “Best Practices for Boards and Staff” at an event sponsored by Loudoun County Chamber of Commerce. Bachelor’s of Science in Accounting from West Virginia University in 2009 Master of Professional Accountancy from West Virginia University in 2010 Olivia Hutton Olivia began her accounting career at YHB in 1998, with a B.S. degree in business (major in accounting) from Bridgewater College and a Certificate in Nonprofit Management, sponsored by the University of Virginia. She is a member of the American Institute of Certified Public Accountants and the Virginia Society of Certified Public Accountants. Olivia focuses on providing financial reporting services to nonprofit organizations, especially private schools, colleges, universities, and foundations. In addition to conducting audits and reviews, she has helped clients prepare Form 990, 990-T and Form 990-PF informational returns. As a member of our Nonprofit and Governmental Services team, Olivia has been named a Super CPA by Virginia Business magazine in the nonprofit/governmental field as well as the “Young CPAs” field. Because she specializes in conducting audits for nonprofit organizations, Olivia has a thorough understanding of applicable regulations and audit standards. This expertise enables her to perform audits efficiently and issue accurate financial statements quickly after completing field work. In addition, she is very good at keeping lines of communication open and letting clients know about current developments in the industry and recently issued accounting standards. For Olivia, the key to efficient service is learning all she can about an organization and its needs. She meets with management to find out whether the nonprofit has endowments, restricted funds or other financial features that require special attention. In conducting an audit, Olivia lets a client know what types of information she will need, documents internal controls and provides a draft financial statement as soon as field work is completed, so the client can review it at the same time a YHB principal does. Form 990 at YHB Annual Not-for-Profit Symposium, Loudoun Chamber Not-for-Profit Academy, Nonprofit Education and Training Workshop, and for other various groups. Audit and Tax Update at Richmond Chapter of CPAs and YHB Annual Not-for-Profit Symposium. Good Governance at Nonprofit Education and Training Workshop, Virginia Foundation for Community College Education Conference, and Hampshire County Community Foundation New Accounting Standards at the YHB Annual Not-for-Profit Symposium “Top five things to know in managing a Not-for-Profit Organization” at Shenandoah Valley Nonprofit Alliance for Excellence Not-for-Profit Finance Fundamentals at Center for Nonprofit Excellence Finance Management at the Lord Fairfax Community College Academy Christopher L. Frye Tax & Advisory Services PPP Loan Forgiveness: Should I wait to apply? Chris joined Yount, Hyde and Barbour, P.C. in 2004 after graduating from Virginia Tech, where he earned a B.S. degree in accounting. He is a member of multiple committees, including the American Institute of Certified Public Accountants, the Virginia Society of Certified Public Accountants, the Associated Builders and Contractors, the ABC-VA, Management Education Committee, the Associated General Contractors (AGC) and the Construction Industry CPAs/Consultants Association. During his time with the firm, Chris has focused his efforts on providing audit, review, compilation and tax services to clients in a variety of industries, including construction, government contracting, real estate and not-for-profit entities. Chris also specializes in assisting clients with strategic performance management, including the implementation of dashboards and overall process improvements. Through continuing education and professional development, Chris stays up-to-date on the trends and changes affecting his clients’ industries and the accounting profession as a whole. He regularly speaks and writes articles on these relevant topics as they arise. In addition to being a licensed CPA, Chris has also earned a CSPM (Certified in Strategic Performance Management) designation through MentorPlus®. This designation allows Chris to provide value to his clients above and beyond tax, audit, and other compliance services. Chris strives to take a “client centric” approach, where services are based on the actual needs of the client rather than a specific commodity or deliverable. By taking time to understand the operations of a business and its future goals, Chris is able to provide superior customer service and help clients avoid and plan for potential difficulties, rather than just accurately reporting on them once they occur. Chris enjoys spending time with his wife and two sons. His hobbies include exercising, strength training and running, as well as following Virginia Tech Athletics. He served as assistant basketball coach at Millbrook High School from 2004 – 2014. 1100 Sunset Lane Suite 1310 P.O. Box 1507 Culpeper, VA 22701 6402 Arlington Blvd Suite 1130, 1320 Central Park Blvd., Suite 405 608 South King Street Suite 200 4419 Pheasant Ridge Road 50 South Cameron Street, Winchester, VA, United States 6 South Pendleton Street, Middleburg, VA, United States 9954 Mayland Drive, Richmond, VA, United States PCAOB Report Submit Request for Proposal 2021 YOUNT, HYDE & BARBOUR An Update on YHB Offices To help protect our clients and staff, YHB offices are open to the public by appointment only, Monday through Friday, 8am – 5pm. We ask that you setup an appointment prior to visiting a YHB office.

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professional_accounting

Lawyers & Agents Other Legal Professionals Firm Affiliations Selected Tax Measures in the Federal Budget 2017 - Canada Reading Time 15 minute read Tax Bulletin The Minister of Finance (Canada), the Honourable Bill Morneau, presented the Government of Canada's 2017 Federal Budget ("Budget 2017") on March 22, 2017 ("Budget Day"). Budget 2017 contains significant proposals to amend the Income Tax Act (Canada) (the "ITA") and the Excise Tax Act (the "ETA") while also providing updates on previously announced tax measures and policies. Significant Budget 2017 proposals and updates include: Investing an additional $523.9 million over five years to prevent tax evasion and improve tax compliance. Extending the mutual fund merger rules to "switch" funds and segregated funds. Extending base erosion rules to Canadian life insurers with foreign branches. Two measures that clarify the timing of recognition of gains and losses on derivatives held on income account. Updates on Canada's participation in the Organisation for Economic Co-operation and Development ("OECD") project on Base Erosion and Profit Shifting ("BEPS"). Selected proposals and tax measures are detailed below: Proposals to Reform the Tax System A Fair and Efficient Tax System In Budget 2017, the Canadian Government renewed its commitment to a fairer and more efficient tax system including by closing tax loopholes and eliminating ineffective and inefficient tax measures. Budget 2017 proposes an additional expenditure of $523.9 million over five years for the Canada Revenue Agency ("CRA") to fund new initiatives and extend existing programs to prevent tax evasion and improve tax compliance. The additional funding is to be used to hire more CRA auditors, develop systems to target high-risk international tax and abusive tax avoidance cases, and improve investigative work targeting criminal tax evaders. Tax Planning Using Private Corporations Budget 2017 raised the topic of tax planning using private corporations, although no specific measures were announced. The Canadian Government raised a concern that high-income individuals could gain unfair tax advantages by using tax reduction strategies, such as sprinkling income to family members using private corporations to achieve a lower overall tax rate, holding passive investments in a private corporation and converting private corporation ordinary income into capital gains, which benefit from a lower effective tax rate. The Canadian Government indicated that despite recent measures to limit certain planning arrangements, it is continuing its review of tax planning strategies involving private corporations. It also intends to review features of the income tax system that have a so-called "inappropriate, adverse impact of genuine business transactions involving family members". A paper should be released in the coming months setting out proposed policy responses to these issues. International Tax Avoidance and Evasion - BEPS Budget 2017 confirms Canada's commitment and continued participation in the OECD project on BEPS. The OECD BEPS project is intended to address concerns related to tax planning by multinationals ("MNEs") which rely on bilateral tax treaties and their interaction with domestic tax rules to minimize taxes for the overall enterprise. Canada, along with other G20 members, endorsed the final package of reports and recommendations from the BEPS project which was released on October 5, 2015. Canada reiterated its commitment and participation in the BEPS project in Budget 2016. Budget 2017 provides an update to the BEPS measures that have been or are in the process of being implemented, including: New legislation enacted in December 2016 introducing country-by-country reporting. Canada is pursuing signature of the multilateral instrument to streamline the implementation of treaty-related BEPS recommendations and is undertaking the necessary procedures to do so domestically. Canada is committed to improving the mutual agreement procedure in Canada's tax treaties. The CRA is engaging in spontaneous exchange of tax rulings with other tax administrations. Practitioners and MNEs based in Canada, or with operations in Canada, continue to follow the Canadian Government's updates on the specific proposals that it intends to implement, as it was generally recognized that Canada already met the standards of some of the BEPS recommendations and other recommendations were not relevant to the Canadian context. To this end, Canada appears to be confirming that existing measures already address some of the BEPS recommendations. Budget 2017 notes that: Canada's "controlled foreign corporation" rules including the foreign accrual property income regime are robust. Canada has implemented requirements for certain taxpayers, advisors and promotors to disclose specified tax avoidance transactions to the CRA. The CRA is applying the revised interpretation of the arm's length principle in the Transfer Pricing Guidelines and will continue to do so. Personal Income Tax Measures Electronic Distribution of T4 Information Slips Under the current rules, employers are required to send T4 slips to their employees' last known address or by delivering it to their employees. These slips may only be sent electronically with the express consent of the employee in advance. Budget 2017 proposes to allow employers to distribute T4 information slips electronically to current employees without having to obtain express consent from those employees in advance. An employer will be required to have sufficient privacy safeguards in place which will be specified by the Minister. Paper T4s will be required where employees cannot access electronic T4s in a confidential manner such as employees on leave or former employees. An employee can also request paper T4s. This measure will apply in respect of T4s issued for the 2017 and subsequent taxation years. Extension of Mineral Exploration Tax Credit for Flow-through Share Investors Budget 2017 proposes to extend eligibility for the 15% mineral exploration tax credit for one year to flow-through share agreements entered into on or before March 31, 2018. Ecological Gifts Program Budget 2017 proposes a number of measures to protect the integrity of gifts of ecologically sensitive property ("Ecogifts") for transactions or events occurring on or after Budget Day. Transfer of Ecogifts: the 50% tax that applies when a charity, municipality in Canada, or municipal or public body performing a function of government in Canada, that is the recipient of the donated land changes the use of the property or disposes of it without the consent of Environment and Climate Change Canada ("ECCC") will be extended to the transferee in cases where Ecogifts are transferred between organizations for consideration and the transferee changes the use of the property or disposes of it without the consent of ECCC. Program Administration: Budget 2017 clarifies that ECCC has the ability to determine whether the proposed changes to the use of lands would degrade conservation protections. Approval of Recipients: the requirement for ECCC to approve recipients of Ecogifts will be extended, on a gift-by-gift basis, to municipalities and municipal and public bodies performing a function of government. Private Foundations: private foundations will no longer be permitted to receive Ecogifts. Personal Servitudes: in Québec, donations of personal servitudes will qualify as Ecogifts, provided they meet certain conditions, including a requirement that the personal servitude runs for at least 100 years. Elimination of Home Relocation Loans Deduction There is a deemed interest income inclusion when a person receives a loan because of their employment and the interest rate on the loan is below a prescribed rate. The amount of the benefit is determined by reference to the difference between these two rates. However, a deduction from taxable income is available in respect of a home relocation loan. Home relocation loans are generally loans used to acquire a new residence where the employee starts work at a new location. The amount deductible is generally limited to the annual benefit that would arise if the amount of the loan were $25,000. Budget 2017 proposes to eliminate the deduction in respect of home relocation loans noting that this deduction disproportionately benefits the wealthy and lacks a strong policy rationale. This measure will apply to benefits arising in the 2018 and subsequent taxation years. Anti-Avoidance Rules for Registered Plans Budget 2017 proposes to extend the anti-avoidance rules that currently apply to Tax-Free Savings Accounts, Registered Retirement Savings Plans and Registered Retirement Income Funds to Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs). These anti-avoidance rules include: The advantage rules, which help prevent the exploitation of tax attributes of a registered plan (e.g., by shifting returns from a taxable investment to a registered plan). The prohibited investment rules, which generally ensure that investments held by a registered plan are arm's length "portfolio" investments. The non-qualified investment rules, which restrict the classes of investments that may be held by a registered plan. Subject to certain exceptions, this measure will apply to transactions occurring, and investments acquired after Budget Day. Investment income generated after Budget Day on previously acquired investments will be considered to be a "transaction occurring" after Budget Day. Business Income Tax Measures Investment Fund Mergers Switch Funds Canadian mutual funds can be organized as trusts or corporations. Budget 2016 included a measure to prevent corporate rollover provisions in the ITA from being used by investors switching between a mutual fund corporation's "switch funds" on a tax-deferred basis. This opportunity had not been available to investors in mutual funds trusts. Budget 2017 proposes amendments to facilitate the reorganization of a mutual fund corporation that is structured with switch funds into multiple mutual fund trusts on a tax-deferred basis. This proposal is to apply to qualifying reorganizations that occur on or after Budget Day. Segregated funds are life insurance policies that have many similarities to mutual fund trusts. Budget 2017 proposes to allow insurers to merge segregated funds on a tax-deferred basis pursuant to provisions that are to be similar to the merger rules applicable to mutual fund trusts. This measure is to apply to mergers of segregated funds occurring after 2017. Budget 2017 also proposes that segregated funds be permitted to carry over non-capital losses arising in taxation years that begin after 2017. The use of these losses is to be subject to normal limitations on the carrying forward and back of non-capital losses, including restrictions following a segregated fund merger. Flow-through Shares Reclassification of Expenses Renounced to Flow-through Share Investors Currently, an eligible small oil and gas corporation may treat up to $1 million of "cumulative development expenses" ("CDE") as "cumulative exploration expenses" ("CEE") when it is renounced to shareholders under a "flow-through share" agreement. In general, CEE may be deducted in its entirety from income of such investors in the year in which it is incurred, whereas only 30% of CDE is deductible each year on a declining balance basis. Consequently, CEE treatment is advantageous as it accelerates deductions available to investors. In addition, CDE incurred before March 31st by an eligible small oil and gas corporation, under a flow-through share agreement entered into before the end of the previous year, may be renounced to investors as CEE incurred in the previous year (the "Look-back rule"). Budget 2017 proposes to disallow eligible small oil and gas corporations from treating the first $1 million of CDE as CEE. Generally, this measure will apply in respect of expenses incurred after 2018 to which the Look-back rule does not apply to deem them as being incurred in 2018. Treatment for Oil and Gas Discovery Wells Budget 2017 proposes to treat certain exploration expenses incurred by oil and gas companies as CDE rather than as CEE. Currently, expenses incurred in drilling or completing an oil and gas "discovery well" (the first well drilled into a new reservoir) are treated as CEE, but are considered in Budget 2017 to be more appropriately classified as CDE because they typically relate to successful exploration activities already undertaken. This measure will apply to expenses incurred after 2018, including those incurred in the first three months of 2019 which would otherwise have engaged the Look-back rule of the ITA and be deemed to have been incurred in 2018. However, these provisions will not apply in respect of expenses incurred before 2021 pursuant to a written commitment entered into before Budget Day to incur the expenses. Meaning of Factual Control Generally, the notion of "control" of a corporation under the ITA refers to de jure control, that is the right to elect the majority of the board of directors of the corporation. For certain limited purposes, such as the definition of "Canadian-controlled private corporation" and the associated corporations rules, the ITA also refers to de facto control which is more broadly defined. It exists where a person has any "direct or indirect influence that, if exercised, would result in control in fact of the corporation". In the assessment of the existence of de facto control, all the relevant factors generally need to be considered. The recent decision of the Federal Court of Appeal in McGillivray (2016 FCA 99) has limited the scope of the de facto control test by restricting the influence to circumstances that include "a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability" (the "Enforceable Right"). In the view of the Department of Finance, this restriction is not appropriate as it limits the scope of factors that may be taken into account in the analysis and from a policy perspective, the factual control test should not be dependent on the existence of such an Enforceable Right. For taxation years that begin on or after Budget Day, the ITA will be amended and will specify that the determination of de facto control shall be done taking into account all factors relevant in the circumstances and shall not be limited to, and the relevant factors need not include, whether the taxpayer has an Enforceable Right. Gains and Losses on Derivatives Availability of Mark-to-Market in Profit Computation Budget 2017 announces two new measures that clarify the scheme of the ITA in connection with the timing of the recognition of gains and losses on derivatives that are held on income accounts by taxpayers. Elective Regime to use Mark-to-Market Method Taxpayers computing gains and losses in connection with income from derivative financial instruments have been uncertain as to whether to follow the mark-to-market reporting rules. The proposals clarify that the mark-to-market method may be available in computing profit to taxpayers holding eligible derivative instruments on income account through a new election regime. An election is available for taxation years beginning after March 21, 2017, are effective for all subsequent years and may only be revoked with the consent of the Minister of National Revenue. To be eligible for such election, the derivative must be valued at fair value in a taxpayer's audited financial statements or have an otherwise readily ascertainable value. Straddle Transactions - Anti-Avoidance Budget 2017 recognizes that taxpayers holding derivatives may, in some circumstances, create a tax advantage by selectively timing dispositions through straddle transactions in which more than one derivative position in the market are held to generate offsetting gains and losses. Citing tax base erosion and fairness concerns, Budget 2017 proposes the introduction of anti-avoidance rules to prevent abuse through stop-loss rules which will defer the realization of any loss on the sale of a position to the extent of any unrealized gain on an offsetting position. The new rule will not apply to positions: (i) held by financial institutions for the purposes of the mark-to-market rules or by mutual fund trusts or mutual fund corporations, (ii) which are part of the certain hedging transactions, (iii) that are offsetting and held for 30 days beginning on the date of disposition of the position; or (iv) that are part of a transaction or series of transactions none of the main proposes of which is to defer or avoid tax. The stop-loss rules will generally apply to any loss realized on a position entered into after March 21, 2017. Billed-Basis Accounting Budget 2017 proposes to phase out the ability for certain professionals (i.e. accountants, dentists, lawyers, Quebec notaries, medical doctors, veterinarians and chiropractors) to exclude unbilled work in progress ("WIP") in calculating their income. Currently, these professionals can claim expenses on a current basis and only recognize income when services are actually billed. For their first taxation year beginning on or after Budget Day, professionals will be required to recognize 50% of the lesser of the cost and the fair market value of WIP in computing income. For subsequent taxation years, 100% of the lesser of the cost and the fair market value of WIP will be so recognized. International Tax Measures Extending the Base Erosion Rules To Foreign Branches of Life Insurers The tax treatment of Canadian-resident life insurance companies carrying on business abroad indirectly through a subsidiary or directly through a branch ("Foreign Branch") is different when it comes to income from the insurance of Canadian risks (e.g., risks in respect of persons resident in Canada). Generally, business income earned by a foreign affiliate or a Foreign Branch is not taxable at the Canadian taxpayer level. However, the foreign accrual property income ("FAPI") rules, which are aimed at taxing passive income of a foreign affiliate at the level of its Canadian parent when earned by the affiliate, contain an anti-avoidance rule whereby income of a controlled foreign affiliate from the insurance of Canadian risks is generally considered FAPI and is therefore taxable in the hands of the Canadian parent on an accrual basis. There is no analogous rule which prevents the shift of income from the insurance of Canadian risks by a Canadian life insurer to its Foreign Branch. For taxation years that begin on or after Budget Day, the ITA will be amended to ensure that Canadian life insurers are taxable in Canada with respect to their income from the insurance of Canadian risks earned through a Foreign Branch unless less than 10 per cent of the gross premium income (net of reinsurance ceded) earned by the branch is premium income in respect of Canadian risks. In addition, anti-avoidance rules will be introduced to prevent the proposed rule being avoided through the use of "insurance swaps" or the ceding of Canadian risks. Finally, a life insurer will be treated as if it had insured Canadian risks if it can reasonably be concluded that the foreign risks he has insured through its Foreign Branch were insured as part of a transaction or series of transactions one of the purposes of which was to avoid the proposed rule. Sales and Excise Tax Measures Budget 2017 contains several proposed GST/HST changes, most of which are targeted at specific industries. Some of the more notable proposed changes are summarized below. Prescription Drugs and Biologicals Amendments Budget 2017 proposes to add naloxone (and its salts), a drug used for treating opioid overdose, to the list of zero-rated non-prescription drugs under paragraph 2(e) of Part I of Schedule VI of the ETA. This proposed inclusion is expected to come into effect as of March 22, 2016, however it would not apply to any such drugs supplied, imported or brought into a HST-participating province on or before March 22, 2017, and for which GST/HST was charged, collected, remitted or paid. Taxi Business Amendments Budget 2017 proposes to broaden the definition of "taxi business" under the ETA to include commercial ride-sharing services that are similar to taxi services. The proposed change would have the effect of requiring certain suppliers of commercial ride-sharing services to register for a GST/HST account and charge and collect GST/HST on their fares. Due to the operation of subsection 240(1.1), the registration and collection obligations would apply to such suppliers even if their total taxable sales remained below the $30,000 small supplier threshold. The proposed change is expected to take effect as of July 1, 2017. Previously Announced Tax Measures Budget 2017 confirms the Canadian Government's intention to proceed with previously announced tax and related measures including: Measures announced on October 3, 2016 in relation to the capital gains exemption on the sale of a principal residence. The measure announced in Budget 2016 on information-reporting requirements for certain dispositions of an interest in a life insurance policy. Legislative proposals released on September 16, 2016 relating to income tax technical amendments. The legislative and regulatory GST/HST proposals released on July 22, 2016, including the changes to pension plan rules for master trusts and the revisions to the drop shipment rules. GST/HST measures relating to the joint venture election, as confirmed in Budget 2016. Budget 2017 notes that such previously announced tax and related measures will be modified to take into account consultations and deliberations since their release and reaffirms the Canadian Government’s commitment to move forward as required with technical amendments to improve the certainty of the tax system. M. Elena Hoffstein Partner Toronto, ON +1 416 865 4388 [email protected] Clarke Barnes Partner | Co-Managing Partner, Calgary Calgary, AB +1 403 261 5374 [email protected] Frédéric Barriault Associate Montréal, QC +1 514 397 5265 [email protected] Paul Cabana Partner Montréal, QC +1 514 397 5213 [email protected] Paul V. Casuccio Partner Toronto, ON +1 416 868 3491 [email protected] Daniel Conrad Associate Toronto, ON +1 416 868 3351 [email protected] Hardeep Gill Associate Vancouver, BC +1 604 631 4825 [email protected] Ronald Nobrega Partner Toronto, ON +1 416 865 4399 [email protected] Alain Ranger Partner Montréal, QC +1 514 397 7555 [email protected] Brittany Sud Associate Toronto, ON +1 416 868 7863 [email protected] Kevin H. Yip Partner Toronto, ON +1 416 865 5497 [email protected] Receive email updates from our team Practicing Entities

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professional_accounting

Sohu.com Reports Second Quarter 2020 Unaudited Financial Results BEIJING, Aug. 10, 2020 /PRNewswire/ — Sohu.com Limited (NASDAQ: SOHU), China’s leading online media, video, search and gaming business group,… BEIJING, Aug. 10, 2020 /PRNewswire/ — Sohu.com Limited (NASDAQ: SOHU), China’s leading online media, video, search and gaming business group, today reported unaudited financial results for the second quarter ended June 30, 2020. Second Quarter Highlights[1] The privatization of Changyou was completed on April 17, 2020. After the effectiveness of the transaction, Changyou’s net income/loss was wholly attributable to Sohu.com Limited. For the second quarter of 2020, Changyou recognized an additional accrual of withholding income tax of US$88 million, as Changyou changed its policy for its PRC subsidiaries with respect to distribution of cash dividends after the completion of the privatization. Total revenues were US$421 million[2], down 9% year-over-year and 3% quarter-over-quarter. Brand advertising revenues were US$38 million, down 14% year-over-year and up 48% quarter-over-quarter. Search and search related advertising revenues[3] were US$241 million, down 13% year-over-year and up 1% quarter-over-quarter. Online game revenues were US$106 million, up 4% year-over-year and down 21% quarter-over-quarter. GAAP net loss attributable to Sohu.com Limited was US$80 million. Excluding the impact of the additional accrual of withholding income tax described above, GAAP net income attributable to Sohu.com Limited was US$8 million, compared with a net loss of US$35 million in the second quarter of 2019 and a net loss of US$20 million in the first quarter of 2020. Excluding the impact of the additional accrual of withholding income tax described above, non-GAAP net income attributable to Sohu.com Limited was US$11 million. Further excluding the loss generated by Sogou, non-GAAP net income attributable to Sohu.com Limited was US$12 million, compared with a net loss of US$41 million in the second quarter of 2019 and a net loss of US$8 million in the first quarter of 2020. Dr. Charles Zhang, Chairman and CEO of Sohu.com Limited, commented, «In the second quarter of 2020, our brand advertising business performed well, the brand advertising revenue had a decent increase, up 48% quarter-over-quarter. Both the brand advertising revenue and bottom line exceeded our prior guidance. During the quarter, we integrated our Media Portal’s brand advantage and influence with Sohu Video’s advanced broadcast technologies. These initiatives allowed us to more effectively generate and distribute our high-quality original content, and further enhanced our credibility by reflecting the attitude and values of Sohu. For Changyou, the privatization was completed on April 17, 2020, and after that Changyou’s net income/loss was wholly attributable to Sohu.com Limited. During the second quarter of 2020, online game revenues met our prior guidance and declined quarter-over-quarter, mainly due to the resumption of work following the easing of COVID-19 restrictions. For Sogou, it delivered in-line results in the second quarter with Search maintaining a steady share of traffic and Mobile Keyboard further expanding its DAU base.» [1] As Changyou’s cinema advertising business ceased operations during the third quarter of 2019, its results of operations have been excluded from the Company’s results from continuing operations in the condensed consolidated statements of operations and are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. Unless indicated otherwise, results presented in this release are related to continuing operations only, and exclude results from the cinema advertising business. [2] On a constant currency (non-GAAP) basis, if the exchange rate in the second quarter of 2020 had been the same as it was in the second quarter of 2019, or RMB6.81=US$1.00, US$ total revenues in the second quarter of 2020 would have been US$438 million, or US$17 million more than GAAP total revenues, and down 5% year-over-year. [3] Search and Search related advertising revenues exclude intra-Group transactions. Second Quarter Financial Results Total revenues for the second quarter of 2020 were US$421 million, down 9% year-over-year and 3% quarter-over-quarter. Total online advertising revenues, which include revenues from the brand advertising and search and search-related advertising businesses, for the second quarter of 2020 were US$279 million, down 13% year-over-year and up 6% quarter-over-quarter. Brand advertising revenues for the second quarter of 2020 totaled US$38 million, down 14% year-over-year and up 48% quarter-over-quarter. The year-over-year decrease was mainly due to the continuous negative impact on the brand advertising industry from the outbreak of the COVID-19 in the first quarter of 2020. The quarter-over-quarter increase was mainly due to the increased revenues in our portal and video advertising businesses as a result of our continuing efforts to boost our revenues and the easing of the impact of COVID-19. Search and search-related advertising revenues for the second quarter of 2020 were US$241 million, down 13% year-over-year and up 1% quarter-over-quarter. Online game revenues for the second quarter of 2020 were US$106 million, up 4% year-over-year and down 21% quarter-over-quarter. The quarter-over-quarter decrease was mainly due to a decrease in player engagement as a result of work resumption during the quarter following the easing of COVID-19 restrictions in China. Both GAAP and non-GAAP[4] gross margin was 41% for the second quarter of 2020, compared with 46% in the second quarter of 2019 and 37% in the first quarter of 2020. Both GAAP and non-GAAP gross margin for the online advertising business for the second quarter of 2020 was 23%, compared with 33% in the second quarter of 2019 and 10% in the first quarter of 2020. Both GAAP and non-GAAP gross margin for the brand advertising business in the second quarter of 2020 were 40%, compared with 28% in the second quarter of 2019 and nil in the first quarter of 2020. The year-over-year margin improvement was mainly due to decreased video content cost. The quarter-over-quarter margin improvement was mainly due to increased revenues in the portal and video advertising businesses. Both GAAP and non-GAAP gross margin for the search and search-related advertising business in the second quarter of 2020 were 21%, compared with 34% in the second quarter of 2019 and 11% in the first quarter of 2020. The year-over-year decrease primarily resulted from an increase in traffic acquisition cost as a percentage of search and search related advertising revenues. The quarter-over-quarter increase was due to a decrease in traffic acquisition cost as a percentage of search and search related advertising revenues due to normalized user traffic following the easing of COVID-19 restrictions in China. GAAP gross margin for online games in the second quarter of 2020 was 77%, compared with 82% in the second quarter of 2019 and 79% in the first quarter of 2020. Non-GAAP gross margin for online games in the second quarter of 2020 was 78%, compared with 82% in the second quarter of 2019 and 79% in the first quarter of 2020. The year-over-year decrease in gross margin was mainly due to an increase in revenue-sharing payments related to TLBB Honor, which was launched during the third quarter of 2019. [4] Non-GAAP results exclude share-based compensation expense; non-cash tax benefits from excess tax deductions related to share-based awards; changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; a one-time impairment charge recognized for an investment unrelated to the Company’s core businesses; income/expense from the adjustment of contingent consideration previously recorded for acquisitions; dividends and deemed dividends to non-controlling preferred shareholders of Sogou; a one-time income tax expense recognized in the fourth quarter of 2017 as a result of the one-time transition tax (the «Toll Charge») imposed by the U.S. Tax Cuts and Jobs Act signed into law on December 22, 2017 (the «TCJA»); the subsequent re-evaluation for the fourth quarter of 2018 and adjustment of the tax expense previously recognized for the Toll Charge; the resulting recognition of a previously unrecognized tax benefit and recording of an uncertain tax position related to the balance of the Toll Charge; and interest accrued in relation to the previously unrecognized tax benefit. Explanation of the Company’s non-GAAP financial measures and related reconciliations to GAAP financial measures are included in the accompanying «Non-GAAP Disclosure» and «Reconciliations of Non-GAAP Results of Operation Measures to the Nearest Comparable GAAP Measures.» For the second quarter of 2020, GAAP operating expenses totaled US$194 million, down 13% year-over-year and up 4% quarter-over-quarter. Non-GAAP operating expenses were US$187 million, down 14% year-over-year and up 3% quarter-over-quarter. The year-over-year decrease in operating expenses was mainly due to decreased marketing expenses. GAAP operating loss for the second quarter of 2020 was US$23 million, compared with an operating loss of US$11 million in the second quarter of 2019 and an operating loss of US$24 million in the first quarter of 2020. Non-GAAP operating loss for the second quarter of 2020 was US$16 million, compared with an operating loss of US$7 million in the second quarter of 2019 and an operating loss of US$20 million in the first quarter of 2020. GAAP income tax expense was US$85 million for the second quarter of 2020, compared with income tax expense of US$4 million in the second quarter of 2019 and income tax expense of US$14 million in the first quarter of 2020. Non-GAAP income tax expense was US$82 million for the second quarter of 2020, compared with income tax expense of US$2 million in the second quarter of 2019 and income tax expense of US$11 million in the first quarter of 2020. For the second quarter of 2020, Changyou recognized an additional accrual of withholding income tax of US$88 million, as Changyou changed its policy for its PRC subsidiaries with respect to distribution of cash dividends after the completion of the privatization of Changyou. Net Income/(Loss) GAAP net loss attributable to Sohu.com Limited for the second quarter of 2020 was US$80 million, or a net loss of US$2.04 per fully-diluted ADS. Non-GAAP net loss attributable to Sohu.com Limited for the second quarter of 2020 was US$77 million, or a net loss of US$1.96 per fully-diluted ADS. Excluding the impact of the additional accrual of withholding income tax described above, GAAP net income attributable to Sohu.com Limited for the second quarter of 2020 was US$8 million, or a net income of US$0.20 per fully-diluted ADS; non-GAAP net income attributable to Sohu.com Limited for the second quarter of 2020 was US$11 million, or a net income of US$0.27 per fully-diluted ADS. As of June 30, 2020, cash and cash equivalents and short-term investments held by the Sohu Group, minus short-term bank loans, were US$1.35 billion, compared with US$1.51 billion as of December 31, 2019. Supplementary Information for Changyou Results Second Quarter 2020 Operational Results For PC games, total average monthly active accounts[5] were 1.9 million, a decrease of 5% year-over-year and 10% quarter-over-quarter. Total quarterly aggregate active paying accounts[6] were 0.9 million, flat year-over-year and a decrease of 10% quarter-over-quarter. The quarter-over-quarter decreases were mainly due to a decrease in player engagement as a result of the resumption of work during the quarter following the easing of COVID-19 restrictions in China. For mobile games, total average monthly active accounts were 3.1 million, an increase of 15% year-over-year and a decrease of 9% quarter-over-quarter. The year-over-year increase was mainly due to the contribution of TLBB Honor, which was launched during the third quarter of 2019. Total quarterly aggregate active paying accounts were 0.6 million, flat year-over-year and a decrease of 40% quarter-over-quarter. The quarter-over-quarter decreases were mainly due to a decrease in player engagement as a result of the resumption of work during the quarter following the easing of COVID-19 restrictions in China. [5] Monthly active accounts refers to the number of registered accounts that are logged in to these games at least once during the month. [6] Quarterly aggregate active paying accounts refers to the number of accounts from which game points are utilized at least once during the quarter. Second Quarter 2020 Unaudited Financial Results Total revenues for the second quarter of 2020 were US$109 million, an increase of 3% year-over-year and a decrease of 20% quarter-over-quarter. Online game revenues were US$106 million, an increase of 4% year-over-year and a decrease of 21% quarter-over-quarter. Online advertising revenues were US$3 million, a decrease of 16% year-over-year and an increase of 23% quarter-over-quarter. GAAP and non-GAAP gross profit for the second quarter of 2020 were both US$85 million, a decrease of 2% year-over-year and 21% quarter-over-quarter. GAAP operating expenses for the second quarter were US$51 million, an increase of 10% year-over-year and a decrease of 6% quarter-over-quarter. The year-over-year increase in operating expenses was mainly due to an increase in share-based compensation expenses as new share-based awards took effect in the fourth quarter of 2019. The quarter-over-quarter decrease was mainly due to a decrease in marketing and promotional spending for TLBB Honor. Non-GAAP operating expenses for the second quarter were US$48 million, a decrease of 1% year-over-year and 6% quarter-over-quarter. GAAP operating profit for the second quarter of 2020 was US$33 million, compared with an operating profit of US$40 million in the second quarter of 2019 and US$52 million in the first quarter of 2020. Non-GAAP operating profit for the second quarter of 2020 was US$37 million, compared with a non-GAAP operating profit of US$38 million in the second quarter of 2019 and US$56 million in the first quarter of 2020. On July 27, 2020, Sohu’s subsidiary Sogou announced that its board of directors (the «Sogou Board») received a letter containing a preliminary non-binding proposal (the «Proposal») from Tencent Holdings Limited (including its affiliates, «Tencent«) for Tencent to acquire all of the outstanding ordinary shares, including ordinary shares represented by ADSs, of Sogou that are not already owned by Tencent for US$9.00 in cash per ordinary share or ADS (as the same may be amended from time to time, a «Proposed Transaction»). The Proposed Transaction, if completed, would result in Sogou becoming a privately-held, indirect wholly-owned subsidiary of Tencent, and Sogou’s ADSs would be delisted from the New York Stock Exchange. On July 31, 2020, the Sogou Board established a special committee of the Sogou Board, composed solely of independent directors, to consider the Proposal. Sohu’s board of directors has not had an opportunity to review and evaluate the Proposal in detail, or to make a determination as to how to respond to the Proposal or as to whether or not the proposed acquisition of Sogou would be in the best interests of Sohu, in its capacity as Sogou’s controlling shareholder, and Sohu’s shareholders for Sohu to approve or reject the Proposal or a Proposed Transaction. Business Outlook For the third quarter of 2020, Sohu estimates: Brand advertising revenues to be between US$37 million and US$42 million; this implies an annual decrease of 9% to 20% and a sequential decrease of 3% to a sequential increase of 11%. Online game revenues to be between US$85 million and US$95 million; this implies an annual decrease of 12% to 21% and a sequential decrease of 10% to 20%. Excluding the profit/loss generated by Sogou, non-GAAP net loss attributable to Sohu.com Limited to be between US$10 million and US$20 million; and GAAP net loss attributable to Sohu.com Limited to be between US$15 million and US$25 million. For the third quarter 2020 guidance, the Company has adopted a presumed exchange rate of RMB7.00=US$1.00, as compared with the actual exchange rate of approximately RMB6.99=US$1.00 for the third quarter of 2019, and RMB7.08=US$1.00 for the second quarter of 2020. This forecast reflects Sohu’s management’s current and preliminary view, which is subject to substantial uncertainty, particularly in view of the potential ongoing impact of the COVID-19 virus, which remains difficult to predict. Non-GAAP Disclosure To supplement the unaudited consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America («GAAP»), Sohu’s management uses non-GAAP measures of gross profit, operating profit, net income, net income attributable to Sohu.com Limited and diluted net income attributable to Sohu.com Limited per ADS, which are adjusted from results based on GAAP to exclude the impact of the share-based awards, which consist mainly of share-based compensation expenses and non-cash tax benefits from excess tax deductions related to share-based awards; changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; a one-time impairment charge recognized for an investment unrelated to the Company’s core businesses; income/expense from the adjustment of contingent consideration previously recorded for acquisitions; dividend and deemed dividend to non-controlling preferred shareholders; the one-time income tax expense recognized in the fourth quarter of 2017 as a result of the Toll Charge imposed by the TCJA and the subsequent re-evaluation for the fourth quarter of 2018 and adjustment of the tax expense previously recognized for the Toll Charge; the resulting recognition of a previously unrecognized tax benefit and recording of an uncertain tax position related to the balance of the Toll Charge; and interest expense recognized in connection with the Toll Charge. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. Sohu’s management believes excluding share-based compensation expense, changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; the one-time impairment charge recognized for an investment unrelated to the Company’s core businesses; non-cash tax benefits from excess tax deductions related to share-based awards; income/expense from the adjustment of contingent consideration previously recorded for acquisitions; dividend and deemed dividend to non-controlling preferred shareholders; and income tax expense, income tax benefit, uncertain tax position, and interest recognized in relation to the Toll Charge from its non-GAAP financial measure is useful for itself and investors. Further, the impact of share-based compensation expense and changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values; the one-time impairment charge recognized for an investment unrelated to the Company’s core businesses; non-cash tax benefits from excess tax deductions related to share-based awards; income/expense from the adjustment of contingent consideration previously recorded for acquisitions; dividend and deemed dividend to non-controlling preferred shareholders; the one-time income tax expense recognized in the fourth quarter of 2017 as a result of the Toll Charge imposed by the TCJA and the subsequent re-evaluation for the fourth quarter of 2018 and adjustment of the tax expense previously recognized for the Toll Charge; the resulting recognition of a previously unrecognized tax benefit and recording of an uncertain tax position related to the balance of the Toll Charge; and interest expense recognized in connection with the Toll Charge cannot be anticipated by management and business line leaders and these expenses were not built into the annual budgets and quarterly forecasts that have been the basis for information Sohu provides to analysts and investors as guidance for future operating performance. As the impact of share-based compensation expense and changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values, the one-time impairment charge recognized for an investment unrelated to the Company’s core businesses, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration previously recorded for acquisitions, and dividend and deemed dividend to non-controlling preferred shareholders does not involve subsequent cash outflow or is reflected in the cash flows at the equity transaction level, Sohu does not factor this impact in when evaluating and approving expenditures or when determining the allocation of its resources to its business segments. As a result, in general, the monthly financial results for internal reporting and any performance measures for commissions and bonuses are based on non-GAAP financial measures that exclude share-based compensation expense and changes in fair value recognized in the Company’s consolidated statements of operations with respect to equity investments with readily determinable fair values, a one-time impairment charge recognized for an investment unrelated to the Company’s core businesses, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration previously recorded for acquisitions, and dividend and deemed dividend to non-controlling preferred shareholders, and also excluded the one-time income tax expense recognized in the fourth quarter of 2017 as a result of the Toll Charge imposed by the TCJA and the subsequent re-evaluation for the fourth quarter of 2018 and adjustment of the tax expense previously recognized for the Toll Charge, the resulting recognition of a previously unrecognized tax benefit and recording of an uncertain tax position related to the balance of the Toll Charge, and interest expense recognized in connection with the Toll Charge. The non-GAAP financial measures are provided to enhance investors’ overall understanding of Sohu’s current financial performance and prospects for the future. A limitation of using non-GAAP gross profit, operating profit, net income, net income attributable to Sohu.com Limited and diluted net income attributable to Sohu.com Limited per ADS, excluding share-based compensation expense, non-cash tax benefits from excess tax deductions related to share-based awards, income/expense from the adjustment of contingent consideration previously recorded for acquisitions, dividend, and deemed dividend to non-controlling preferred shareholders is that the impact of share-based awards and non-cash tax benefits from excess tax deductions related to share-based awards has been and will continue to be a significant recurring expense in Sohu’s business for the foreseeable future, income/expense from the adjustment of contingent consideration previously recorded for acquisitions may recur in the future, and dividend and deemed dividend to non-controlling preferred shareholders may recur when Sohu and its affiliates enter into equity transactions. In order to mitigate these limitations Sohu has provided specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables include details on the reconciliation between the GAAP financial measures that are most directly comparable to the non-GAAP financial measures that have been presented. Notes to Financial Information Financial information in this press release other than the information indicated as being non-GAAP is derived from Sohu’s unaudited financial statements prepared in accordance with GAAP. This announcement contains forward-looking statements. It is currently expected that the Business Outlook will not be updated until release of Sohu’s next quarterly earnings announcement; however, Sohu reserves right to update its Business Outlook at any time for any reason. Statements that are not historical facts, including statements about Sohu’s beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, instability in global financial and credit markets and its potential impact on the Chinese economy; exchange rate fluctuations, including their potential impact on the Chinese economy and on Sohu’s reported US dollar results; recent slow-downs in the growth of the Chinese economy; the uncertain regulatory landscape in the People’s Republic of China; fluctuations in Sohu’s quarterly operating results; the possibilities that Sohu will be unable to recoup its investment in video content and that Changyou will be unable to develop a series of successful games for mobile platforms or successfully monetize mobile games it develops or acquires; Sohu’s reliance on online advertising sales, online games and mobile services for its revenues; the impact of the U.S. TCJA; the effects of the COVID-19 virus on the economy in China in general and on Sohu’s business in particular; and the fact that there is no assurance that Tencent will make a definitive offer to acquire Sogou, that a definitive agreement relating to the Proposal will be entered into between Tencent and Sogou, or that a Proposed Transaction or any other similar transaction between Tencent and Sogou will be approved or consummated. Further information regarding these and other risks is included in Sohu’s annual report on Form 20-F for the year ended December 31, 2019, and other filings with the Securities and Exchange Commission. Conference Call and Webcast Sohu’s management team will host a conference call at 7:30 a.m. U.S. Eastern Time, August 10, 2020 (7:30 p.m. Beijing/Hong Kong time, August 10, 2020) following the quarterly results announcement. Participants can register for the conference call by navigating to https://apac.directeventreg.com/registration/event/8993497. Once preregistration has been completed, participants will receive dial-in numbers, an event passcode, and a unique registrant ID. To join the conference, please dial the number you receive, enter the event passcode followed by your unique registrant ID, and you will be joined to the conference instantly. Please dial in 10 minutes before the call is scheduled to begin. A telephone replay of the call will be available after the conclusion of the conference call at 10:30 a.m. Eastern Time August 10 through August 18, 2020. The dial-in details for the telephone replay are: The live Webcast and archive of the conference call will be available on the Investor Relations section of Sohu’s Website at http://investors.sohu.com/. About Sohu.com Sohu.com Limited (NASDAQ: SOHU) is China’s premier online brand and indispensable to the daily life of millions of Chinese, providing a network of web properties and community based/web 2.0 products which offer the vast Sohu user community a broad array of choices regarding information, entertainment and communication. Sohu has built one of the most comprehensive matrices of Chinese language web properties and proprietary search engines, consisting of the mass portal and leading online media destination www.sohu.com; interactive search engine www.sogou.com; developer and operator of online games www.changyou.com/en/ and online video website tv.sohu.com. Sohu’s corporate services consist of online brand advertising on Sohu’s matrix of websites as well as bid listing and home page on its in-house developed search directory and engine. Sohu also provides multiple news and information services on mobile platforms, including Sohu News App and the mobile news portal m.sohu.com. Sohu’s online game subsidiary Changyou develops and operates a diverse portfolio of PC and mobile games, such as Tian Long Ba Bu («TLBB»), one of the most popular PC games in China. Changyou also owns and operates the 17173.com Website, a game information portal in China. Sohu’s online search subsidiary Sogou (NYSE: SOGO) has grown to become the second largest search engine by mobile queries in China. It also owns and operates Sogou Input Method, the largest Chinese language input software. Sohu, established by Dr. Charles Zhang, one of China’s internet pioneers, is in its twenty-fourth year of operation. For investor and media inquiries, please contact: Ms. Pu Huang Sohu.com Limited [email protected] In the United States: Ms. Linda Bergkamp [email protected] (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Search and search-related advertising Total revenues Cost of revenues: Brand advertising (includes stock-based compensation expense of $36, $-40, and $-22, respectively) Search and search-related advertising (includes stock-based compensation expense of $45, $77, and $127, respectively) Online games (includes stock-based compensation expense of $152, $161, and $-17, respectively) Total cost of revenues Product development (includes stock-based compensation expense of $4,169, $2,429, and $3,587, Sales and marketing (includes stock-based compensation expense of $795, $-415, and $1,355, General and administrative (includes stock-based compensation expense of $1,678, $1,561, and $-572, Total operating expenses Other income[7], net Exchange difference Income/(loss) before income tax expense Income tax expense[8] Net loss from continuing operations Net loss from discontinued operations, net of tax Net loss Less: Net income/(loss) from continuing operations attributable to the noncontrolling interest shareholders Less: Net loss from discontinued operations Net loss from continuing operations attributable to Net loss from discontinued operations attributable to Net loss attributable to Sohu.com Limited Basic net loss from continuing operations per ADS attributable to Sohu.com Limited Basic net loss from discontinued operations per ADS Basic net loss per ADS attributable to Sohu.com Limited ADS used in computing basic net loss per ADS attributable to Diluted net loss from continuing operations per ADS Diluted net loss from discontinued operations per ADS Diluted net loss per ADS attributable to Sohu.com Limited ADS used in computing diluted net loss per ADS [7] For the second quarter of 2020, other income included a tax refund that was received by Sogou as part of the Chinese government’s initiatives taken in response to COVID-19. [8] Following completion of the Changyou privatization, Changyou changed its policy for its PRC subsidiaries with respect to distribution of cash dividends. As a result, Changyou recognized an additional accrual of withholding income tax of US$88 million for the second quarter of 2020. (UNAUDITED, IN THOUSANDS) As of Jun. 30, 2020 As of Dec. 31, 2019 Restricted cash[9] Account and financing receivables, net Prepaid and other current assets Long-term investments, net Fixed assets, net Restricted time deposits[9] Prepaid non-current assets Accrued liabilities Receipts in advance and deferred revenue Accrued salary and benefits Taxes payable Short-term bank loans Other short-term liabilities Long-term accounts payable Long-term bank loans Long-term tax liabilities[10] Sohu.com Limited shareholders’ equity Noncontrolling interest Total shareholders’ equity Total liabilities and shareholders’ equity [9] In the second quarter of 2020, in connection with the Company’s financing of the Changyou privatization, Changyou pledged deposit certificates in the amount of US$127 million in the aggregate, of which US$102 million was recorded as restricted cash and US$25 million was recorded as restricted time deposits. [10] Following completion of the Changyou privatization, Changyou changed its policy for its PRC subsidiaries with respect to distribution of cash dividends. As a result, Changyou recognized an additional accrual of withholding income tax of US$88 million for the second quarter of 2020. RECONCILIATIONS OF NON-GAAP RESULTS OF OPERATIONS MEASURES TO THE NEAREST COMPARABLE GAAP MEASURES Three Months Ended Jun. 30, 2020 Three Months Ended Mar. 31, 2020 Non-GAAP Brand advertising gross profit Brand advertising gross Search and search-related advertising gross profit advertising gross margin Online advertising gross profit Online advertising gross Online games gross profit Online games gross margin Others gross profit (a) $ Others gross margin Income tax expense[11] (c,d)$ Net income/(loss) before non- controlling interest Net loss from continuing operations attributable to Sohu.com Limited for diluted net loss per ADS Net loss from discontinued Net loss attributable to Diluted net loss from continuing operations per ADS attributable to Sohu.com discontinued operations per Diluted net loss per ADS attributable to Sohu.com Shares used in computing [11] Following completion of the Changyou privatization, Changyou changed its policy for its PRC subsidiaries with respect to distribution of cash dividends. As a result, Changyou recognized an additional accrual of withholding income tax of US$88 million for the second quarter of 2020. (a) To eliminate the impact of share-based awards as measured using the fair value method. This adjustment does not have any impact on income tax expense. (b) To adjust Sohu’s economic interests in Changyou and Sogou attributable to the above non-GAAP adjustments. This adjustment does not have any impact on income tax expense. (c) To adjust for a change in the fair value of the Company’s investment in Hylink and the income tax effect. (d) To adjust for the effect of the U.S. TCJA. View original content to download multimedia:http://www.prnewswire.com/news-releases/sohucom-reports-second-quarter-2020-unaudited-financial-results-301108865.html SOURCE Sohu.com Ltd.

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professional_accounting

Rankings – UAE "UAE government strengthens regulatory framework to ensure legitimacy in the eyes of the global community" Regulatory change has been a key theme over the last 12 months in the UAE as the country seeks to broaden its appeal as a business location he UAE has been busy implementing measures to address tax avoidance and money laundering to match international best practice and change perceptions of the state as a tax haven. Zahra Haider from Nexia International member firm Sajjad Haider Chartered Accountants outlines some of the key developments as follows: Cabinet Resolution No. 57 of 2020 concerning economic substance requirements in response to a review of the UAE tax reporting framework by the European Union Cabinet Decision No. 58 of 2020 concerning ultimate beneficial owners, which requires companies to maintain registers with information about their ultimate beneficial owners, shareholders and nominee board members Cabinet Decision No. 74 of 2020 concerning anti-money laundering and countering financing of terrorism Zahra Haider, Sajjad Haider Chartered Accountants, Nexia International member firm “The UAE is committed to enhancing market transparency and efficiency and bringing compliance requirements within the framework of international obligations related to money laundering and terrorist financing, prevention of treaty abuse and harmful tax practices, and compliance with international transfer pricing laws, as well as global guidelines to combat tax avoidance through tax base erosion and profit shifting,” says Asad Abbas, managing partner of PrimeGlobal member firm Asad Abbas & Co Chartered Accountants. Asad Abbas, Managing Partner, Abbas & Co Chartered Accountants, PrimeGlobal member firm Other significant regulatory developments include the 100% foreign direct investment option, which means foreign investors do not need to have a local sponsor to own 51% of their business, explains Siddharth Ravi, auditor at MSI Global Alliance member firm Alnoman & Ravi. Siddharth Ravi, Auditor, Alnoman & Ravi, MSI Global Alliance member firm While the law has been amended, Faiyaaz Rajkotwala, partner at MGI Salim Rajkotwala & Associates notes that its implementation is still a work in progress, with the business community expecting to see some restrictions on the freedoms promised, such as size of investment and sectors covered. “Implementation of various other laws, such as the economic substance regulations, ultimate beneficial owner declarations and anti-money laundering regulations for financial and certain designated non-financial businesses has moved ahead after some delays due to the pandemic,” he adds. “The UAE government is clearly looking to continue to strengthen its regulatory framework, to ensure it secures the growth it wants with the legitimacy it needs in the eyes of the global community.” Faiyaaz Rajkotwala, Partner, MGI Salim Rajkotwala & Associates An onshore UAE company can now be established with no UAE national shareholder provided it does not carry on activities with strategic importance explains Franzel Ann Francisco, manager, assurance and advisory at Ecovis Fuller International CPA. “These strategic activities and their terms will be determined later by a specialised committee and will require participation of an UAE national either as a shareholder or as part of the management,” she says. “Companies will have a maximum of one year to comply with the amended law from the time the changes become effective, although this period may be extended under a decision by the cabinet as proposed by the Minister of Economy.” Franzel Ann Francisco, Manager, assurance and advisory, Ecovis Fuller International CPA Francisco adds that the UAE is optimistic that the amendments to the companies law will attract valuable investments and will promote UAE as a destination for ease of doing business. Sudhir Kumar, senior partner Kreston Menon observes that the new legal framework introduces major amendments that revoke or replace a total of 51 existing articles of the commercial companies law. “The framework brings in a rejuvenated investment climate that will encourage more joint ventures as well as major mergers and acquisitions,” he says. “This initiative is definitely going to attract long term investments and will accelerate sustainable growth.” Dubai recently announced that three new chambers of commerce - Dubai Chamber, Dubai Chamber of International Trade and Dubai Chamber of Digital Economy - would be created. Kumar explains that the Chamber of International Trade will work to support the interests of international companies based in Dubai, while the Chamber of Digital Economy will seek to leverage technological trends to promote growth and innovation. John Varghese, managing partner HLB HAMT points out that the law pertaining to 100% ownership for foreign nationals will not be applicable to companies owned by the federal or local government or their subsidiaries. “The UAE government announced a series of legal changes last year lessening the role of Islamic legal codes in the judiciary system of the country,” he adds. “Relaxations have been made to laws regarding divorce, wills and inheritance.” John Varghese, Managing Partner, HLB HAMT The government also introduced a scheme that gives expats an opportunity to apply for retirement visas. Residents aged 55 and above can make use of this visa to continue their stay in the emirate and the visa can be renewed every five years. To apply for a retirement visa, retirees must meet one of three financial requirements Earn AED20,000 monthly Have AED1 million in savings Own a property in Dubai worth AED2 million A valid UAE health insurance is also required to avail the scheme. The UAE has also taken various steps to make sure that the legal system is up to international standards, making sure contracts are enforceable and are upheld in the court and speeding up litigation. “The objective of economic substance regulations is to make sure that businesses set up here have substance in UAE - to ensure the licensee has actual business activity happening in UAE and not a licence that is purely created to avoid taxation,” says Ravi. In July 2020, Sheikh Mohammed bin Rashed Al-Maktoum announced that the Insurance Authority would be merged with the Securities and Commodities Markets (SCA). The Central Bank of UAE (CBUAE) is also now responsible for protecting the rights of the insured and monitoring the financial solvency of insurance companies. “With this change, the UAE government wants to ensure the CBUAE provides the appropriate environment to develop and boost the role of the insurance industry to support the national economy, encourage fair and effective competition and provide the best insurance services with competitive prices and coverage,” says Stany Pereira, managing partner at PKF UAE. In November, Abu Dhabi Global Market announced the issuance of a public consultation paper on its proposed new data protection regulations. Dubai International Financial Centre’s new data protection law came into force in October 2021, bringing its data protection regime in line with the GDPR and global data protection standards. Zayd Khalid Maniar, International Liaison Partner, Crowe UAE BEPS Action 13 requires large multinational groups of entities or MNEs to file a country-by-country report that should provide a breakdown of the group’s global revenue, profit before tax, income tax accrued and other indicators of economic activities for each jurisdiction in which it operates. “In the UAE, country-by-country reporting requirements are applicable to UAE headquartered groups with financial reporting years starting on or after 1 January 2019,” explains Zayd Khalid Maniar, international liaison partner Crowe UAE. “Accordingly, chartered accountants play a pivotal role in helping clients understand the requirements and help narrow any expectation gaps.” The Federal Ministry of Economy has been tightening up the regulations relating to who can sign audit reports. The requirements include holding an accounting academic qualification from a recognised university or equivalent institution, with an equivalence certificate attested from the Ministry of Higher Education for all academic certificates obtained from outside the country. “It is mandatory that a further certificate confirms that the person is a partner of a UAE registered national auditor, registered or working with them,” explains Tim Howe, managing director at MSI Global Alliance member firm Al Ghaith & Co. “Annually, auditors have to undergo a five-day training seminar - organised by the ministry - before their licence is renewed.” The audit profession has undoubtedly benefitted from more emphasis on rules and regulations and closer monitoring by the ministry, although there are still some firms that need to be weeded out, he adds. Paryank Shah, partner at KSi Shah & Associated acknowledges that revenue is down as a result of the pandemic. “However, I believe there are positive economic prospects for the years to come with the UAE reopening to immigrants again and having gained a positive relationship with Israel,” he says. As the pandemic continues, auditors are facing new challenges in performing audits says Abbas. “They need to be more creative in performing audit procedures and ensuring compliance with auditing standards,” he continues. “Auditors can now rely on information technology resources in obtaining reasonable assurance that the financial statements are free from material misstatement.” Even though there are various overseeing bodies to monitor practice in accounting, auditing and tax advisory, there is still a need to establish a professional body that will promulgate accounting standards across the country suggests Abbas. “This UAE professional body could play an increased regulatory, licensing and standards monitoring role, which would result in a better quality of financial information,” he adds. Rajkotwala says it is understandable that the government has been focused on pandemic mitigation measures and is confident that it will focus on this matter in connection with its goals of strengthening the regulatory and compliance framework once the pandemic is over. According to Howe, one consequence of the pandemic is that many accountants have lost their jobs in the private sector and have set up small accounting businesses. “With minimal expenses, they present a real challenge to existing firms when it comes to fees for accounting and tax work,” he observes. “Most are professionally qualified but there are still some with little or no qualifications and experience, working in a sector with few regulations to date.” He says there is no doubt that fee income will be slightly lower in 2021, with clients renegotiating and others having closed down. “There are indicators that some firms have reduced staff numbers, whilst others are making more use of outsourcing,” Howe concludes.

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professional_accounting

Avista Advisory Investment Banking Advisory Banking & Project Financing Illiquid Assets & Portfolio Buyouts Private Placement of debt and equity Mezzanine & Special Situations Financing Opportunities at Avista My Journey at Avista Sterling Biotech restructures $250 mn bond funding Bondholders have approved restructuring for five years Vadodara-based Sterling Group, having diversified industrial interests, informed that the company’s pharmaceuticals subsidiary, Sterling Biotech Ltd’s lenders have approved a restructuring plan of US $250 million (approx. Rs 1,575 crore at current exchange rate) bonds for a period of five years. Sterling Biotech’s bondholders of Zero Coupon Convertible Bonds which were due in 2012, have agreed to suspend all litigations in India and the United Kingdom, thereby opening a way for the consensual restructuring of the existing bonds. The Zero Coupon Convertible Bonds are a combination of a zero-coupon bond and a convertible bond. Meaning that the bond pays no interest and is issued at a discount to par value and the bond is convertible into common stock of the issuer at a certain conversion price. In 2012, the company had faced series of issues, which resulted into losses in the company, thereby leading it to default on Bonds. The company’s bondholders on Wednesday approved a restructuring by passing an extraordinary resolution at a meeting of bond holders held at Hongkong on November 20. As per the terms of restructuring, the fresh Zero Coupon Convertible Bonds will be issued to replace existing bonds. New bonds will be due in the year 2018 and will have conversion price of Rs 60 per share. “The Bond Holders have also agreed and approved (1) that the conversion price of the Bonds due 2018 shall be Rs . 60 per share, subject to Reserve Bank of India, Foreign Investment Promotion Board and such other regulatory approvals, if any, as may be required; (2) to suspend all litigations in India and UK till January 2014 and (3) to withdraw the litigations in India and UK on completion of the exchange and substitution of the Existing Bonds with and for the Zero Coupon Convertible Bonds due 2018,” Sterling Biotech informed in a stock exchange filing. It was a very long process of negotiation and legal battle, which Company has been successful in resolving in amicable manner, a Sterling Group insider informed. The agencies involved in advising the company for restructuring were HoulihanLokey and Avista. Brandon Gale, vice-president of HoulihanLokey stated, “Sterling Biotech’s large bondholders believed that litigation will destroy the value of Bonds and company. Large bondholders are confident that in 3 years, the company will revive significantly.” According to insiders, the conversion price of Rs 60 a share will maintain the economic interests of the promoters – NitinSandesara and family in the business. NitinSandesara, chairman, Sandesara Group said, “This is a significant milestone in bringing back the glory of Sterling Biotech and we are grateful to bondholders for approving the restructuring process and we are confident that in 3 years horizon Sterling Biotech will get its glory back and create great value for shareholders and bondholders.” Sterling Biotech shares jumped by close to 20 per cent with heavy volume of over 3.5 million shares traded on Thursday following the development. Sterling Biotech entered pharmagelatin business in 1995 and became one of the top 5 global players by 2010 with 11 per cent of the world market. Notably, Sterling Group’s oil and gas exploration arm, Sterling Oil Exploration & Production Co Ltd (Seepco) recently sold 1 million barrels (bbl) of Brent crude from its Nigerian fields in Africa to India’s PSU oil refiner, Indian Oil Corporation. Explore the possibilities Contact Us Amos International Growth Capital funding and acquisition of majority stake by See Case Study Sellside OPV Pharmaceutical JSC Acquisition of significant stake by Suzlon Energy Limited has completed reorganization and refinancing of Foreign Currency Convertible Bonds of US$ 577 mn Creditor Advisor Closed: July 2014 Morepen Lab Ltd. Financial Restructuring INR 7,500 mn ASTARC Group (India) Structured Finance INR 400 million Velankani Information Systems Pvt Ltd. Structured Finance and Mezzanine Financing $75 million Barque Hotels Pvt. Ltd Structured Project Finance Facility INR 3,000 million Global Budget Hotels Project Debt Financing $50 million Bain Capital Credit Valuation Work Netherlands Based Oil & Gas Company Valuation Advisor to a Special Situations Fund Track Record of Public Issues Disclosure of Track Record of the public issues managed by Avista Corporate Finance Advisory Private Limited as a Merchant Banker Securities and Exchange Board of India vide its circular no. CIR/MIRSD/1/2012 dated January 10, 2012 has mandated certain information with respect to track record of the Public issues managed by a merchant banker in the past 3 years to be disclosed on the website of the Merchant Banker Avista Corporate Finance Advisory Private Limited has not managed any public issues in the past 3 years. © Copyright 2018, Avista Holdings Pte. Ltd.

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professional_accounting

Company expects to close Paladin Labs transaction on February 28, 2014. Full year 2013 adjusted diluted EPS exceeds previously issued guidance by $0.04. Total quarterly revenues of $585 million, reported diluted (GAAP) loss per share of $6.74 and adjusted diluted EPS of $0.96. Company expects 2014 revenues to be in the range from $2.50 billion to $2.62 billion. Company expects 2014 reported diluted (GAAP) EPS to be in the range from$1.36 to $1.81 and 2014 adjusted diluted EPS to be in the range from $3.40 to $3.65. Endo Health Solutions (Nasdaq: ENDP) today reported fourth quarter 2013 revenues of $585 million, compared to $750 million for the same quarter of 2012. As previously announced, on February 3, 2014, Endo completed the sale of its former HealthTronics business. Financial results related to HealthTronics are presented as income (loss) from discontinued operations, net of tax and non-controlling interest expense on the consolidated statements of income, and are excluded from all other results and 2014 financial guidance. Endo reported a net loss of $776 million in fourth quarter 2013 compared to a net loss of $716 million in fourth quarter 2012. As detailed in the supplemental financial information below, adjusted net income for the three months ended December 31, 2013 decreased by 34 percent to $124 million, compared to $187 million for the same period in 2012. The net loss reported for the period is primarily attributable to two charges that were previously disclosed. A pre-tax, non-cash asset impairment charge of approximately $495 million, primarily related to goodwill attributable to the company's acquisition of American Medical Systems. And, a pre-tax, non-cash charge of $316 million, to increase the company's product liability reserve for all known, pending and estimated future claims primarily related to vaginal mesh cases. The change in the accrual for product liability claims is primarily associated with the company's ongoing evaluation of the vaginal mesh litigation, including the inherent uncertainty of this litigation and potential settlement costs. Reported diluted loss per share for the fourth quarter 2013 was $6.74, compared to $6.35 for the fourth quarter of 2012. Adjusted diluted EPS decreased by 41 percent to $0.96 for the fourth quarter of 2013 compared to $1.62 for the same period in 2012. "We made significant progress in 2013 towards our objective of transforming Endo into a leading specialty healthcare company. We re-oriented the company in a new strategic direction, completed a significant restructuring, implemented a new more efficient operating model and completed a series of transactions that have transformed the company while improving our focus," said Rajiv De Silva, President and CEO of Endo. "And today we have announced the expected close of the acquisition of Paladin Labs. As a result of this acquisition Endo now has a platform for creating further shareholder value that will help accelerate our plans for long term strategic growth." Fourth quarter 2013 branded pharmaceutical revenues were $255 million, a 44 percent decrease compared to fourth quarter 2012 branded pharmaceutical revenues. This decrease was primarily attributable to the decrease in net sales of LIDODERM®. Fourth quarter 2013 net sales of LIDODERM decreased 87 percent compared to the fourth quarter 2012. This decrease is attributable to the effects of the loss of market exclusivity for the product in September 2013. The decrease of LIDODERM sales in the fourth quarter was partially offset by $30 million of royalty revenues that Endo recognized per the terms of its previously announced Watson (now doing business as Actavis, Inc.) Settlement Agreement. Fourth quarter 2013 net sales of Voltaren® Gel increased 22 percent compared to fourth quarter 2012. This increase is attributable to strong growth in demand. According to IMS Health, total prescriptions for Voltaren Gel increased by 29 percent compared to fourth quarter 2012. Fourth quarter 2013 net sales of OPANA® ER decreased 14 percent compared to fourth quarter 2012. This decrease is primarily attributable to a year-over-year decrease in demand. According to IMS Health, total prescriptions for OPANA ER decreased by 11 percent compared to fourth quarter 2012. Fourth quarter 2013 generic product net sales of $198 million represent an increase of 22 percent compared to fourth quarter 2012 generic product net sales. This increase was primarily attributable to strong demand for Qualitest's diversified product portfolio. Generic product net sales of $731 million for full-year 2013 represent an increase of 15 percent compared to the first twelve months of 2012. Qualitest continues to focus on sales growth and improving processes to enhance profitability. On February 3, 2014, Qualitest announced the close of its acquisition of Boca Pharmacal, a privately owned specialty generics company, for $225 million. The company expects the transaction to be immediately accretive to Endo's adjusted diluted earnings per share. In the fourth quarter 2013, AMS sales were $132 million, a decrease of less than 1 percent, at current exchange rates, compared to the fourth quarter of 2012. This decrease is primarily attributable to a decrease in Women's Health sales which decreased by 12 percent in the fourth quarter 2013, compared to the same period last year. The decrease in Women's Health sales is attributable to year-over-year declines in U.S.-based procedural volumes. In the fourth quarter 2013, Men's Health sales increased 9 percent compared to fourth quarter 2012. This increase is primarily attributable to growth in sales of male continence products including the AMS 800™ Urinary Control System and the AdVance™ Male Sling System. Fourth quarter 2013 sales of AMS's benign prostatic hyperplasia (BPH) business decreased 8 percent compared to fourth quarter 2012. This decrease is primarily attributable to lower sales of GreenLight™ consoles and was partially offset by an increase in GreenLight fiber sales. On December 19, 2013, Endo issued $700 million in aggregate principal amount of 5.75% Senior Notes due 2022 at an issue price of par. Endo intends to use the net proceeds from the offering, together with borrowings under the term loan portion of a new senior secured credit facility, to refinance Endo's existing senior secured credit facility, to pay related fees and expenses and for general corporate purposes, which may include strategic acquisitions. Endo will conduct a conference call with financial analysts to discuss this news release today at 8:30 a.m. ET. Investors and other interested parties may call 866-515-2910 (domestic) or +1 617-399-5124 (international) and enter passcode 79916686. Please dial in 10 minutes prior to the scheduled start time. A replay of the call will be available from February 28, 2014 at 12:30 p.m. ET until 11:59 p.m. ET on March 15, 2014 by dialing 888-286-8010 (domestic) or +1 617-801-6888 (international) and entering passcode 13770519. A simultaneous webcast of the call can be accessed by visiting www.endo.com. In addition, a replay of the webcast will be available until 11:59 p.m. ET on March 15, 2014. The replay can be accessed by clicking on "Events" in the Investor Relations section of the website. To exclude amortization of commercial intangible assets related to marketed products of $39,493 and accruals for milestone payments to partners of $12,332. To exclude certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $13,602, amortization of customer relationships of $2,515 and mesh litigation-related defense costs of $18,588. To exclude milestone payments to partners of $6,307 and certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $722. To exclude integration costs of $3,416 and a loss of $660 recorded to reflect the change in fair value of the contingent consideration associated with the Qualitest acquisition. To reflect the cash tax savings results from our acquisitions and dispositions and the tax effect of the pre-tax adjustments above at applicable tax rates. To exclude certain items related to the HealthTronics business, which is reported as Discontinued operations, net of tax, that the Company believes does not reflect its core operating performance. To exclude amortization of commercial intangible assets related to marketed products of $52,536, an adjustment to the accrual for the payment to Impax related to sales of OPANA ER of $(2,000) and certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $151. To exclude certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $15,863 and amortization of customer relationships of $2,506. To exclude milestone payments to partners of $4,173 and certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $3,381. To exclude the net impact of accruals for litigation-related and other contingencies. To exclude acquisition-related and integration costs of $4,909 and a loss of $209 recorded to reflect the change in fair value of the contingent consideration associated with the Qualitest Pharmaceuticals acquisition. To exclude amortization of commercial intangible assets related to marketed products of $175,298, certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $1,118 and accruals for milestone payments to partners of $18,332. To exclude certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $84,290, amortization of customer relationships of $10,036 and mesh litigation-related defense costs of $53,459. To exclude milestone payments to partners of $11,371 and certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $14,845. To exclude integration costs of $7,129 and a loss of $823 recorded to reflect the change in fair value of the contingent consideration associated with the Qualitest acquisition. To exclude the unamortized debt issuance costs written off and recorded as a loss on extinguishment of debt upon our March 2013 prepayment on our Term Loan indebtedness as well as upon the amendment and restatement of our existing credit facility. To exclude $50,400 related to patent litigation settlement income and other income of $1,048. To exclude amortization of commercial intangible assets related to marketed products of $210,299, the impact of inventory step-up recorded as part of acquisition accounting of $880, the accrual for the payment to Impax related to sales of OPANA ER of $102,000, net milestone payments to partners of $2,927 and certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $151. To exclude certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $36,858 and amortization of customer relationships of $10,021. To exclude milestone payments to partners of $57,851 and certain separation benefits and other costs incurred in connection with continued efforts to enhance the company's operations of $5,904. To exclude the net impact of the Actavis (Watson) litigation settlement. To exclude acquisition-related and integration costs of $19,176 and a loss of $237 recorded to reflect the change in fair value of the contingent consideration associated with the Qualitest Pharmaceuticals acquisition. To reflect the cash tax savings results from our acquisitions and the tax effect of the pre-tax adjustments above at applicable tax rates. Non-GAAP Adjusted net income and its components and Non-GAAP Adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS. Despite the importance of these measures to management in goal setting and performance measurement, we stress that these are Non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, Non-GAAP Adjusted net income and its components (unlike U.S. GAAP net income and its components) may not be comparable to the calculation of similar measures of other companies. These Non-GAAP financial measures are presented solely to permit investors to more fully understand how management assesses performance. See Endo's Current Report on Form 8-K filed today with the Securities and Exchange Commission for an explanation of Endo's reasons for using non-GAAP measures. Includes all completed business development transactions as of Feb 28, 2014. Endo Health Solutions Inc. is a U.S.-based specialty healthcare company with business segments that are focused on branded pharmaceuticals, generics, and medical devices which deliver quality products to its customers intended to improve the lives of patients. Through its operating companies - Endo Pharmaceuticals, Qualitest, and AMS - Endo is dedicated to delivering value to our stakeholders: customers, patients, and shareholders. Learn more at www.endo.com. "This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements including words such as "believes," "expects," "anticipates," "intends," "estimates," "plan," "will," "may," "look forward," "intend," "guidance," "future" or similar expressions are forward-looking statements. Because these statements reflect our current views, expectations and beliefs concerning future events, these forward-looking statements involve risks and uncertainties. Investors should note that many factors, as more fully described under the caption "Risk Factors" in our Form 10-K, Form 10-Q and Form 8-K filings with the Securities and Exchange Commission and as otherwise enumerated herein or therein, could affect our future financial results and could cause our actual results to differ materially from those expressed in forward-looking statements contained in our Annual Report on Form 10-K. The forward-looking statements in this press release are qualified by these risk factors. These are factors that, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.

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professional_accounting

New Enterprise Announces New Plans November 25, 2013 Rock Products News New Enterprise Stone & Lime Co. Inc. announced that it has further developed its previously disclosed cost-reduction and operational-efficiency plan. The company has appointed BDO USA LLP as the company’s new independent registered public accounting firm for its fiscal year ending Feb. 28, 2014. The company anticipates obtaining an additional $10 million of cost savings in fiscal 2015. The cost savings will come from the elimination of costs relating to the implementation of its Enterprise Resource Planning system, reduction of professional fees, modifications to benefit plans and further workforce reductions. Precipitated by a planned partner rotation with its current auditor, the company also announced the appointment of BDO as the company’s independent registered public accounting firm. Under the guidance of the Audit Committee, management conducted a competitive request for proposal of audit services. Management and the Audit Committee evaluated a number of potential firms that were invited to submit a proposal. The company’s management and the Audit Committee determined that BDO offered the broadest array of services at pricing that represented the best value for the company. The decision to change auditors was not the result of any disagreement between the company and PricewaterhouseCoopers LLP, the company’s current auditors, on any matter of accounting principle or practice, financial statement disclosures, or auditing scope or procedure. “New Enterprise is pleased to be able to engage an organization such as BDO,” said Paul Detwiler, III, New Enterprise’s president and CEO. “As a key component of our cost reduction plan, we are monitoring our business in an effort to manage costs and improve our profitability. We feel that the engagement of BDO is consistent with our goal of maintaining top quality while achieving our objective of cost efficiency. We believe that making this change commencing with the third quarter review will allow us to transition to our new auditors with no disruptions to our financial reporting.” Congressional Fellowship Travel Industry Called Upon to Embrace Tolling

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professional_accounting

A Guide to the Role of Internal Auditors in Fraud Risk Management July 10, 2021 Auditing Corporate fraud is on the rise across the world and it’s alarming that nearly 70% of the fraud is committed by insiders. In many cases, corporate fraud can bring an organisation to its knees. Both senior management and internal auditors in Dubai have an equal role to play in fraud risk management. Some organisations argue that internal auditors are ultimately responsible for detecting and preventing fraud. Another group thinks that fraud prevention is the responsibility of senior management as the first line of defence. The misconception of internal auditors acting as fraud detectives has created unrealistic expectations in the corporate world. As fraudsters come up with sophisticated techniques, it has become imperative for businesses to build strong anti-fraud control frameworks to detect and prevent fraud. But we need to be clear on the responsibilities of internal auditors in helping an organisation in detecting, responding and preventing fraud. Here are some key insights regarding the hot topic: The Role of Internal Audit in Fraud Detection & Prevention The Institute of Internal Auditors (IIA) says that every organisation must develop an anti-fraud response plan that sets out important policies and investigation methodologies. The plan should clearly state the role of the internal audit when the management suspects fraud and related control failure in the organisation. The IIA’s ’Fraud and Internal Audit Position Paper’ outlines the fundamental responsibilities of an internal auditor as the following: Identify red flags where fraud may have occurred Get to know the nature of fraud, and the techniques, schemes and scenarios used by the fraudsters Assess the indicators of fraud and decide if further action or investigation is required Assess the efficacy of controls to stop or detect fraud This means that though the internal auditors need not act like fraud investigators, they will use their skills in data analysis to identify trends and patterns that suggest fraudulent activity. As a general rule, we can say that the combination of external standards and an anti-fraud policy are the factors that determine the exact role of internal audits in fraud prevention. Internal auditors in Dubai often play a significant part in helping organisations to cut down the financial or reputation impact of fraud. They can also assist corporate entities in removing the obstacles to business objectives. As the first line of defence against all kinds of corporate risks, here are some ways internal audit can respond to the challenge of fraud risks more specifically: Review detection controls The management should ask themselves whether they are confident about the organisation’s ability to identify fraud early on. If they are not confident, a review of annual plans must be performed to ensure that the controls to detect fraud are just as effective as the preventative controls. This is important because when fraud occurs, it can be identified through checks such as reconciliations and management monitoring. Detection policies can also encompass whistle-blowing arrangements in which any staff member can provide a tip-off to stop in its tracks. Internal auditors can work with senior managers to ensure that the whistleblowing arrangements do not deter employees from coming forward at business-critical moments. It is advisable to avail of the services of top internal audit firms in Dubai to conduct a review of the internal controls. Auditing Controls of Risk-prone Areas Internal auditors will check the areas where the fraud risk is apparent within the organisation and audit the specific area’s controls. They will assess the potential for the incidence of fraud and will examine how the organisation manages the risk of fraud through risk assessment. Analyse Data and Trends The internal audit team of entities should impart their expertise in data analysis to identify trends and patterns that suggest the occurrence of fraud and funding misuse. However, not all companies may not be able to develop a strong internal audit team that possesses such expertise. However, such companies can engage resources with sufficient knowledge or expertise such as internal audit firms in Dubai. Risk assessments and controls Fraud risk management becomes effective when the management devolves the responsibility across all the levels in the business. Internal auditors help businesses by encouraging and facilitating periodic risk assessments in the organisations. Time spent for risk assessments will only add more value to the business by identifying threats and thereby cutting down likely losses. Internal auditors then incorporate these risk assessments results into the audit plan. The risk assessment enables the auditors in Dubai to identify high-risk areas and by targeting such areas they can undertake proactive anti-fraud work. How can Jitendra Chartered Accountants Help? Typically, the role of internal auditors varies across different industries, and organisations, but the predominantly internal auditors are expected to provide an objective assurance that will add value and improve an organisation’s operations. The responsibilities of internal auditors in Dubai include assessing the design and efficacy of controls in an organisation, such as controls related to fraud risk management. If the internal audit team lacks the experience and expertise for undertaking fraud risk management, the companies can entrust the best internal audit firms in Dubai such as Jitendra Chartered Accountants (JCA). JCA has completed twenty years of exemplary service in the UAE and boasts of some highly reputed clients. Our internal audit services in Dubai will help you implement the best practices of fraud prevention policies within your organisation.

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professional_accounting

Speculation and Investment FRANK FAYANT May 1 1909 Speculation and Investment FRANK FAYANT May 1 1909 FRANK FAYANT From Moody’s Magazine HE WHO goes to Wall Street goes to buy an income or to speculate, and if he seeks a larger income than the minimum interest rate his income-purchase becomes in itself speculative. “I never speculate in Wall Street,” says a merchant, “I only buy outright for investment.” The fallacy that investment and speculation may be divorced is common. The merchant who thinks he doesn’t speculate may buy railroad shares, like Erie or Rock Island, that pay no dividends. This is a hazardous speculation, whether the shares are paid for in full or carried on margin. The purchase of seasoned dividend shares is a speculation, for their dividend rates may advance or decline and their market prices may vary widely in periods of boom or panic. Even the purchase of high-grade bonds is a speculation. Take the extreme case of the purchase for $1,000 of a $1,000 highest grade 3^ per cent, railroad gold bond maturing in ten years, the investor being assured that he will have no use for the principal until the maturity of the bond. Every year he will receive an income of $35 and at the end of ten years the company will repay him the $1,000 gold. There appears to be very little speculation here. But suppose that in these ten years, by reason of increased production, gold declines and the things that gold buys advance. When the bondho1der gets back his $1,000 gold he finds that it will buy less food, fewer clothes and less comfortable shelter than when he bought the bond. He is, therefore, relatively poorer. In the meantime the railroad company shares in the general prosperity and increases its dividends to shareholders. Its stocks rise in price. The bond buyer finds he has been speculating in gold. To put money into good railroad bonds at the beginning of this era of prosperity was a poor speculation ; to buy railroad stocks was a good speculation. Ten years ago Chicago & North Western securities were all of the highest grade. The stock, paying 5 per cent., advanced from $85 to $143, netting only 3^2 per cent, on the investment at the top. The 3y? per cent, general mortgage bonds of 1897 ranged from $990 to $1,020, netting about 3Y2. per cent. also. But the investor who bought North Western bonds at their lowest price ten years ago has not fared nearly as well as the investor who bought the stock at the top. The bonds in 1908 ranged from $900 to $960, an average decline of $75 a bond. The stock, now paying 7 per cent., ranged in 1908 from $135 to $185, and its extreme range in the ten years has been $i2Ó-$270. The investor who bought North Western stock in preference to the bonds ten years ago has received twice as large an income on his money, and has had abundant opportunity to realize on his purchase at a profit of from 50 to 100 per cent. North Western was a high grade investment stock ten years ago. But many of the leading railroad stocks of to-day, like Atchison, Union Pacific, Northern Pacific and Southern Pacific, were considered almost worthless ten years ago. The investors who bought the stock of these roads in preference to their bonds, thus speculating on the growth of the West, have made enormous profits. There is Union Pacific. Its first mortgage 4 per cents, sold then above par, and they sold a few months ago $120 below their average price ten years ago. But the common stock, which paid no dividend and ranged from $16 to $44 then, now pays 10 per cent., and in 1908 ranged from $iio-$i85. A study of railroad securities in our ten years of prosperity shows that gilt-edge bonds have gradually declined in price, while common stocks have risen enormously. The profits have accrued to the speculators in the stocks—whether they bought one share outright or carried a thousand shares on margin. Speculation has an evil sound to many good folks’ ears. It at once suggests the bucket-shop and the hazardous trading in securities on slender margins. But all business is speculation, and if the American people for the past hundred years had put their money only into gilt-edge investments we would still be reading by candlelight and riding in stage coaches. England became the greatest commercial nation in the world because Englishmen were big speculators. Now we are out-speculating the English and becoming a greater commercial power. Speculation and industrial progress go hand in hand. It was a hazardous speculation that built the first railroad across the Rockies ; it was a still more hazardous speculation that rescued the property from bankruptcy. In the 90's, when the pessimists thought the country was going to the demnition bowwows, a fox-eyed speculator went from banker to banker in Wall Street, saying. “Here's the bankrupt Union Pacific selling for $3 a share ; let’s buy up the stock, assess 92 ourselves $15 a share and make a railroad out of it”—the conservative old bankers threw up their hands in amazement. They wouldn’t embark on such hazardous speculation. But Harriman persisted, found men who were willing to join him in the speculation, and we all now marvel at the result. Without speculators like Harriman and Hill the railroads beyond the Mississippi would still be “streaks of rust”—If there were any railroads at all. But because speculation is the leaven of industrial progress, it doesn’t follow that every man with a few dollars in his pocket should plunge into wild speculation—whether it is buying building lots, eggs or railroad shares. Speculation, especially our modern system of margin speculation, is a highly useful factor in our industrial life, but trading on margin is a hazardous undertaking, and nine-tenths of the players lose. The trouble with the average American is that he wants to make too much money in too short a time. He knows that, with luck, he can make a great deal of money in Wall Street on a small capital, and in his greed for fortune he takes extravagant risks. It is because he takes such chances that he usually loses. Any candid Wall Street broker will tell you that the habitual margin speculators lose year in and year out. Money may be made in Wall Street, just as it may be made in merchandizing or manufacture or agriculture or mining—by the exercise of ordinary business common sense. “The men who have made the big fortunes in America,” said Mr. Morgan, the other dav, “are those who have been bulls on the country.” One of the Standard Oil capitalists said some time ago, “A man who hasn’t made a fortune in America in the past ten years can’t blame the country.” In this period railroad dividends have increased 250 per cent., steel production 240 per cent., bank deposits 160 per cent.— our industrial progress has been astounding. And the men who have made fortunes have been those who have believed in the country year in and year out. The conservative investor, with a surplus that he can spare for speculation, has more than a reasonable chance of making a profit by buying good stock in panic periods and selling them in boom times. This may take him to Wall Street only once in a year or two, 'but he will make a good deal more money than the man who goes there every day. The public is credulous about money making. It always has been. And this credulity is born in cupidity. It’s the desire to acquire money easily and quickly that leads the public into absurd speculative ventures, and that provides a never-ending harvest for the unscrupulous and reckless promoters. The tulip craze in Holland in the 17th century, the South Sea Bubble in England and John Law’s wonderful bank in France in the 18th century, our own extravagant railroad ventures after the Civil War— all grew out of this over-mastering desire for wealth. There never has been a time when a smooth-tongued financial adventurer—honest enthusiast or scheming fakir—couldn’t stand on the street corner and tempt the coin of the realm out of the pockets of the credulous. The country merchant, who thinks he is mighty lucky to make $1,000 earn $150 in a year in a home investment, sends his money awav to some clever advertiser who promises to make his $1,000 earn in a year from $1,000 to $10,000. This is happening every day, and there is no way to prevent it. Men who know that two plus two equals four will put their money knowingly into a fraud or a bubble on the chance that they will pull out ahead of the victims. The other day the manager of a Wall Street brokerage house received an order from a customer to buy 1,000 shares of an extravagantly advertised mining stock. “Why, that’s a fraud promoted by an ex-convict,” protested the broker, “and I refuse to buy the stock for you.” “Oh, I know all about it. It’s a plain swindle. But the gang behind it is going to put it up to catch the suckers. I don’t see why I shouldn’t get some of the money—” “Of the suckers?” “Well, you buy me 1,000 shares.” The broker reluctantly bought the stock for $1,400. The next day the stock couldn't be sold for $700, for the manufactured market suddenly collapsed. Several years ago a well-known circus-poster advertising promoter announced over his signature that the investment of $1,000 in a new copper stock would make a profit of $10,000 to $15,000 in a few days, or 1,000 to 1,500 per cent. Seven days later subscriptions to the stock to the amount of $6,600,000 in cash had accumulated in New York’s biggest bank—an astounding response from a credulous public. We all know that the public didn’t make from $66,000,000 to $99,000,000 on its investment in a few days. Instead it soon faced a loss of nearly $5,000,000, and in four years the market value of the stock showed a loss of all of its original investment of $6,600,000 and more than $10,000,000 besides. But this same circus-poster enthusiast has repeatedly painted wonderful pictures for the credulous of the easv road to sudden wealth, and the public has always paid for the pictures at fancy prices. Several months ago he invited the public to ioin him in a discretionary speculation pool, promising that he could make 300 per cent, a year on a capital of $5,000,000. He predicted that a $20,000 investment in the shares of the venture would be worth $100,000 within four months ; instead, the market value of the investment declined to $8,000. If this particular venture collapses absolutely, and the shares that recently sold around $2 go begging again at a few cents, will it be a bar to the repetition of a similar venture by the same enthusiasts, with another harvest from the credulous? Not at all. The farmer reads in his weekly paper how the three-shell fellows cleaned out the credulous in a neighboring county fair, and then goes to his own county fair and tries to beat the game. He knows the game is crooked, but his cupidity stirs him to think that he can beat it. Some years ago in Chicago a great discretionary pool swindle took hundreds of thousands of dollars out of the credulous before it collapsed. The same gang repeated the operation on a bigger scale in New York several years later. The swindlers were exposed and some went to prison. Three years later they started out again and took two millions more from the same gullible public. The gang’s stool pigeon promised to pay 520 per cent, a year, and he did pay weekly dividends at this rate (out of the victims’ money, of course) until the police raided his shop in Brooklyn. The same swindle, were it started again, would be just as profitable to its organizers. In every industrial boom a horde of wildcat promoters invades the market place and offers its wares to the credulous through circus-poster newspaper advertising. The records show that there is not one chance in a hundred of one of these Sunday-advertised ventures becoming a sound business enterprise, and not one chance in a thousand of one of them being the bonanza that they are all painted. In the industrial boom following the flotation of the Steel Corporation, iqo companies offered their shares to the public through a single New York newspaper in a year. Three years later an investigation showed that nearly all of these companies were dead and that not one was earning anything for its shareholders. A mining engineer recently investigated all of the companies brought out in the past ten years through flambuoyant newspaper advertising and found only three on a healthv dividend basis. But in the next industrial boom the wildcat promoters will reap the usual har94 vest from the gullible. As the fakirs themselves say, “there’s always a new crop of suckers.” Mr. Barnum said, “The American people like to be humbugged,” and nowhere is the truth of this better illustrated than in the market place. But there is another side to it. The small investors are not nearly so foolish in their real investments as their absurd chasing after bubbles would indicate. The public in the past few years, largely as a result of the widespread interest in American business affairs, has shown an intelligence in its investments that has surprised the old timers in Wall Street. The Wall Street aphorism, “the public buys at the top and sells at the bottom,” is probably still true in a large measure of the public’s margin speculation, but it is not true of its investments. “The public invests at the bottom and sells at the top”—and the records of the past four years, more especially of the past two, show this in a remarkable degree. When railroad shares were pushed to the highest prices in their history of the Harriman bull market of IQO6, the talk of the Street was that “the insiders were unloading on the public,” and when the crash came in 1907, with terrific losses Ín market prices, every sourfaced looker-on thought he saw a cruel shaking-out of the public, with bargains falling into the laps of the big speculators. What happened was just the other thing. When prices were in the skies in the full and earlv winter of TQO6 the public was selling out on Wall Street, and the public never came back to reinvest its gains until the panic lvt the market and snilled the big speculators’ loads out on the bargain table. In the great advance in prices from the snrinçr of T004 to the winter of Toofi-v the public soin manv millions of dollars of securit'es to speculators in WaU Street, because investors found that stocks were selbng so high that their income return was less than savings bank interest rates. Tn the first collapse in the bull market early in T907 investors began reinvesting their savings in good railroads and industrials, and when the bank panic in October drove prices to the lowest in years, a flood of investment buying resulted. In two years not less than 400,000 new names were enrolled on the stock books of the railroad and industrial corporations listed on the Stock Exchange. A dozen of the biggest corporations gained 100,000 shareholders. Great Northern, when it was selling at a fancy figure late in 1906, had only 2,700 shareholders. The long decline in 1907 attracted 4,000 new shareholders up to the week of the bank panic, and in the months of depressed prices following the panic 7,500 more bargain-hunters came to Wall Street to buy “Jim” Hill’s stock, with the result that Great Northern now has five times as many shareholders as it had two years ago. The public similarly unloaded its Reading shares on Wall Street in a bull market and bought them back in the panic. Before the bull market collapsed the holders of Reading common numbered only 1,700. During the bear market 1,000 new investors bought the shares, and in the panic the list rose to 4,300. When Wall Street began bulling Reading again last summer the shareholders took their profits, and early this winter, when Reading had doubled its panic price, the number of shareholders had declined to 3,000. For years the list of Pennsylvania Railroad sharehold.ers has risen in bear markets and declined in bull markets. The common gained nearly 20,000 shareholders in the bear market of 1907, and since then the list has been gradually der dining with the recovery in the price of the stock. The great recovery in security prices since the panic, while helped along by manipulation, has been built on the solid foundation of the public’s investment of several hundred million dollars in Wall Street at the bargain prices from March, 1907, to March, 1908. When the speculators boom the market to the skies again, the public will convert its stocks into cash and await the inevitable collapse. The lambs are learning. The development of one’s personality cannot be accomplished in isolation or solitude ; the process involves close and enduring association with one’s fellows. If work were purely a matter of mechanical skill, each worker might have his cell and perform his task, as in a prison. But work involves the entire personality, and the personality finds its complete unfolding, not in detachment, but in association. Hamilton Wright Mabie. Exercise That Rests May 1909 By WOODS HUTCHINSON The News Value of Old Billings May 1909 By ELLIS PARKER BUTLER His Majesty’s Ministers May 1909 By AUDITOR TANTUM Prince Rupert in the Making May 1909 By ERNEST CAWCROFT High Life at Low Rates May 1909 By E. L. BACON MEN AND EVENTS IN THE PUBLIC EYE May 1909 By R. P. CHESTER The Real Owners of America January 1909 By FRANK FAYANT

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professional_accounting

Article 4-1 After receiving an application by a foreign issuer for a primary stock listing, the case handler of the TWSE shall begin a document review of the application, its appendices, and other materials submitted by the foreign issuer, the underwriter, the CPA and the lawyer: Review guidelines: The foreign issuer's financial reports for the most recent two years, audited and attested by a certified public accountant, shall be reviewed, and if there are irregular changes in any accounting items, then the financial report for the preceding year shall be reviewed with particular attention to the given accounting item. From the date that the applicant company submits its application documents until its listing, it shall, in compliance mutatis mutandis with the requirements of the competent authority regarding public announcement and filing of financial reports, submit all of its quarterly and annual financial reports to the TWSE, and upload the electronic versions of the aforesaid financial reports to the Internet information reporting system designated by the TWSE, to serve as a basis for review. If the review period crosses over the fiscal year of the application, the TWSE shall request the applicant company to additionally submit the unaudited four major financial statements of the fiscal year of the application to serve as reference for review. The CPA audit or review report: The certifying CPAs for the most recent three years shall be two practicing Taiwan CPAs at a joint accounting firm approved by the competent authority for attestation of the financial reports of public companies. None of the following circumstances may apply to the CPAs engaged by the applicant company: In the preceding three years, the CPAs have been subject to disciplinary action or disposition in the form of a warning or above, but this restriction does not apply if the disciplinary action or disposition is a warning or reprimand and the cause in fact for such disciplinary action or disposition occurred five or more years before the date of application for listing. The CPAs have been subject at least twice to a public announcement by the TWSE or TPEx in the most recent year under the TWSE Regulations Governing the Handling of Errors by Certified Public Accountants in Auditing of Initial Applications for TWSE Listing or the GreTai Securities Market Regulations for Handling Deficiencies in Certified Public Accountants' Reviews of GTSM Listing Applications that the financial reports of TWSE or TPEx listing applicants that have been attested by the CPAs are rejected for a certain period, but this restriction does not apply if unless a disposition of rejecting the CPA-attested financial reports of the listing applicant company for a certain period by TWSE or TPEx, and the cause in fact for such disposition public announcement occurred five or more years before the date of application for listing. The opinion section of the audit report or conclusion section of the review report shall explain the accounting principles adopted by the foreign issuer and the differences between those principles and the regulations issued by the competent authority to govern the preparation of financial reports for the relevant industry, and include an index to the notes; it shall also contain respective statements that the report has been reviewed in accordance with Taiwan's Regulations Governing Auditing and Certification of Financial Statements by Certified Public Accountants and generally accepted auditing standards. The CPA shall produce an audit report that states an unqualified opinion without reference to the audit work of other CPAs. If the quarterly financial reported reviewed by the CPA includes information on a major subsidiary, the financial report and related materials on that subsidiary shall also be reviewed by the CPA, and the CPA shall issue a conclusion on the major subsidiary without reference to any other accountant's review. Content of the financial reports: The financial reports shall be produced using the New Taiwan Dollar as monetary unit, and shall be in Chinese, but may also add English. The financial reports shall be produced using period-on-period comparison, and shall include balance sheets, statements of comprehensive income, statements of cash flows, statements of changes in equity, and the accompanying notes. The notes to financial reports shall state the accounting principles used by the foreign issuer. If the financial reports are prepared in accordance with the regulations issued by the competent authority to govern the preparation of financial reports for the relevant industry, then Article 7, paragraph 1 of those regulations governing the preparation of annual parent company only financial reports need not apply. If they are not prepared in accordance with the regulations issued by the competent authority to govern the preparation of financial reports for the relevant industry, then the differences, including material discrepancies and their dollar amounts, from the regulations governing preparation of financial reports adopted by the competent authority, as reflected in the period-to-period balance sheet and the statement of comprehensive income, shall be disclosed. Checklist of legal issues: The case handler shall ascertain whether the lawyer filling out the checklist has compiled the working paper in accordance with the instructions on the preparation of the checklist and, if the contents of the comments section or results of review indicated in the checklist are not adequately confirmed by the lawyer’s working paper, shall request the lawyer to provide a supplementary explanation. Reviewers shall apprise themselves of whether the foreign issuer is in compliance with Articles 28-4, 28-5, and 28-6 of the TWSE Rules Governing Review of Securities Listings, and whether any circumstance under any subparagraph of Article 28-8, paragraph 1 of the same Rules that would make market listing inappropriate apply to the foreign issuer or any company it controls. Review procedures: The TWSE may initiate the following review procedures as it deems necessary for a review: Requesting that the foreign issuer, the underwriter, the CPA and lawyers attach additional information and an explanation of the information. If a material irregularity is discovered and still cannot be reasonably explained following a request for the submission of additional written information by the relevant persons in accordance with the preceding paragraph, then, with the written approval of the TWSE president, an onsite audit may be conducted or the foreign issuer may be required to engage a CPA, attorney, or other institution designated by the TWSE to conduct an audit of the foreign issuer within a scope designated by the TWSE, and to submit the results of the audit to the TWSE. The recommendations for the internal control system issued by a CPA for the most recent 3 years shall be examined, and the foreign issuer shall be requested to engage a CPA to issue a special audit report on the internal control system. The TWSE shall gain an understanding of the applicant's production of financial forecast data, and as needed may require the applicant to provide financial forecast data for each quarter during the review period. The data shall be provided only for use as a reference in the review of the given case, and may not be made public or otherwise divulged. Whether the prospectus submitted by foreign issuers is compiled in accordance with the TWSE Regulations Governing the Particulars to be Recorded in Prospectuses for Initial Listing of Securities shall be examined. Whether the checklist of legal issues filled out by the lawyer adequately supports the conclusions of the legal opinion contained in the prospectus shall also be ascertained. The securities underwriter and CPA handling an application for a primary listing by a foreign issuer shall apply the TWSE Regulations Governing the Reporting of Basic Information on Advisory Client Companies by Securities Underwriters, Directions Governing the Particulars to be Recorded in the Securities Underwriter's Evaluation Report for Initial Listing of Securities, Assessment and Auditing Procedures for Securities Underwriters Handling Initial Applications for Market Listing, Regulations for Handling Deficiencies in the Evaluation Report or Other Relevant Information Submitted by a Securities Underwriter and Regulations Governing the Handling of Errors by Certified Public Accountants in Auditing of Initial Applications for Market Listing. The case handler shall provide the key points of the audit results, requesting relevant expert opinion and consulting relevant information as needed to produce written proposals for the purpose of reference during the review process. An application for a primary listing by a foreign issuer is subject to review by the management, before being submitted to the Review Committee for review. The application will be submitted to the Review Committee for review where said members pass a resolution approving the listing. Where a resolution disallowing the listing is passed, the TWSE Vice President will assemble the relevant personnel for a re-review and, if necessary, invite the applicant and securities underwriter to give an explanation. If the listing is still not approved under such circumstance, it will be forthwith rejected upon the approval of the President. The aforementioned internal review meeting shall have a quorum of two-thirds of the internal members. Applications for a primary listing by a foreign issuer shall be submitted for deliberation by the Securities Review Committee within six weeks after receipt of the application documents. Under exceptional circumstances, however, the Administration Department, 10 days prior to the Review Committee meeting, may extend the deadline for submission to the Review Committee based upon review requirements or at the request of the applicant company, subject to the signed approval of the president of the GTSM. Extensions granted at the request of the applicant company are be limited to a maximum period of a month. When a foreign issuer applies for a primary listing (with the exception of a GTSM primary listed company applying for a TWSE primary listing, to which the provisions of Article 7-1, paragraph 1, subparagraph 1 of the TWSE Procedures for Review of Securities Listings regarding exemption from review by the review committee and relevant provisions of Article 7-2 of said procedures apply mutatis mutandis), the provisions of Article 4, paragraphs 2 and 3 of the TWSE Procedures for Review of Securities Listings in regard to retaining an outside reviewer to give a consulting opinion, and the provisions regarding review by the Committee for Review of Stock Exchange Securities Listings will apply mutatis mutandis. However, when any circumstance of the subparagraphs of Article 28-8, paragraph 1 applies to a foreign issuer or any company it controls, or in the case of re-reviews, the approval of two-thirds or more of the Review Committee members present is required, and the Review Committee must submit the concrete reasons for their overall consideration that approval of the listing be granted. The provisions of the TWSE Procedures for Review of Securities Listings in regard to consideration by the board of directors, return of applications and re-reviews, forwarding to the competent authority, and listing and trading of stocks shall apply mutatis mutandis to applications for primary listing by a foreign issuer. Taiwan Stock Exchange Corporation Procedures for Review of Securities Listings § 4、7-1、7-2 (2020.03.30) Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listings § 28-4、28-5、28-6、28-8 (2020.03.30)

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professional_accounting

Before the frenzy of the holidays comes, seize the opportunity to check your retirement, education, and health savings accounts to make sure you’re taking full advantage of the benefits offered. With so much to cover, I’m featuring my annual checklist in two parts. First, I’ll give you a checklist for your IRAs and other retirement accounts and required minimum distributions (RMDs). In Part 2, I’ll discuss beneficiaries, rollovers, 529 plans, Coverdell ESAs, and health savings accounts (HSAs). Q. Have you fully funded your 401(k)? A. In 2018, you can defer maximum of $18,500 into your 401(k) or 403(b). The limit is an aggregate of all pretax and/or Roth contributions made. In 2018, individuals participating in both a 457(b) and 403(b) or 401(k) can defer up to a $37,000 (for example, an individual can fund $18,500 into a 457(b) plus an additional $18,500 into a 401(k) or 403(b), for a total of $37,000). In addition, individuals age 50 and older can defer an additional $12,000 in a catch-up contribution. Q. Have you fully funded your SIMPLE IRA? A. In 2018, you can defer maximum of $12,500 into your SIMPLE IRA. By participating, you are eligible to receive a non-forfeitable employer contribution (3% match or 2% non-elective). Q. Have you fully funded your individual retirement account (IRA)? A. While it is true that you can wait until April 15, 2019 to contribute your IRA for the 2018 tax year, why not fund it now, if you are able to, and have the funds working for you on a tax-favored basis for a longer length of time? Virtually anyone with reportable (earned) income is eligible to fund a traditional IRA up to $5,500 ($6,500 including the age 50+ catch-up) in 2018. However, everyone is not eligible to make Roth IRA contributions. Roth IRAs carry statutory maximum income levels, and investors must satisfy an annual income test. There are no maximum age restrictions on Roth contributors, although individuals older than 70½ cannot make contributions to traditional IRAs. The spousal IRA is sole exception to the income requirement; available to those couples where one spouse has no earned income. Notably, the spousal IRA only applies to those (married) couples that file a joint tax return. Tip: Participation in an employer-sponsored plan, such as a 401(k), 403(b), 457(b), SIMPLE, or SEP IRA, does not affect IRA eligibility or contribution limits. However, participation may affect whether or not your contributions are tax deductible. A number of variables apply in determining whether taxpayers’ contributions to their traditional IRA are tax deductible. Variables include filing status, modified adjusted gross income (MAGI), and whether individuals and/or their spouses are active participants in a workplace retirement plan. To learn more about IRA deductibility, see my column here. Q. Have you funded a Roth IRA for a child? A. There is no minimum age to establish an IRA. Instead a child, regardless of age, who has reportable earned income, is eligible to fund a Roth IRA. Once established, the IRA can be funded by anyone, up to the amount earned by the minor. For more information, see my article about establishing Roth IRA for a child. Q. Did you mistakenly “overfund” your IRA? A. It’s a common error to over contribute to an IRA. "Excess contributions," as the IRS refers to them, typically occur when individuals unwittingly deposit funds that are not permitted to be made to an IRA. There are a number of scenarios that can lead an IRA owner to overfund their IRA. For example, contributing more than the maximum annual contribution limit ($5,500 in 2018/ $6,500 [age 50+], not satisfying Roth income-eligibility, and funding an IRA with an ineligible rollover are just a few of the common errors that lead to excess IRA contributions. Reviewing all of your IRA account activity for the past year with your financial and/or tax professional can help you avoid an inadvertent overfunding that could result in taxes and/or penalties. Q. Have you had the “back-door” Roth IRA discussion? A. As noted, Roth IRA eligibility is means tested—that is, an investor must satisfy an annual income requirement. Since 2010, however, high-income earners, regardless of the amount of household income, have been eligible to fund a traditional IRA and subsequently convert those funds to a Roth IRA, a strategy commonly referred to as a “back-door” Roth IRA. For more information on this popular strategy, see my column here. Q. Did you make a nondeductible (aftertax) IRA contribution? For more on nondeductible IRAs and form 8606, see my article. Q. Did you take a distribution from a traditional IRA? A. The tax liability of any distribution (e.g. normal, conversion, or RMD) from any IRA once you have basis is calculated and reported on IRS Form 8606. An IRA owner (or most likely their tax professional) is required file this form in those tax years that they make a non-deductible contribution and in any year that they take any distribution (including a conversion to a Roth IRA) from any IRA after they have accumulated non-deductible funds in an IRA. For tax purposes, all IRAs (except Roth IRAs) are considered one single IRA regardless of where they have been established (e.g. different investment managers) and your distributions are taxed “pro-rata,” partly from your deductible (pretax contributions plus earnings, if any) and partly from your non-deductible (aftertax) IRA funds. In other words, when there are aftertax dollars (basis) in a traditional IRA (including Rollover IRA, SEP and SIMPLE) and you don’t withdraw the entire IRA value (across all IRAs), then the amount of the distribution subject to income tax is based on the ratio of aftertax dollars to total IRA assets (across all IRAs, including Rollover IRA, SEP and SIMPLE accounts) at the end of the year. This is known as the “pro-rata” rule. For more on nondeductible (after-tax) contributions see my article. Q. Did you (or intend to) make a Roth IRA conversion for 2018? A. Conversions are made on a calendar year basis. You do not have until April 15th 2019 to complete a prior year (e.g. 2018) conversion. Instead, the funds must be distributed in 2018 and reported on a 2018 1099-R. The Tax Cuts and Jobs of 2017 act lowered individual tax rates for many Americans, thus making Roth conversions more appealing. Plus, IRA owners can convert as much or as little of a traditional IRA (including SEP and SIMPLE) to a Roth IRA as they want; although the amount of funds converted (minus any basis) is subject income tax (federal and state, if applicable) in the year of conversion. The conversion amount is taxed at your marginal tax bracket. Tip: Converting to a Roth is irrevocable. This is due to a provision in The Tax Cut and Jobs Act of 2017 repealing the recharacterization of a Roth conversion. For more on the eliminating of recharacterization, see my column. Q. Did you turn 70½ in 2018? A. In general, when you reach age 70½, you must begin to take required minimum distributions (RMDs) from your retirement accounts. However, you can defer your first RMD to April 1, 2019. However, if elected, you must take two RMDs next year [both your (deferred) 2018 and 2019 RMD]. If you have an IRA, SEP or SIMPLE (other than a Roth), you must begin taking required minimum distributions (RMDs) from that account when you reach age 70½ regardless if you are still working or if you don’t need or want the assets. Not taking an RMD subjects you to a 50% penalty tax. 401(k) plan assets are also subject to RMDs. However, unlike IRAs, your initial RMD could be deferred past age 70½. This exception is referred to as the “still working exception.” Here, you may not have to take a distribution from your 401(k) or like plan if: (1) You’re still working for the employer sponsoring the plan and (2) You’re not a “5% owner” of the company. In addition your plan must specifically allow for this exception. Q. If you are older than age 70½, have you taken your RMD for 2018? A. Don’t forget that a hefty 50% penalty tax is applied to the minimum distribution amount that was required, but not taken. You can always take more than your annual minimum distribution. Q. If you are subject to RMDs, have you included the value of all your IRAs in the calculation? A. Government rules require account owners to calculate RMD amounts for each individual (separate) IRA, including SEP IRAs and SIMPLE IRAs, but not Roth IRAs. Once calculated, however, the total or aggregate amount may be taken from any one or more IRAs. Notably, 401(k) and 403(b) are subject to different set of RMD aggregation rules. For more on aggregating RMDs see my column here. Q. If you are subject to RMDs, have you included your 401(k) account? A. 401(k) plans (unlike IRAs) follow a different set of RMD rules. Unlike an IRA, 401(k) participants who own 5% or less of their current employer’s plan can defer their RMD until the later of the year they turn 70½ or the year they retire, whereas participants who own more than 5% are required to start taking RMDs at 70½, regardless of work status. Q. If you are subject to RMDs, have you included your 403(b) account? A. Generally, RMDs must start no later than April 1 of the year following later of attainment of age 70½ or the date the employee leaves the employer sponsoring the 403(b). Notably, for 403(b) plans, only a special exception applies for the account value on December 31, 1986 if it’s been separately tracked. Here, the required begin date for RMDs is the later of age 75 or the date the employee separates from service from the employer sponsoring the plan. It’s common for participants to own multiple 403(b) accounts. Like IRAs, individuals who have more than one 403(b) account must determine the RMD separately, although the aggregate amount can be taken from any one or more multiple 403(b) accounts. However, not all 403(b) plan sponsors permit aggregation with another 403(b) account from a different sponsor. You cannot satisfy RMDs for one plan type (e.g. 403(b)) with an RMD from another plan type (e.g. 401(k)). Q. Did you or (are you planning) on using net unrealized appreciation (NUA) strategy? A. NUA treatment requires a taxpayer to satisfy a number of rules. One requirement is all plan funds must be distributed by the end of the year. In other words, if plan funds remain (in the plan) at the end of the year, the lump sum distribution requirement will not be satisfied. For more on NUA strategy, see my column here. Q. Did you turn any of these ages in 2018? A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee’s SEP IRA. A governmental 457(b) deferred-compensation plan allows employees of states, political subdivisions of a state, or any agency or instrumentality of a state to invest money on a pretax or Roth aftertax basis through salary reductions. The employer deposits amounts withheld into an annuity, custodial, or a trust account, where the funds accumulate tax-deferred or potentially tax free in the case of Roth aftertax contributions until withdrawals commence, usually at retirement. Join Brian Dobbis, Director of Retirement Solutions, in a discussion about year-end tips for retirement and education savings on Tues., Dec. 4 at 4:15 pm ET.

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professional_accounting

NVIDIA Announces Financial Results for Third Quarter Fiscal 2023 16 novembre 2022, 4:20 PM ·20 minuto per la lettura NVIDIA Corp. headquarters NVIDIA is headquartered in Santa Clara, Calif. Data Center revenue of $3.83 billion, up 31% from a year ago Quarterly return to shareholders of $3.75 billion SANTA CLARA, Calif., Nov. 16, 2022 (GLOBE NEWSWIRE) -- NVIDIA (NASDAQ: NVDA) today reported revenue for the third quarter ended October 30, 2022, of $5.93 billion, down 17% from a year ago and down 12% from the previous quarter. GAAP earnings per diluted share for the quarter were $0.27, down 72% from a year ago and up 4% from the previous quarter. Non-GAAP earnings per diluted share were $0.58, down 50% from a year ago and up 14% from the previous quarter. “We are quickly adapting to the macro environment, correcting inventory levels and paving the way for new products,” said Jensen Huang, founder and CEO of NVIDIA. “The ramp of our new platforms ― Ada Lovelace RTX graphics, Hopper AI computing, BlueField and Quantum networking, Orin for autonomous vehicles and robotics, and Omniverse ― is off to a great start and forms the foundation of our next phase of growth. “NVIDIA’s pioneering work in accelerated computing is more vital than ever. Limited by physics, general purpose computing has slowed to a crawl, just as AI demands more computing. Accelerated computing lets companies achieve orders-of-magnitude increases in productivity while saving money and the environment,” he said. During the third quarter of fiscal 2023, NVIDIA returned to shareholders $3.75 billion in share repurchases and cash dividends, bringing the return in the first three quarters to $9.29 billion. As of October 30, 2022, the company had $8.28 billion remaining under its share repurchase authorization through December 2023. NVIDIA will pay its next quarterly cash dividend of $0.04 per share on December 22, 2022, to all shareholders of record on December 1, 2022. Q3 Fiscal 2023 Summary ($ in millions, except earnings per share) Q3 FY23 Q/Q Y/Y Down 12% Up 10.1 pts Down 11.6 pts Up 7% Up 31% NVIDIA’s outlook for the fourth quarter of fiscal 2023 is as follows: Revenue is expected to be $6.00 billion, plus or minus 2%. GAAP and non-GAAP gross margins are expected to be 63.2% and 66.0%, respectively, plus or minus 50 basis points. GAAP and non-GAAP operating expenses are expected to be approximately $2.56 billion and $1.78 billion, respectively. GAAP and non-GAAP other income and expense are expected to be an income of approximately $40 million, excluding gains and losses from non-affiliated investments. GAAP and non-GAAP tax rates are expected to be 9.0%, plus or minus 1%, excluding any discrete items. NVIDIA achieved progress since its previous earnings announcement in these areas: Third-quarter revenue was $3.83 billion, up 31% from a year ago and up 1% from the previous quarter. Began shipping the NVIDIA® H100 Tensor Core GPU based on the new NVIDIA Hopper™ architecture, with first systems available now. Announced at the SC22 supercomputing conference that NVIDIA H100 and Quantum-2 systems are being broadly adopted; that NVIDIA Omniverse™ connects to leading scientific computing visualization software; and that NVIDIA powers 90% of the new systems in the latest TOP500 list of the world’s fastest supercomputers, including the H100-powered system deployed at the Flatiron Institute, in the U.S, which topped the Green500 list of the most-efficient systems. Announced a multi-year collaboration with Microsoft to help enterprises train, deploy and scale AI, including state-of-the-art models, through Microsoft Azure, which is deploying tens of thousands of A100 and H100 GPUs. Announced a multi-year partnership with Oracle to bring NVIDIA’s full accelerated computing stack to Oracle Cloud Infrastructure, which is deploying tens of thousands more NVIDIA GPUs, including A100 and H100 accelerators. Announced a partnership with Nuance Communications to bring AI-based diagnostic tools to clinical radiologists. Announced that Rescale is integrating NVIDIA AI Enterprise software into its HPC-as-a-service offering. Announced two new large language model cloud AI services — NVIDIA NeMo™ LLM and NVIDIA BioNeMo™ LLM — enabling developers to easily adapt LLMs and deploy customized AI applications for content generation, text summarization, protein structure and biomolecular property predictions, and more. Announced that NVIDIA H100 Tensor Core GPUs set records in both AI inference and AI training on all workloads in their first appearances on the MLPerf AI benchmarks. Unveiled the second generation of NVIDIA OVX™, powered by the Ada Lovelace GPU architecture and enhanced networking technology, enabling the creation of 3D worlds with groundbreaking real-time graphics, AI and digital-twin simulation capabilities. Announced a new data center solution delivering zero-trust security optimized for VMware vSphere 8 combining Dell PowerEdge servers with NVIDIA BlueField® DPUs, NVIDIA GPUs and NVIDIA AI Enterprise software. Third-quarter revenue was $1.57 billion, down 51% from a year ago and down 23% from the previous quarter. Launched GeForce RTX™ 4090, the first Ada Lovelace architecture GPU for gamers and creators, which quickly sold out in many locations. Sales began today of the RTX 4080. Introduced NVIDIA DLSS 3, an AI-powered performance multiplier for a new era of NVIDIA RTX™ neural rendering. More than 240 DLSS games and applications are now available, and 35 have announced support for DLSS 3, including Marvel’s Spider-Man Remastered, Cyberpunk 2077 and Microsoft Flight Simulator. Shipped 37 new RTX games and apps, pushing up the total available to more than 360. Expanded the GeForce NOW™ library with 85+ games, bringing the total available games to 1,400+. Professional Visualization Third-quarter revenue was $200 million, down 65% from a year ago and down 60% from the previous quarter. Introduced NVIDIA Omniverse™ Cloud, the company’s first software- and infrastructure-as-a-service offering, with a comprehensive suite of cloud services for artists, developers and enterprise teams to access metaverse applications. Automotive and Embedded Third-quarter revenue was $251 million, up 86% from a year ago and up 14% from the previous quarter. Introduced NVIDIA DRIVE Thor™, the company’s 2,000 TFLOPS next-generation centralized computer for safe and secure autonomous vehicles, with Geely-owned ZEEKR integrating it into electric vehicles in 2025. Marked the launch of the all-electric Volvo EX90, powered by NVIDIA DRIVE Orin and Xavier™, and Polestar 3, the brand’s first SUV, which runs on the NVIDIA DRIVE™ platform. Announced that Hozon Auto’s Neta brand will build future electric vehicles on the NVIDIA DRIVE Orin™ platform, enabling automated driving and intelligent features. Announced new DRIVE IX ecosystem partners that are building on the company’s open AI cockpit software stack to deliver interactive features for vehicles. Launched Jetson Orin Nano™ system-on-modules that deliver up to 80x the performance over the prior generation for entry-level edge AI and robotics. CFO Commentary Commentary on the quarter by Colette Kress, NVIDIA’s executive vice president and chief financial officer, is available at https://investor.nvidia.com/. Conference Call and Webcast Information NVIDIA will conduct a conference call with analysts and investors to discuss its third quarter fiscal 2023 financial results and current financial prospects today at 2 p.m. Pacific time (5 p.m. Eastern time). A live webcast (listen-only mode) of the conference call will be accessible at NVIDIA’s investor relations website, https://investor.nvidia.com. The webcast will be recorded and available for replay until NVIDIA’s conference call to discuss its financial results for its fourth quarter and fiscal 2023. Non-GAAP Measures To supplement NVIDIA’s condensed consolidated financial statements presented in accordance with GAAP, the company uses non-GAAP measures of certain components of financial performance. These non-GAAP measures include non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP income from operations, non-GAAP other income (expense), net, non-GAAP net income, non-GAAP net income, or earnings, per diluted share, and free cash flow. For NVIDIA’s investors to be better able to compare its current results with those of previous periods, the company has shown a reconciliation of GAAP to non-GAAP financial measures. These reconciliations adjust the related GAAP financial measures to exclude acquisition termination costs, stock-based compensation expense, acquisition-related and other costs, contributions, IP-related costs, legal settlement costs, restructuring costs, gains and losses from non-affiliated investments, interest expense related to amortization of debt discount, the associated tax impact of these items where applicable and domestication tax benefit. Free cash flow is calculated as GAAP net cash provided by operating activities less both purchases of property and equipment and intangible assets and principal payments on property and equipment and intangible assets. NVIDIA believes the presentation of its non-GAAP financial measures enhances the user’s overall understanding of the company’s historical financial performance. The presentation of the company’s non-GAAP financial measures is not meant to be considered in isolation or as a substitute for the company’s financial results prepared in accordance with GAAP, and the company’s non-GAAP measures may be different from non-GAAP measures used by other companies. Since its founding in 1993, NVIDIA (NASDAQ: NVDA) has been a pioneer in accelerated computing. The company’s invention of the GPU in 1999 sparked the growth of the PC gaming market, redefined computer graphics, ignited the era of modern AI and is fueling the creation of the metaverse. NVIDIA is now a full-stack computing company with data-center-scale offerings that are reshaping industry. More information at https://nvidianews.nvidia.com/. Simona Jankowski Robert Sherbin [email protected] [email protected] A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/0b2b7b7d-12bb-4da3-a570-cce517e9f884 Certain statements in this press release including, but not limited to, statements as to: NVIDIA quickly adapting to the macro environment, correcting inventory levels and paving the way for new products; the ramp of NVIDIA’s new platforms forming the foundation of NVIDIA’s next phase of growth; NVIDIA’s pioneering work in accelerated computing being more vital than ever; AI demanding more computing; accelerated computing letting companies achieve orders-of-magnitude increases in productivity while saving money and the environment; NVIDIA’s next quarterly cash dividend; NVIDIA’s financial outlook for the fourth quarter of fiscal 2023; NVIDIA’s expected tax rates for the fourth quarter of fiscal 2023; the benefits, impact, performance, and availabilities of our products and technologies; NVIDIA H100 and Quantum-2 systems being broadly adopted; the multi-year collaboration with Microsoft to help enterprises train, deploy and scale AI, including state-of-the-art models; the multi-year partnership with Oracle to bring NVIDIA’s full accelerated computing stack to Oracle Cloud Infrastructure; the partnership with Nuance Communications to bring AI-based diagnostic tools to clinical radiologists; Rescale integrating NVIDIA AI Enterprise into its HPC-as-a-service offering; NVIDIA NeMo LLM and NVIDIA BioNeMo LLM enabling developers to easily adapt LLMs and deploy customized AI applications for content generation, text summarization, protein structure, biomolecular property predictions, and more; the second generation of NVIDIA OVX enabling the creation of 3D worlds with groundbreaking real-time graphics, AI and digital-twin simulation capabilities; the new data center solution delivering zero-trust security optimized for VMware vSphere 8 combining Dell PowerEdge servers with NVIDIA BlueField DPUs, NVIDIA GPUs and NVIDIA AI Enterprise software; NVIDIA Omniverse Cloud providing a comprehensive suite of cloud services for artists, developers and enterprise teams to access metaverse applications; ZEEKR integrating NVIDIA DRIVE Thor into electric vehicles in 2025; Hozon Auto’s Neta brand building future electric vehicles on the NVIDIA DRIVE Orin platform, enabling automated driving and intelligent features; new DRIVE IX ecosystem partners building on the company’s open AI cockpit software stack to deliver interactive features for vehicles; and the Jetson Orin Nano system-on-modules delivering up to 80x the performance over the prior generation for entry-level edge AI and robotics are forward-looking statements that are subject to risks and uncertainties that could cause results to be materially different than expectations. Important factors that could cause actual results to differ materially include: global economic conditions; our reliance on third parties to manufacture, assemble, package and test our products; the impact of technological development and competition; development of new products and technologies or enhancements to our existing product and technologies; market acceptance of our products or our partners’ products; design, manufacturing or software defects; changes in consumer preferences or demands; changes in industry standards and interfaces; unexpected loss of performance of our products or technologies when integrated into systems; as well as other factors detailed from time to time in the most recent reports NVIDIA files with the Securities and Exchange Commission, or SEC, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q. Copies of reports filed with the SEC are posted on the company’s website and are available from NVIDIA without charge. These forward-looking statements are not guarantees of future performance and speak only as of the date hereof, and, except as required by law, NVIDIA disclaims any obligation to update these forward-looking statements to reflect future events or circumstances. © 2022 NVIDIA Corporation. All rights reserved. NVIDIA, the NVIDIA logo, GeForce, GeForce NOW, GeForce RTX, Jetson Orin Nano, NVIDIA BioNeMo, NVIDIA BlueField, NVIDIA DRIVE, NVIDIA DRIVE Orin, NVIDIA DRIVE Thor, NVIDIA Hopper, NVIDIA NeMo, NVIDIA RTX, NVIDIA OVX and NVIDIA Omniverse are trademarks and/or registered trademarks of NVIDIA Corporation in the U.S. and/or other countries. Other company and product names may be trademarks of the respective companies with which they are associated. Features, pricing, availability, and specifications are subject to change without notice. (In millions, except per share data) October 30, Acquisition termination cost Other, net Income before income tax Income tax expense (benefit) Net income per share: Weighted average shares used in per share computation: Cash, cash equivalents and marketable securities Operating lease assets Deferred income tax assets Accrued and other current liabilities Long-term operating lease liabilities Shareholders' equity Total liabilities and shareholders' equity Adjustments to reconcile net income to net cash provided by operating activities: Losses (gains) on investments in non affiliates, net Prepaid expenses and other assets Proceeds from maturities of marketable securities Proceeds from sales of marketable securities Purchases of marketable securities Purchases related to property and equipment and intangible assets Acquisitions, net of cash acquired Investments and other, net Proceeds related to employee stock plans Payments related to repurchases of common stock Payments related to tax on restricted stock units Principal payments on property and equipment and intangible assets Issuance of debt, net of issuance costs Net cash provided by (used in) financing activities Change in cash and cash equivalents RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES GAAP gross profit GAAP gross margin Acquisition-related and other costs (A) Stock-based compensation expense (B) IP-related costs Non-GAAP gross profit Non-GAAP gross margin GAAP operating expenses Restructuring costs (C) Legal settlement costs Non-GAAP operating expenses GAAP income from operations Total impact of non-GAAP adjustments to income from operations Non-GAAP income from operations GAAP other income (expense), net (Gains) losses from non-affiliated investments Interest expense related to amortization of debt discount Non-GAAP other income (expense), net GAAP net income Total pre-tax impact of non-GAAP adjustments Income tax impact of non-GAAP adjustments (D) Domestication tax adjustments Non-GAAP net income Diluted net income per share Weighted average shares used in diluted net income per share computation GAAP net cash provided by operating activities Principal payments on property and equipment (A) Acquisition-related and other costs are comprised of amortization of intangible assets, transaction costs, and certain compensation charges and are included in the following line items: (B) Stock-based compensation consists of the following: (C) Costs related to Russia branch office closure. (D) Income tax impact of non-GAAP adjustments, including the recognition of excess tax benefits or deficiencies related to stock-based compensation under GAAP accounting standard (ASU 2016-09). RECONCILIATION OF GAAP TO NON-GAAP OUTLOOK Q4 FY2023 Outlook ($ in millions) Impact of stock-based compensation expense, acquisition-related costs, and other costs Stock-based compensation expense, acquisition-related costs, and other costs

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professional_accounting

The AMF Ombudsman Access our databases BDIF - Decisions and financial disclosures database GECO - Savings products & management companies database My management companies space Management companies news My relations with the AMF Create an investment management company in France Develop your investment management company Operate in France (incoming passport) Create financial products in France Market products in France or in Europe How to get the RCCI professional licence Submit annual reports on the AMF Access the GECO extranet Decrypt the regulation AMF Examination Investment services providers My investment services providers space Investment services providers news Provide investment services Obtain DASP authorisation Make my reporting, notifications and disclosure Obtain the RCSI professional licence My fintech space Discuss with the AMF about my project Obtaining approval for an ICO Become a crowdfunding advisers (CIP) Listed companies & issuers My listed companies & issuers space Listed companies and issuers news Prepare a financial transaction File financial and non-financial disclosures Disseminating regulated information Professional investors My professional investor space Professionals news Major holding Declaration of intention Takeover reporting Net short positions Directors' dealings disclosure Securities lending/borrowing The space for other professionals Other professionals news Benchmark administrator Financial Investment Advisor status (FIA) Central securities depository Depositary of UCITS and AIFs Intermediation in miscellaneous assets Trading venue Data reporting service provider Consult the AMF Policy Warnings and blacklists AMF news releases Enforcement Committee news releases AMF Events AMF diary Public appearances by officials Conferences & briefings AMF’s EU positions Currently in-depth Information obligations of listed companies Reports, research and analysis SPOT inspection campaigns Professional guides Annual reports and institutional publications Household savings Observatory AMF Household Savings Observatory Household Savings Newsletters Active retail investors dashboard Regulation: Homepage General regulation General Regulation user guide GR into force since 23/09/2021 Book I - The Autorité des marchés financiers Title II - The ruling procedure of the Autorité des marchés financiers Chapter 1er - Request for ruling Chapter 2 - Examination of the request Chapter 3 - Publication of the ruling Title III - Certification of standard agreements for transactions in financial instruments Title IV - Inspections and investigations by the Autorité des marchés financiers Chapter 2 - Informing the AMF about the net asset values of collective investment schemes Chapter 3 - Supervision of persons referred to in section II of article L. 621-9 of the Monetary and Financial code Chapter 4 - Investigations Title V - The establishment of procedures to report the failings referred to in article L. 634-1 of the monetary and financial code Book II - Issuers and financial disclosure Title I - Admission of financial securities to trading on a regulated market and offer of securities to the public Chapter I - Scope Chapter II - Information to be disseminated when securities are admitted to trading on a regulated market or offered to the public Section 2 - Filing, approval and circulation of prospectuses Section 3 - Special cases Chapter II bis - Summary information to be disseminated in the case of an offer to the public not subject to a prospectus approved by the AMF Chapter III - Right of the AMF to suspend or prohibit a public offer or admission of securities to trading on a regulated market and to be informed prior to such admission Chapter IV - Appointment of a correspondent by persons or entities having their registered office outside France Chapter V - Designating the AMF as the competent authority to supervise an offer Chapter VI - Sounding out the market for financial offerings Chapter VII - Offers made via a website and not subject to a prospectus approved by the AMF Title II - Periodic and ongoing disclosure obligations Chapter I - Common provisions and dissemination of regulated information Chapter II - Periodic information Section 1 - Financial and accounting information Section 2 - Other information Section 3 - Equivalence criteria for periodic information for issuers having their registered office outside the European Economic Area Chapter III - Ongoing disclosure Section 1 - Obligation to inform the public Section 2 - Crossing of shareholding thresholds, declarations of intent and changes of intent Section 3 - Shareholder agreements Section 5 - Transactions in the company's securities by officers and directors and persons referred to in article L. 621-18-2 of the monetary and financial code Section 6 - Lists of insiders Section 7 - Statement of intent in the event of preparations for a takeover bid Section 8 - Provisions applying to issuers of financial instruments that are no longer traded on a regulated market Section 9 - Short positions reporting Section 10 - Disclosure of securities financing transactions involving equity securities Title III - Takeover bids Chapter I - General rules and common provisions Section 1 - Scope, definitions and general principles Section 2 - Nature of the offer and conditions precedent Section 3 - Filing of the draft offer, the draft offer documentand the draft reply document Section 4 - Disclosures to shareholders and the public Section 5 - Contents of the draft offer document and the reply document Section 6 - Review of the draft offer by the amf Section 7 - Distribution of the offer and reply documents Section 9 - Offer timetable Section 10 - Obligations of officers and directors, persons concerned by the offer and their advisers Section 11 - Trading in the securities concerned by the public offer Section 12 - Oversight of public offers Section 14 - Suspending the effects of restrictions on the exercise of voting rights and extraordinary powers to appoint and dismiss directors, members of the supervisory board, members of the management board, chief executive officers and deputy chief executive officers Chapter II - Standard procedure Section 1 - General provisions Section 2 - Competing and improved offers Chapter III - Simplified procedure Chapter IV - Mandatory filing of a draft offer Chapter V - Public offers for financial instruments admitted to trading on an organised multilateral trading facility Chapter VI - Buyout offers with squeeze-out Chapter VII - Squeeze-outs Chapter VIII - Disclosure and procedure for orderly acquisition of debt securities that do not give access to equity Section 1 - Disclosure of acquisitions of debt securities that do not give access to equity Section 2 - Procedure for orderly acquisition of debt securities that do not give access to equity Title IV - Buyback programmes for shares and transaction reporting Section 2 - Provisions complementing accepted market practices Title V - Marketing in France of financial instruments traded on a recognised foreign market or a regulated market of the European Economic Area (EEA) Title VI - Fairness opinions Chapter I - Appointing an independent appraiser Chapter II - Appraisal report Chapter III - Recognition of professional associations Section 1 - Requirements for AMF recognition Section 2 - Recognition procedure Section 3 - Reporting to the AMF Book III - Service providers Title I - Investment services providers Chapter I - Procedures for authorisation and programme of operations Section single - Approval of the programme of operations Chapter II - Organisational rules Section 1 - Compliance system Section 2 - Verification of the knowledge of specified persons Section 3 - Safeguarding client assets Section 4 - Professional licences Section 5 - Record keeping Section 6 - Annual data sheet Section 7 - Third-party risk management Chapter III - Financial instrument governance requirements Section 1 - Financial instrument governance obligations for manufacturers Section 2 - Financial instrument governance obligations for distributors Chapter IV - Conduct of business rules Section 2 - Information to customers Section 3 - Assessment of the suitability and appropriateness of the service to be provided Section 4 - Verification of the level of knowledge and assessment of the knowledge and skills of the persons providing investment advice or information Section 5 - Clients agreements Section 6 - Order handling and execution when providing the portfolio management service Section 7 - Inducements and fees Section 8 - Obligations in the case of offers of financial securities or minibons via a website Chapter V - Other provisions Section 1 - Management of inside information and restrictions to be applied within authorised investment services providers Section 2 - Derogations to the publication of transactions Section 3 - Obligations of investment services providers relating to the prevention of money laundering and terrorist financing Section 4 - Handling and monitoring of subscription applications and book entry Section 5 - Accepted market practices Section 6 - Provisions for orders with instructions for deferred settlement and delivery and derivatives markets Chapter VI - Systematic internalisers Section 1 - Informing the AMF Title I bis - Asset management companies of AIFs Chapter I - Procedures for authorisation, programme of operations and passport Section 1 - Authorisation and programme of operations Section 2 - Passport for asset management companies seeking to manage aifs or provide investment services in the other member states of the european union Section 3 - Specific rules on the authorisation of managers seeking to manage european union aifs or to market aifs of the european union or third countries under their management in the european union with a passport Chapter II - Authorisation requirements for aif asset management companies and for acquiring or increasing an equity interest in an aif asset management company Section 1 - Authorisation requirements Section 2 - Content of the programme of operations Section 3 - Requirements for acquiring or increasing an equity interest in an asset management company Chapter III - Organisational rules Section 1 - Organisational rules Section 3 - Responsibilities of senior management and supervisory bodies Section 5 - Complaint handling Section 6 - Personal transactions Section 7 - Conflicts of interest Section 10 - Annual data sheet Section 10 bis - Report of compensation paid and non-compliance with AIF investment rules Section 11 - Risk management Section 12 - Liquidity management Section 13 - Information transmission on financial contracts Section 14 - Internal audit Section 15 - Organisation of compliance and internal control functions Section 16 - Outsourcing Section 17 - Delegation of AIF management Section 2 - Order handling and execution Section 3 - Fees Section 4 - Information about AIF management Section 1 - Management of inside information and restrictions to be applied within the asset management companies of aifs Section 2 - Obligations relating to the prevention of money laundering and terrorist financing Section 3 - Miscellaneous provisions Section 4 - Handling and monitoring of subscription applications and book Title I ter - Asset management companies of UCITS Section 2 - Passport Chapter II - Authorisation requirements for asset management companies and for acquiring or increasing an equity interest in an asset management company Section 1 - General organisational requirements Section 10 bis - Report of compensation and non-compliance with UCITS investment rules Section 12 - Transmission of information on derivative instruments Section 16 - Delegation management of UCITS Section 2 - Handling and executing orders Section 3 - Inducements Section 4 - Information about subscription or redemption orders for units or shares of UCITS and the management of UCITS Section 1 - Management of inside information and restrictions to be applied within authorised asset management companies Title I quater - Others asset management companies Title II - Other service providers Chapter I - Custody account-keepers Section unique - Provisions relating to custody account-keeping - terms of reference for the custody account-keeper Chapter II - Depositaries of UCITS Section 1 - Duties of the UCITS depositary Section 2 - Organisational structures and resources of the depositary Section 3 - Procedures for safekeeping of certain assets by the UCITS depositary Section 4 - Procedures for supervising legal and regulatory compliance of decisions made by the UCITS or its management company Chapter III - AIF depositaries Section 1 - Duties of the depositary of AIF Section 2 - Organisational structures and resources of the AIF depositary Section 3 - Procedures for custody of certain assets by the AIF depositary Section 4 - Procedures for supervising compliance of the decisions made by the AIF or its asset management company Chapter III bis - Depositaries of securitisation vehicles Section 1 - Duties of the depositary of securitisation vehicles Section 2 - Organisational structures and resources of the depositary of securitisation vehicles Section 3 - Procedures for custody of certain assets by the depositary Section 4 - Procedures for supervising legal and regulatory compliance of decisions made by the management company of securitisation vehicle Chapter IV - Clearers Chapter V - Financial investment advisers Section 1 - Professional entrance requirements Section 2 - Conduct of business rules Section 4 - Governance of products, services and transactions Section 5 - Reception and transmission of units or shares in collective investment undertakings Section 6 - Authorisation of representative associations Chapter V bis - Crowdfunding investment advisers Section 1 - Admission requirements Chapter VI - Direct marketers Chapter VII - Investment analysts not associated with an investment service provider Section 1 - Scope Section 2 - Production and dissemination of investment research Section 3 - Dissemination of investment research produced by third parties Chapter VIII - Data reporting services providers Section single - Authorisation requirements and changes Book IV - Collective investment products Title I - Undertakings for Collective Investment in Transferable Securities (UCITS) Chapter unique - Undertakings for collective investment in transferable securities (UCITS) Section 1 - Authorisation Section 2 - General rules Section 3 - Operating rules Section 4 - Calculating global exposure Section 5 - Master and feeder funds Section 6 - Information to be provided to investors Section 7 - marketing of CIS in france Title II - AIFS Chapter I - General provisions Section 1 - Procedure for marketing and pre-marketing of AIFs Section 2 - Valuation Chapter II - Funds open to retail investors Section 1 - Retail investment funds Section 2 - Private equity funds Section 3 - Real estate collective investment undertakings Section 4 - Real estate investment companies and forestry investment companies Section 5 - Funds of alternative funds Chapter III - Funds open to professional investors Section 1 - Authorised funds Section 2 - Declared funds Chapter IV - Employee savings scheme funds Section 2 - Formation Section 4 - Calculating aggregate risk Section 6 - Provisions specific to the employee savings plan investments (FCPE) covered by Article L. 214-165-1 of the Monetary and Financial Code Chapter V - Financing vehicles Section 1 - Provisions common to financing vehicles Section 2 - Provisions specific to securitisation vehicles Section 3 - Provisions specific to specialised financing vehicles Title III - Other collective investments Title IV - Miscellaneous assets Book V - Market infrastructures Title I - Regulated markets and market operators Chapter I - Market operator and recognition of regulated markets Section 1 - Procedures for recognising regulated markets Section 2 - Changes in the conditions governing recognition of regulated markets Section 3 - Market operator's authorisation Chapter II - Organisational rules for market operators and rules of conduct Section 3 - Compliance rules for members of staff of the market operator Section 4 - Issuance of a professional licence to certain members of staff of a market operator and the conditions in which they perform their duties Chapter III - Members of regulated markets Chapter IV - Principles for trading on regulated markets - transparency rules Section 2 - Derogations to transparency principles and publication of market information Section 3 - Notification to the amf Chapter V - Admission of financial instruments to trading on a regulated market Chapter VI - Special provisions for certain markets Section 1 - Orders with instructions for deferred settlement and delivery Section 2 - Corporate actions Section 3 - Other provisions Section 4 - Provisions applicable to certain compartments Title II - Multilateral trading facilities Section 1 - Authorisation for an investment services provider to operate a multilateral trading facility and changes to the conditions of this authorisation Section 2 - Authorisation for a market operator to operate a multilateral trading facility and changes to the conditions of this authorisation Section 3 - Multilateral trading facility's rules Chapter II - Transparency and conduct of business rules Section 1 - Derogations to transparency principles Section 2 - Rules of conduct Chapter III - Supervision of the functioning of the mtf and its members Section 1 - Issuance of professional licences to some members of staff Chapter IV - Multilateral trading facilities registered as an sme growth market Chapter V - Organised multilateral trading facilities Title III - Organised trading facilities (OTF) Section 1 - Approval for the operation of an organised trading facility by investment services providers and changes to the conditions of this approval Section 3 - Organised trading facility's rules Chapter II - Trading principles, transparency and conduct of business rules Section 1 - Specific requirements applicable to the otf operator Chapter III - Supervision of the functioning of the otf and its clients Title IV - Clearing houses Chapter I - Common provisions Section 1 - Approval and publication of clearing house operating rules Section 2 - Rules of conduct applicable to clearing house and its staff Section 3 - Issuance of professional licences to certain clearing house staff Section 4 - Clearing house participation conditions Section 5 - Transparency rules Section 6 - Clearing house operation Section 7 - Collateral requirements Section 8 - Default procedures Section 9 - Others provisions Title V - Central depositories of financial instruments Title VI - Central depositaries of financial instruments Chapter unique - Central depositories and payment and settlement systems for financial instruments Section 1 - Approval and publication of the operating of central depositaries Section 2 - Methods of valuation Section 3 - Issuance of professional licences to certain members of the central depositary's staff Section 4 - Conditions of access to central depositaries Section 5 - Anti-money laundering measures Title VII - Transfer of ownership of financial instruments accepted by a central depository or settlement system Title VIII - Provisions common for trading platforms : position limits and position reporting Book VI - Market abuse: insider dealing and market manipulation Book VII - Token Issuers and Digital Assets Services Providers Title I - Initial coin offering Chapter II - Approval of the information document Section 1 - Filing and approval of the information document Section 2 - Amended information document Chapter III - Dissemination of the information document and marketing material Section 1 - Dissemination of the information document Section 2 - Marketing material Chapter IV - Communications by the issuer following approval Chapter V - Suspension of all communications concerning the token offering mentioning its approval, and withdrawal of the approval Title II - Digital Assets Services Providers Chapter I - Registration requirements, license requirements and common provisions applicable to licensed digital assets services providers Section 1 - Registration requirements Section 2 - License requirements Section 3 - Common provisions applicable to licensed digital assets services providers Chapter II - Specific provisions applicable to licensed digital assets services providers Section 1 - Provisions applicable to the service of custody of digital assets on behalf of third parties Section 2 - Provisions applicable to the service of buying or selling digital assets in a currency that is legal tender and the service of trading of digital assets for other digital assets Section 3 - Provisions applicable to the service of operation of a trading platform for digital assets Section 4 - Provisions relating to the services referred to in Article L. 54-10-2 5° of the Monetary and Financial Code GR Archives Upcoming GR AMF policy by book AMF policy documents: user guide Policy content I - Issuers and financial disclosure I. 1 - Periodic information I. 1.1. Guide on periodic information I. 1.2. Filing requirements DOC-2013-08 Pro forma financial information I. 1.3. Non Financial disclosure I. 1.4. Alternative performance measures I. 1.5. Accounting information I. 1.5.1. Table of contents of the recommendations and financial statements of the current year DOC-2018-06 Table des matieres recommandations d'arrêté des comptes applicables au 1er janvier 2018 (in French only) DOC-2020-09 2020 Financial statements and review of 2018-2019 financial statements I. 1.5.2. Previous year’s financial statements DOC-2018-12 Annual report - 2018 financial statements and review of the 2016-2017 financial statements DOC-2017-09 2017 Financial Statements DOC-2014-13 Financial statements 2014 I. 1.5.3 Statutory auditors DOC-2010-25 Relationships between statutory auditors and the AMF I. 2 - Ongoing information I. 2.1. Guide on ongoing information DOC-2007-03 Electronical filing to the AMF of regulated information I. 3 - Universal registration document I. 3.1. Guide on universal registration document I. 4 - Prospectus and information document for a public offering I. 4.1. European prospectus I. 4.1.2. Filing requirements I. 4.2. National prospectuses I. 4.3. Key information document I. 4.4. Initial coin offering DOC-2019-06 Procedure for examination of the application and establishment of an information document for approval by the AMF on an initial coin offering I. 5 - Financial operations I. 5.2. Initial public offering I. 5.3. Share buybacks I. 5.4. Transfer from a regulated market to a MTF DOC-2010-03 AMF Q&A pertaining to the transfer of a listed company from Alternext to Euronext I. 5.5. Major assets disposal and acquisition DOC-2015-05 Major Asset Disposals and Acquisitions I. 6 - Takeover bids I. 6.1. General rules DOC-2006-07 Takeover bids DOC-2009-08 Takeover bids supervision I. 6.2. Independent expert DOC-2006-08 Fairness opinion DOC-2006-15 Fairness opinion in the context of corporate finance transactions I. 6.3. Shareholders’ agreement DOC-2004-02 Advertising campaigns for public disclosure of standstill commitments to hold shares entered into under the Dutreil Act I. 6.4. Major holding notification, letter of intent and change of intent DOC-2008-02 Major shareholding notification and letter of intent I. 6.5. Orderly acquisition procedure DOC-2010-02 Transparency and procedure for the orderly acquisition of debt securities that do not give access to capital I. 7 - Corporate governance and general meetings I. 7.1. General meetings DOC-2012-05 General meetings of shareholders of listed companies DOC-2011-04 Procedures for communicating on transactions involving the temporary transfer of shares. DOC-2015-09 Communication by companies aimed at promoting their securities to individual investors DOC-2015-10 Communication by companies on fees associated with holding securities in pure registered form DOC-2011-06 Proxy voting advisory firms I. 7.2. Corporate governance DOC-2012-02 Corporate governance and executive compensation in companies referring to the AFEP-MEDEF code - Consolidated presentation of the recommendations contained in the AMF annual reports DOC-2011-17 AMF 2011 annual report on corporate governance and executive compensation DOC-2010-15 AMF supplementary report on corporate governance, executive compensation and internal control – Mid-caps and small-caps governed by the Middlenext corporate governance code of December 2009 DOC-2010-16 Reference framework for risk management and internal control systems II - Investment products II. 1 - Collective investment schemes (CISs) II. 1.1. Common provisions applicable to UCITS and CISs DOC-2018-05 Requirements for stress test scenarios under article 28 of the european money market fund regulation DOC-2012-12 A guide to fees DOC-2011-24 A guide to drafting collective investment marketing materials and distributing collective investments DOC-2011-25 A guide to the monitoring of collective investment undertakings DOC-2021-01 Performance fees in UCITS and certain types of AIFs DOC-2020-08 Requirements for liquidity stress testing in UCITS and AIFs DOC-2020-03 Information to be provided by collective investment schemes incorporating non-financial approaches DOC-2011-05 A guide to regulatory documents governing collective investment undertakings DOC-2008-14 Fund performance swaps and actively managed investment structures DOC-2011-15 Calculation of global exposure for authorised UCITS and AIFs DOC-2007-19 Extra-financial criteria for securities selection and application of these criteria to funds declaring themselves compliant with Islamic law DOC-2012-15 Criteria applicable to "philanthropic" collective investments DOC-2017-05 Conditions for setting up redemption gate mechanisms II. 1.2. Specific provisions applicable to UCITS DOC-2011-19 Authorisation procedures, preparation of a KIID and a prospectus and periodic reporting for French and foreign UCITS marketed in France DOC-2013-06 ETFs and other UCITS issues II. 1.3. Specific provisions applicable to CISs open to all subscribers II. 1.3.1. Common provisions DOC-2014-09 Methods for meeting requirements to report to the AMF under the AIFM directive DOC-2013-16 Key concepts of the Alternative Investment Fund Managers Directive II. 1.3.2. Specific provisions applicable to Funds open to non-professional investors DOC-2011-22 Authorisation procedures, preparation of a KIID and rules, and reporting for private equity funds DOC-2011-23 Authorisation and establishment processes for a KIID and a prospectus and periodic information for real estate collective investment undertakings and professional real estate collective investment undertakings DOC-2011-20 Authorisation processes, preparation of a KIID and a prospectus and periodic reporting for retail investment funds, funds of alternative funds and professional retail investment funds DOC-2019-04 Real estate investment companies, Forestry investment companies and Forestry groups DOC-2012-11 Guide for retail and professional private equity funds II. 1.3.3. Specific provisions applicable to Funds open to professional investors DOC-2012-06 Procedures for making disclosures and introducing changes, preparation of a prospectus and reporting for specialised professional funds and professional private equity funds DOC-2005-14 Q&A on professional specialised investment funds DOC-2006-18 Calculation period for the net asset values of funds of alternative funds and retail investment funds II. 1.3.4. Specific provisions applicable to employee investment undertakings DOC-2011-21 Authorisation procedures, preparation of a KIID and a prospectus, and reporting for employee investment undertakings DOC-2012-10 Guide relating to employee investment undertakings II. 1.3.5. Specific provisions applicable to securitisation vehicles DOC-2011-01 Securitisation vehicles II. 2 - Other investment products DOC-2017-01 Questions and answers – Prohibition of marketing communications with regard to the provision of investment services on certain financial derivatives DOC-2011-08 Q&A on foreign exchange trading III - Providers III. 1 - Investment services providers III. 1.1. Authorisation / Programme of operations / Passport DOC-2008-03 Authorisation procedure for investment management companies, disclosure obligations and passporting DOC-2016-02 Organisation of asset management companies for managing loan-granting AIFs DOC-2008-23 Questions and answers on the concept of investment service of investment advice DOC-2014-01 Programme of activity of investment services providers and information provided to the AMF DOC-2012-08 Placement services and marketing of financial instruments DOC-2012-19 Programme of operations guide for asset management companies and self-managed collective investments DOC-2018-08 Joint guidelines of the European banking authority (EBA) and the European securities and markets authority (ESMA) on the assessment of the suitability of members of the management body and key function holders (eba/gl/2017/12) DOC-2013-22 Frequently asked questions on the transposition of the AIFM Directive into French law DOC-2009-24 Q&A on changes in the ownership structure of asset management companies DOC-2017-10 Prudential assessment of acquisitions and increases of qualifying holdings in the financial sector DOC-2008-15 Funds of hedge funds management in France III. 1.2. Organisational rules DOC-2021-04 Compliance function requirements DOC-2007-24 Q&A on the organisational rules of investment services providers DOC-2014-06 Guide to the organisation of the risk management system within asset management companies DOC-2012-01 Risk management organisation for collective investment undertaking management activities and discretionary portfolio management investment services DOC-2006-09 Examination for the issuance of professional licences to compliance and internal control officers and investment services compliance officers III. 1.3. Rules of conduct DOC-2013-10 Rémunérations et avantages reçus dans le cadre de la commercialisation et de la gestion sous mandat d'instruments financiers DOC-2007-25 Q&A on the rules of conduct applicable to investment services providers DOC-2014-07 Guide to best execution DOC-2019-12 Professional obligations of investment services providers to retail clients with regard to third-party portfolio management DOC-2019-03 MIFID II suitability requirements DOC-2008-04 Application of business conduct rules to marketing of units or shares in UCITS or AIFs by asset management companies, management companies or managers DOC-2007-02 Investment decision and order execution support services DOC-2017-07 Future performance simulations DOC-2016-14 Sound remuneration policies under the UCITS Directive DOC-2005-19 Exercising voting rights for asset management companies DOC-2013-11 Remuneration policies for alternative investment fund managers III. 1.4. Other obligations DOC-2013-09 The exemption for market making activities and primary market operations under Regulation (EU) 236/2012 III. 2 - Other providers III. 2.1. Custody account-keeper DOC-2005-09 Discretionary portfolio management certificate III. 2.2. Depositaries DOC-2016-01 Authorisation procedure for investment firms acting as a UCITS depositary – Review procedure for the performance specifications of other UCITS and AIF depositaries III. 2.3. Financial analysts DOC-2007-12 Production of independent research for large scale securities offerings intended for retail investors III. 2.4. Legal entities managing certain Other AIFs DOC-2013-21 Registration arrangements for legal entities, other than portfolio management companies, managing certain Other AIF III. 2.5 III. 2.6. Digital assets services providers DOC-2020-07 Questions & answers on the digital asset service providers regime DOC-2019-24 Digital assets service providers - Cybersecurity system of requirements (version 1.0) DOC-2019-23 Rules applicable to digital asset service providers III. 3 - Anti-money laundering and combating the financing of terrorism DOC-2019-14 Guidelines on risk factors DOC-2019-18 Guidelines on the obligation to report to TRACFIN DOC-2019-17 Guidelines on the concept of politically exposed persons DOC-2019-16 Guidelines on due diligence obligations with respect to clients and their beneficial owners DOC-2019-15 Guidance on the risk-based approach to combating money laundering and terrorist financing III. 4 - Crowdfunding DOC-2014-12 Information to be provided to investors by the issuer and crowdfunding investment adviser or investment services provider within the framework of crowdfunding DOC-2014-10 Placing without a firm commitment basis and crowdfunding DOC-2014-11 Description of the AMF review process of registration applications by crowdfunding investment advisers and the transmission of annual disclosures by said advisers DOC-2018-02 Marketing of crowdfunding offers, calculation of default rates and run-off management of platforms IV - Marketing - Customer relationship IV. 1 - General provisions DOC-2020-04 Requirements applicable to professional associations of financial investment advisors DOC-2013-07 Requirements relating to the professional competence of financial investment advisers, the updating of their knowledge, and reporting to the AMF on their activity and that of associations DOC-2006-23 Questions and answers on the rules that apply to financial investment advisers DOC-2018-04 Guidelines on MIFID II product governance requirements DOC-2018-03 Placing of financial instruments without a firm commitment basis, investment advice and consultancy services provided to firms in relation to capital structure, industrial strategy and mergers and acquisitions DOC-2017-08 Position/Recommendation supplementing Position 2013-02 on collecting know-your-client information DOC-2012-07 Complaint handling DOC-2013-02 Collecting 'know-your-client' information IV. 2 - Specific provisions applicable to certain products DOC-2010-05 Marketing of complex financial instruments DOC-2014-04 Guide to UCITS, AIF and other investment fund marketing regimes in France DOC-2014-03 Procedure for marketing units or shares of AIFs DOC-2014-02 Disclosure to investors in unauthorised or undeclared AIFs DOC-2017-06 Procedure for preparing and registering an information document that must be filed with the AMF by intermediaries in miscellaneous assets DOC-2013-12 Requirement to offer a guarantee (of the formula and/or capital, as appropriate) for structured UCITS and AIFs, "guaranteed" UCITS and AIFs and structured debt securities issued by special purpose entities and marketed to the general public V - Market infrastructure V. 1 - Regulated market and multilateral trading facilities DOC-2020-02 Clarifications regarding the notion of trading venue, applicable in particular to financial instruments registered in a distributed ledger DOC-2017-12 Position limits for commodity derivatives traded on Euronext V. 2 - Central depositories, clearing houses, payment and settlement systems DOC-2009-07 On the file to be submitted to the AMF by a CSD or a SSS manager, within the framework of the prior approval application to the AMF for allowing an institution to open an account with the CSD or take part in the securities settlement system V. 3 - Other market participants DOC-2019-05 Procedure of recognition of foreign exchanges DOC-2013-14 Scope of the regulation on credit rating agencies VI - Market abuse VI. 1 - Market soundings DOC-2017-02 Persons receiving market soundings VI. 2 - Whistleblowers Latest policy AMF Instructions for each book Obsolete policy Principles policy Exceptional intervention measures Consult the current General Regulation The AMF Presentation of the AMF The AMF at a glance The AMF in figures #Supervision2022 Strategic Plan Priorities for action and supervision The AMF Board Enforcement Committee Consultative Commissions Climate and Sustainable Finance Commission Financial Skills Certification Board AMF regulation Bringing about regulatory change Committing to sustainable finance Promote the attractiveness of the Paris financial centre Authorise Investigate and Inspect Propose a Settlement Impose Sanctions Inform and Support Agreements and cooperation Multilateral agreements Access the presentation of the AMF Access our missions: regulate, supervise, inform and protect Forms and declarations Subscriptions & RSS feeds Print from the website of the AMF GR into force GR into force from 23/05/2021 to 30/07/2021 Book I The Autorité des marchés financiers Title II The ruling procedure of the Autorité des marchés financiers Chapter 1er Request for ruling Chapter 2 Examination of the request Chapter 3 Publication of the ruling Title III Certification of standard agreements for transactions in financial instruments Title IV Inspections and investigations by the Autorité des marchés financiers Chapter 2 Informing the AMF about the net asset values of collective investment schemes Chapter 3 Supervision of persons referred to in section II of article L. 621-9 of the Monetary and Financial code Chapter 4 Investigations Title V The establishment of procedures to report the failings referred to in article L. 634-1 of the monetary and financial code Book II Issuers and financial disclosure Title I Admission of financial securities to trading on a regulated market and offer of securities to the public Chapter I Scope Chapter II Information to be disseminated when securities are admitted to trading on a regulated market or offered to the public Section 2 Filing, approval and circulation of prospectuses Section 3 Special cases Chapter II bis Summary information to be disseminated in the case of an offer to the public not subject to a prospectus approved by the AMF Chapter III Right of the AMF to suspend or prohibit a public offer or admission of securities to trading on a regulated market and to be informed prior to such admission Chapter IV Appointment of a correspondent by persons or entities having their registered office outside France Chapter V Designating the AMF as the competent authority to supervise an offer Chapter VI Sounding out the market for financial offerings Chapter VII Offers made via a website and not subject to a prospectus approved by the AMF Title II Periodic and ongoing disclosure obligations Chapter I Common provisions and dissemination of regulated information Chapter II Periodic information Section 1 Financial and accounting information Section 2 Other information Section 3 Equivalence criteria for periodic information for issuers having their registered office outside the European Economic Area Chapter III Ongoing disclosure Section 1 Obligation to inform the public Section 2 Crossing of shareholding thresholds, declarations of intent and changes of intent Section 3 Shareholder agreements Section 5 Transactions in the company's securities by officers and directors and persons referred to in article L. 621-18-2 of the monetary and financial code Section 6 Lists of insiders Section 7 Statement of intent in the event of preparations for a takeover bid Section 8 Provisions applying to issuers of financial instruments that are no longer traded on a regulated market Section 9 Short positions reporting Section 10 Disclosure of securities financing transactions involving equity securities Title III Takeover bids Chapter I General rules and common provisions Section 1 Scope, definitions and general principles Section 2 Nature of the offer and conditions precedent Section 3 Filing of the draft offer, the draft offer documentand the draft reply document Section 4 Disclosures to shareholders and the public Section 5 Contents of the draft offer document and the reply document Section 6 Review of the draft offer by the amf Section 7 Distribution of the offer and reply documents Section 9 Offer timetable Section 10 Obligations of officers and directors, persons concerned by the offer and their advisers Section 11 Trading in the securities concerned by the public offer Section 12 Oversight of public offers Section 14 Suspending the effects of restrictions on the exercise of voting rights and extraordinary powers to appoint and dismiss directors, members of the supervisory board, members of the management board, chief executive officers and deputy chief executive officers Chapter II Standard procedure Section 1 General provisions Section 2 Competing and improved offers Chapter III Simplified procedure Chapter IV Mandatory filing of a draft offer Chapter V Public offers for financial instruments admitted to trading on an organised multilateral trading facility Chapter VI Buyout offers with squeeze-out Chapter VII Squeeze-outs Chapter VIII Disclosure and procedure for orderly acquisition of debt securities that do not give access to equity Section 1 Disclosure of acquisitions of debt securities that do not give access to equity Section 2 Procedure for orderly acquisition of debt securities that do not give access to equity Title IV Buyback programmes for shares and transaction reporting Section 2 Provisions complementing accepted market practices Title V Marketing in France of financial instruments traded on a recognised foreign market or a regulated market of the European Economic Area (EEA) Title VI Fairness opinions Chapter I Appointing an independent appraiser Chapter II Appraisal report Chapter III Recognition of professional associations Section 1 Requirements for AMF recognition Section 2 Recognition procedure Section 3 Reporting to the AMF Book III Service providers Title I Investment services providers Chapter I Procedures for authorisation and programme of operations Section single Approval of the programme of operations Chapter II Organisational rules Section 1 Compliance system Section 2 Verification of the knowledge of specified persons Section 3 Safeguarding client assets Section 4 Professional licences Section 5 Record keeping Section 6 Annual data sheet Section 7 Third-party risk management Chapter III Financial instrument governance requirements Section 1 Financial instrument governance obligations for manufacturers Section 2 Financial instrument governance obligations for distributors Chapter IV Conduct of business rules Section 2 Information to customers Section 3 Assessment of the suitability and appropriateness of the service to be provided Section 4 Verification of the level of knowledge and assessment of the knowledge and skills of the persons providing investment advice or information Section 5 Clients agreements Section 6 Order handling and execution when providing the portfolio management service Section 7 Inducements and fees Section 8 Obligations in the case of offers of financial securities or minibons via a website Chapter V Other provisions Section 1 Management of inside information and restrictions to be applied within authorised investment services providers Section 2 Derogations to the publication of transactions Section 3 Obligations of investment services providers relating to the prevention of money laundering and terrorist financing Section 4 Handling and monitoring of subscription applications and book entry Section 5 Accepted market practices Section 6 Provisions for orders with instructions for deferred settlement and delivery and derivatives markets Chapter VI Systematic internalisers Section 1 Informing the AMF Title I bis Asset management companies of AIFs Chapter I Procedures for authorisation, programme of operations and passport Section 1 Authorisation and programme of operations Section 2 Passport for asset management companies seeking to manage aifs or provide investment services in the other member states of the european union Section 3 Specific rules on the authorisation of managers seeking to manage european union aifs or to market aifs of the european union or third countries under their management in the european union with a passport Chapter II Authorisation requirements for aif asset management companies and for acquiring or increasing an equity interest in an aif asset management company Section 1 Authorisation requirements Section 2 Content of the programme of operations Section 3 Requirements for acquiring or increasing an equity interest in an asset management company Chapter III Organisational rules Section 1 Organisational rules Section 3 Responsibilities of senior management and supervisory bodies Section 5 Complaint handling Section 6 Personal transactions Section 7 Conflicts of interest Section 10 Annual data sheet Section 10 bis Report of compensation paid and non-compliance with AIF investment rules Section 11 Risk management Section 12 Liquidity management Section 13 Information transmission on financial contracts Section 14 Internal audit Section 15 Organisation of compliance and internal control functions Section 16 Outsourcing Section 17 Delegation of AIF management Section 2 Order handling and execution Section 3 Fees Section 4 Information about AIF management Section 1 Management of inside information and restrictions to be applied within the asset management companies of aifs Section 2 Obligations relating to the prevention of money laundering and terrorist financing Section 3 Miscellaneous provisions Section 4 Handling and monitoring of subscription applications and book Title I ter Asset management companies of UCITS Section 2 Passport Chapter II Authorisation requirements for asset management companies and for acquiring or increasing an equity interest in an asset management company Section 1 General organisational requirements Section 10 bis Report of compensation and non-compliance with UCITS investment rules Section 12 Transmission of information on derivative instruments Section 16 Delegation management of UCITS Section 2 Handling and executing orders Section 3 Inducements Section 4 Information about subscription or redemption orders for units or shares of UCITS and the management of UCITS Section 1 Management of inside information and restrictions to be applied within authorised asset management companies Title I quater Others asset management companies Title II Other service providers Chapter I Custody account-keepers Section unique Provisions relating to custody account-keeping - terms of reference for the custody account-keeper Chapter II Depositaries of UCITS Section 1 Duties of the UCITS depositary Section 2 Organisational structures and resources of the depositary Section 3 Procedures for safekeeping of certain assets by the UCITS depositary Section 4 Procedures for supervising legal and regulatory compliance of decisions made by the UCITS or its management company Chapter III AIF depositaries Section 1 Duties of the depositary of AIF Section 2 Organisational structures and resources of the AIF depositary Section 3 Procedures for custody of certain assets by the AIF depositary Section 4 Procedures for supervising compliance of the decisions made by the AIF or its asset management company Chapter III bis Depositaries of securitisation vehicles Section 1 Duties of the depositary of securitisation vehicles Section 2 Organisational structures and resources of the depositary of securitisation vehicles Section 3 Procedures for custody of certain assets by the depositary Section 4 Procedures for supervising legal and regulatory compliance of decisions made by the management company of securitisation vehicle Chapter IV Clearers Chapter V Financial investment advisers Section 1 Professional entrance requirements Section 2 Conduct of business rules Section 4 Governance of products, services and transactions Section 5 Reception and transmission of units or shares in collective investment undertakings Section 6 Authorisation of representative associations Chapter V bis Crowdfunding investment advisers Section 1 Admission requirements Chapter VI Direct marketers Chapter VII Investment analysts not associated with an investment service provider Section 1 Scope Section 2 Production and dissemination of investment research Section 3 Dissemination of investment research produced by third parties Chapter VIII Data reporting services providers Section single Authorisation requirements and changes Book IV Collective investment products Title I Undertakings for Collective Investment in Transferable Securities (UCITS) Chapter unique Undertakings for collective investment in transferable securities (UCITS) Section 1 Authorisation Section 2 General rules Section 3 Operating rules Section 4 Calculating global exposure Section 5 Master and feeder funds Section 6 Information to be provided to investors Section 7 marketing of CIS in france Title II AIFS Chapter I General provisions Section 1 AIF marketing procedure Section 2 Valuation Chapter II Funds open to retail investors Section 1 Retail investment funds Section 2 Private equity funds Section 3 Real estate collective investment undertakings Section 4 Real estate investment companies and forestry investment companies Section 5 Funds of alternative funds Chapter III Funds open to professional investors Section 1 Authorised funds Section 2 Declared funds Chapter IV Employee savings scheme funds Section 2 Formation Section 4 Calculating aggregate risk Section 6 Provisions specific to the employee savings plan investments (FCPE) covered by Article L. 214-165-1 of the Monetary and Financial Code Chapter V Financing vehicles Section 1 Provisions common to financing vehicles Section 2 Provisions specific to securitisation vehicles Section 3 Provisions specific to specialised financing vehicles Title III Other collective investments Title IV Miscellaneous assets Book V Market infrastructures Title I Regulated markets and market operators Chapter I Market operator and recognition of regulated markets Section 1 Procedures for recognising regulated markets Section 2 Changes in the conditions governing recognition of regulated markets Section 3 Market operator's authorisation Chapter II Organisational rules for market operators and rules of conduct Section 3 Compliance rules for members of staff of the market operator Section 4 Issuance of a professional licence to certain members of staff of a market operator and the conditions in which they perform their duties Chapter III Members of regulated markets Chapter IV Principles for trading on regulated markets - transparency rules Section 2 Derogations to transparency principles and publication of market information Section 3 Notification to the amf Chapter V Admission of financial instruments to trading on a regulated market Chapter VI Special provisions for certain markets Section 1 Orders with instructions for deferred settlement and delivery Section 2 Corporate actions Section 3 Other provisions Section 4 Provisions applicable to certain compartments Title II Multilateral trading facilities Section 1 Authorisation for an investment services provider to operate a multilateral trading facility and changes to the conditions of this authorisation Section 2 Authorisation for a market operator to operate a multilateral trading facility and changes to the conditions of this authorisation Section 3 Multilateral trading facility's rules Chapter II Transparency and conduct of business rules Section 1 Derogations to transparency principles Section 2 Rules of conduct Chapter III Supervision of the functioning of the mtf and its members Section 1 Issuance of professional licences to some members of staff Chapter IV Multilateral trading facilities registered as an sme growth market Chapter V Organised multilateral trading facilities Title III Organised trading facilities (OTF) Section 1 Approval for the operation of an organised trading facility by investment services providers and changes to the conditions of this approval Section 3 Organised trading facility's rules Chapter II Trading principles, transparency and conduct of business rules Section 1 Specific requirements applicable to the otf operator Chapter III Supervision of the functioning of the otf and its clients Title IV Clearing houses Chapter I Common provisions Section 1 Approval and publication of clearing house operating rules Section 2 Rules of conduct applicable to clearing house and its staff Section 3 Issuance of professional licences to certain clearing house staff Section 4 Clearing house participation conditions Section 5 Transparency rules Section 6 Clearing house operation Section 7 Collateral requirements Section 8 Default procedures Section 9 Others provisions Title V Central depositories of financial instruments Title VI Central depositaries of financial instruments Chapter unique Central depositories and payment and settlement systems for financial instruments Section 1 Approval and publication of the operating of central depositaries Section 2 Methods of valuation Section 3 Issuance of professional licences to certain members of the central depositary's staff Section 4 Conditions of access to central depositaries Section 5 Anti-money laundering measures Title VII Transfer of ownership of financial instruments accepted by a central depository or settlement system Title VIII Provisions common for trading platforms : position limits and position reporting Book VI Market abuse: insider dealing and market manipulation Book VII Token Issuers and Digital Assets Services Providers Title I Initial coin offering Chapter II Approval of the information document Section 1 Filing and approval of the information document Section 2 Amended information document Chapter III Dissemination of the information document and marketing material Section 1 Dissemination of the information document Section 2 Marketing material Chapter IV Communications by the issuer following approval Chapter V Suspension of all communications concerning the token offering mentioning its approval, and withdrawal of the approval Title II Digital Assets Services Providers Chapter I Registration requirements, license requirements and common provisions applicable to licensed digital assets services providers Section 1 Registration requirements Section 2 License requirements Section 3 Common provisions applicable to licensed digital assets services providers Chapter II Specific provisions applicable to licensed digital assets services providers Section 1 Provisions applicable to the service of custody of digital assets on behalf of third parties Section 2 Provisions applicable to the service of buying or selling digital assets in a currency that is legal tender and the service of trading of digital assets for other digital assets Section 3 Provisions applicable to the service of operation of a trading platform for digital assets Section 4 Provisions relating to the services referred to in Article L. 54-10-2 5° of the Monetary and Financial Code General regulation of the AMF into force from 23/05/2021 to 30/07/2021 ELI : /en/eli/fr/aai/amf/rg/20210523/notes General regulation of the AMF Information boxes have been inserted within the General Regulation. They allow for a direct access to the relevant European regulations on the subject matter. The user will be redirected to the European regulations as initially published in the Official Journal of the European Union and to the subsequent corrigenda, if any. The AMF does not guarantee the completeness of the redirections to these European regulations and corrigenda. The boxes are located at the most relevant level of the GRAMF depending on the provision of the EU regulations to which they refer (Book, Title, Chapter, Section, etc.). This additional material is provided for information purposes only and does not constitute a regulatory instrument. The AMF shall not be held liable or responsible for any harm resulting directly or indirectly from the provision or the use of these information boxes. The provisions of the Title I of the Book I have been removed and are now available in the internal rules of the Autorité des marches financiers at the following address: https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000035317699. When queried in writing ahead of a transaction about an interpretation of this General Regulation, the AMF issues an opinion in the form of a written ruling (rescrit). This opinion stipulates whether, in light of the elements submitted by the interested party, the transaction contravenes this General Regulation. All persons referred to in Article L. 621-7 of the Monetary and Financial Code who initiate a transaction are entitled to submit a request for a ruling to the AMF. A request for a ruling is made in good faith and applies to a specific transaction. The request shall be made by a person party to the transaction. It shall be submitted by registered letter with return receipt and shall be clearly marked "Ruling Request" (demande de rescrit). The request shall specify the provisions in this General Regulation for which the interpretation is requested and shall set forth the relevant aspects of the planned transaction. The request shall be accompanied by a separate document giving the names of the persons concerned by the transaction and, where appropriate, any other elements needed for the AMF's assessment. The AMF shall ensure the confidentiality of this document. The AMF will dismiss without examination any request that does not meet the conditions set out hereabove. The petitioner will be informed of such dismissal. The ruling is issued by the AMF within thirty working days of receipt of the request and is conveyed to the petitioner. If the request is imprecise or incomplete, the petitioner may be asked to provide supplemental information. In this case, the thirty-day deadline is suspended until the AMF has received that information. Where it is unable to assess the true nature of the transaction, or where it considers that the request has not been made in good faith, the AMF duly informs the petitioner, within the time period specified in Article 122-1, of its refusal to issue a ruling. A ruling is valid solely in respect of the petitioner. Provided the petitioner complies with the ruling in good faith, the AMF shall not take any enforcement action or inform the judicial authorities as regards the aspects of the transaction addressed by the ruling. The ruling and the request are both published in full in the next edition of the AMF's monthly review and on its website. At the petitioner's request or on its own initiative, however, the AMF may postpone publication for a period of no more than 180 days starting from day the ruling was issued. If the transaction has not been completed by that date, the time period can be extended until the end of the transaction. Pursuant to Article L. 621-18-1 of the Monetary and Financial Code, the AMF can certify standard agreements for transactions in financial instruments, at the reasoned request of one or more investment services providers or a trade association of investment service providers. To that end, it ensures that the provisions of the standard agreement in question are consistent with this General Regulation. The AMF must be informed of the net asset values of collective investment schemes if such values are calculated by the management company or open-ended investment company (SICAV) referred to in Point 7, Section II of the Article L. 621-9 of the Monetary and Financial Code that is responsible for such calculation. To ensure that the market operates in an orderly manner and that the activity of the entities and persons referred to in Section II of Article L. 621-9 of the Monetary and Financial Code complies with the professional obligations arising from laws and regulations or from the professional rules it has approved, the AMF carries out off-site examinations of records and on-site inspections at the business premises of such entities or persons. To ensure the proper performance of its supervisory duties, the inspectors may order any of the persons referred to in Section II of Article L. 621-9 of the Monetary and Financial Code to retain information, regardless of the storage medium. Such a measure is confirmed in writing, with details of its duration and the conditions in which it may be renewed. The Secretary General issues an inspection order to the persons he has placed in charge. The inspection order indicates, inter alia, the name of the entity or body corporate to be inspected, the identity of the inspector and the purpose of the inspection. Persons subject to inspection shall cooperate diligently and honestly. Where the proper performance of an AMF inspection has been hindered, this fact is mentioned in the inspection report or in a special report setting out these difficulties. Post-inspection reports are transmitted to the inspected entity or body corporate. Transmittal does not take place, however, if the Board, alerted by the Chief Executive, observes that a report describes facts which are capable of being characterised as criminal and deems that such transmittal could interfere with legal proceedings. The entity or body corporate to which a report has been transmitted is requested to submit its observations to the Secretary General of the AMF within a specified period, which cannot be less than ten days. These observations are forwarded to the Board if it when it examines the report in accordance with Section I of Article L. 621-15 of the Monetary and Financial Code. Having due regard for the conclusions of an inspection report and for any observations that may be submitted, the inspected entity or body corporate is informed by registered letter with return receipt or by hand delivery against receipt of the measures it is required to put in place. The entity or body is requested to forward the report and the aforementioned letter to its board of directors, or executive board and supervisory board, or the equivalent decision-making body, as well as to the statutory auditors. Where the inspected entity or person is affiliated with a central body, as per Article L. 511-30 of the Monetary and Financial Code, a copy of the report and the letter shall also be sent to that body. The General Secretariat of the AMF keeps a register of the authorizations provided for in Article L. 621-9-1 of the Monetary and Financial Code. If, for the purposes of an investigation, the Secretary General wishes to call on a person that is not authorised to carry out investigations, he issues an authorization that is restricted to the investigation in question. To ensure that investigations proceed smoothly, investigators may order the retention of information, regardless of the storage medium. Such a measure is confirmed in writing, with details of its duration and the conditions in which it may be renewed. Before the final investigation report is written up, a detailed letter relating the points of fact and of law noted by the investigators is submitted to the persons likely to be charged subsequently. These persons may submit written observations within a period of no more than one month. These observations are forwarded to the Board when it examines the investigation report in accordance with Section I of Article L. 621-15 of the Monetary and Financial Code. Where the proper performance of an AMF investigation has been hindered, this fact is mentioned in the investigation report or in a special report setting out these difficulties. The Board examines the investigation report pursuant to Article L. 621-15 of the Monetary and Financial Code. Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 The AMF General Secretary designates the members of his or her staff, specialised in dealing with reports of the failings referred to in Article L. 634-1 of the Monetary and Financial Code, responsible for receiving and monitoring of such reports and relations with the whistleblower. Specialist staff are trained for this purpose. In a distinct and easily identifiable section of its website, the AMF publishes information concerning the receipt of reports of failings referredto in Article L. 634-1 of the Monetary and Financial Code. Independent, autonomous and secure communication channels that guarantee confidentiality are established within the AMF for receiving and monitoring reports of failings referred to in Article L. 634-1 of the Monetary and Financial Code. The AMF maintains a register of all reports of failings referred to in Article L. 634-1 of the Monetary and Financial Code. The register is kept within a secure and confidential system, and the data contained in it shall be accessible only to specialist AMF staff. The receipt of reports is acknowledged immediately, except upon express request to the contrary from the whistleblower or if there is reason to believe that acknowledgement of receipt could compromise the confidentiality of the whistleblower's identity. The provisions of Chapter II of this Title apply to persons or entities which: Fall within the scope of Regulation (EU) n° 2017/1129 of 14 June 2017 ; or Make an offer to the public of the following securities : shares in the mutual and cooperative banks referred to in Article L. 512-1 of the Monetary and Financial Code ; or mutual company certificates referred to in Article L. 322-26-8 of the Insurance Code ; or shares in cooperative companies incorporated in the form of a public limited company falling within the scope of Article 11 of Law n° 47-1775 of 10 September 1947 establishing the status of cooperative activities. I. - The offer of securities to the public mentioned in point 1° of Article L. 411-2-1 of the Monetary and Financial Code is of a total amount, in France and in the European Union, less than EUR 8,000,000 or the foreign currency equivalent thereof. II. - The offer of securities to the public mentioned in point 2° of Article L. 411-2-1 of the Monetary and Financial Code is addressed to investors acquiring at least EUR 100,000 worth, or the foreign currency equivalent thereof, per investor and per transaction, of the relevant financial securities. III. - The offer of securities to the public mentioned in point 3° of Article L. 411-2-1 of the Monetary and Financial Code concerns securities with a minimum par value of at least EUR 100,000 or the foreign currency equivalent thereof. IV. - The total amount of the offer referred to in paragraph I, and the amount referred to in point 2° of Article L. 411-2 of the Monetary and Financial Code are calculated over a twelve-month period. The total amount of these offers is less than EUR 8,000,000 calculated over a twelve-month period. Any person or entity making an offer of the kind referred to in point 2° of Article L. 411-2 or point 1° of Article L. 411-2-1 of the Monetary and Financial Code shall inform investors participating in the offer that the offer does not require a prospectus to be submitted for approval to the AMF. [Removed by the decree of 7 november 2019] Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC Commission Delegated Regulation (EU) 2019/979 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, and repealing Commission Delegated Regulation (EU) No 382/2014 and Commission Delegated Regulation (EU) 2016/301 Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No 809/2004 [Removed by decree of 7 november 2019] Where appropriate, an AMF instruction shall specify the nature of the information referred to in Article 1(4) and (5) of Regulation (EU) n° 2017/1129 of 14 June 2017 and to be included in the documents to be drawn up in order not to fall within the scope of the obligation to publish a prospectus. Sub-section 1 - Filing and approval of the prospectus Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements Commission Delegated Regulation (EU) 2016/301 of 30 November 2015 supplementing Directive 2003/71/EC of the European Parliament and of the Council with regard to regulatory technical standards for approval and publication of the prospectus and dissemination of advertisements and amending Commission Regulation (EC) No 809/2004 Paragraph 1 - Filing Delegated Regulation (EU) n° 2019/980 of 14 March 2019 supplementing Regulation (EU) n° 2017/1129 of 14 June 2017 on the form, content, examination and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and an AMF instruction stipulate: The form in which the following are filed with the AMF: - drafts of the prospectus and any changes to them; - drafts of the supplements to the prospectus and any changes to them; - drafts of the base prospectus and any changes to them; - the final terms determining which options in a base prospectus are applicable to an individual issuance ; and - the universal registration documents and any changes to them Documentation required for scrutinising the file for approval by the AMF, its content and transmission procedures. Paragraph 2 - Language used for the prospectus I. - The languages accepted by the Autorité des Marchés Financiers, within the meaning of Article 27 of Regulation (EU) n° 2017/1129 of 14 June 2017, for the drawing up and publication of a prospectus, a registration document or a universal registration document are French and English. Where the prospectus is drafted in a language other than French, the summary note must be translated and available in French. However, this summary note in French is not required for: offer of financial securities to the public made in one or more Member States of the European Union, excluding France, and not giving rise to admission to trading on a regulated market in France; admission to trading on a regulated market sought in one or more Member States of the European Union, excluding France, and not giving rise to any offer to the public in France other than an offer to the public referred to in points 1 or 2 of Article L. 411-2 of the Monetary and Financial Code or points 2 or 3 of Article L. 411-2-1 of the Monetary and Financial Code; admission to trading of equity securities sought in the compartment referred to in Article 516-5. II. - Where the final terms of the base prospectus are communicated to the Autorité des Marchés Financiers in accordance with Article 25 (4) of Regulation (EU) n° 2017/1129 of 14 June 2017, the summary note of the individual issuance annexed to the final terms shall be available in French. Paragraph 3 - Universal registration document I - Where an issuer files or registers a universal registration document in French with the Autorité des Marchés Financiers, it may also file or register the document in a language that is customary in the sphere of finance, in accordance with the terms set out in an AMF instruction. In this case, the successive updates shall be drafted both in French and in the same language customary in the sphere of finance. II. - In order to benefit from the publication waivers referred to in Article 9 of Regulation (EU) n° 2017/1129 of 14 June 2017, the issuer may, in accordance with Article 221-3, disseminate the whole of the universal registration document or publish a news release explaining how this document and its updates are to be made available. Paragraph 4 - Responsibility of the different participants In the event of the disposal of equity securities by an entity other than the issuer presented in a prospectus drawn up by the issuer, that entity shall also be responsible for the information relating to the description of the entity, of its connections with the issuer or with the group of the issuer, and of the sale of its equity securities, if the equity securities it is disposing of represent more than 10% of all the equities already issued by the issuer and more than 10% of the equity securities offered. The persons referred to in paragraph II of Article L. 412-1 of the Monetary and Financial Code confirm to the AMF by a declaration that to the best of their knowledge, the information contained in the prospectus for which they are responsible is in accordance with the facts and makes no omission likely to affect its import. I - The statutory auditors shall state whether the interim, consolidated or annual financial statements that have undergone an audit or a limited review and that are presented in a prospectus, a registration document or a universal registration document or in any supplement, amendment or correction thereto give a true and fair view of the issuer. Where the interim financial statements are summary versions, the statutory auditors shall give their opinion on whether those statements comply with the accounting principles. They shall declare that any pro forma information that might be presented in a prospectus, registration document or universal registration document or in any supplement, amendment or correction thereto, has been properly prepared in accordance with the indicated basis and that the accounting basis is consistent with the issuer's accounting policies. II. - They shall examine all the other information in a prospectus, registration document or universal registration document or in any supplement, amendment or correction thereto. This overall examination and any special verifications shall be carried out in accordance with a standard applicable to statutory auditors for prospectus verification. They shall draw up a completion letter for their work on the prospectus, in which they inform the issuer about the reports appearing in the prospectus, registration document or universal registration document or in any supplement, amendment or correction thereto and upon completion of their overall examination and any special verifications that may have been made in accordance with the aforementioned professional standard, they shall indicate any observations they might have. The issue date of this completion letter must coincide as closely as possible with the date of the expected AMF approval. The issuer shall forward a copy of the completion letter to the AMF before the filing or approval of the registration document or universal registration document, or of any amendments or corrections thereto. If the letter contains observations, the AMF shall take appropriate action when scrutinising the prospectus. In case of difficulty, the statutory auditors of a French issuer can approach the AMF with any questions about financial information contained in a prospectus, registration document or universal registration document or in any supplement, amendment or correction thereto. III. - The provisions of paragraph II shall not apply to prospectuses prepared for an offer to the public or admission to trading on a regulated market of debt securities, provided that the securities do not give holders access to equity, or for admission of financial securities to the compartment referred to in Article 516-5. I. - Where one or more investment service providers are managing the initial admission of equity securities to trading on a regulated market, such investment service provider(s) shall confirm to the AMF in a declaration that they have exercised customary professional diligence and that such diligence did not reveal any inaccuracies or material omissions in the content of the prospectus, that are likely to mislead investors or affect their judgement. After the initial admission of equity securities to trading on a regulated market, where one or more investment service providers are managing any offer to the public or admission to trading on a regulated market of said equity securities, the declaration of such investment service provider(s) shall concern only the procedures of the offer and the characteristics of the equity securities being offered or admitted to trading on a regulated market, as described in the prospectus or the note to the equity securities, as applicable. II. - Where one or more investment service providers are managing an offer to the public of equity securities that are not admitted to trading on a regulated market, such investment service provider(s) shall confirm to the AMF in a declaration that they have exercised customary professional diligence and that such diligence did not reveal any inaccuracies or material omissions in the content of the prospectus that are likely to mislead investors or affect their judgement. III. - Where one or more legal persons or other entities, whether investment service providers or not, are authorised by a market operator or an investment service provider that operates an organised multilateral trading facility (MTF) within the meaning of Article 524-1 are managing an offer to the public of said equity securities on that MTF, such legal persons or other entities shall declare to the AMF that they have exercised customary professional diligence and that such diligence did not reveal any inaccuracies or material omissions in the content of the prospectus that are likely to mislead investors or affect their judgement. IV. - The provisions of this article do not apply to prospectuses drawn up for admission of financial securities to the compartment referred to Article 516-5. Paragraph 5 - Approval conditions Where the requirements of Regulation (EU) n° 2017/1129 of 14 June 2017 and of this Chapter have been met, and particularly where the AMF has received the declarations referred to in Articles 212-14 to 212-16, the AMF shall approve the prospectus. The signed declarations submitted to the AMF and relating to the final version of the prospectus must be dated no more than two trading days before said approval. Before approving the prospectus, the AMF may request additional investigations from the statutory auditors or ask for an audit to be carried out by an external specialist, appointed with its agreement, if it considers that the statutory auditors have not exercised due care. Paragraph 6 - Supplement to the prospectus Commission Delegated Regulation (EU) No 382/2014 of 7 March 2014 supplementing Directive 2003/71/EC of the European Parliament and of the Council with regard to regulatory technical standards for publication of supplements to the prospectus Sub-section 2 - Promotional marketing materials [Removed by decree of 7 january 2019] The prospectus, registration document, universal registration document, supplement to the prospectus and any supplement, amendment or modification thereto published and made available to the public shall always be identical to the original version approved by the AMF. The promotional marketing materials relating to a offer to the public other than one of those mentioned in points 1° or 2° of Article L. 411-2 of the Monetary and Financial Code, or points 2° or 3° of Article L. 411-2-1 of said code or to an admission to trading on a regulated market, whatever their form or method of dissemination, shall be submitted to the AMF prior to their dissemination. The AMF may require that promotional marketing materials referred to in the previous paragraph contain a warning about certain exceptional characteristics of the issuer or the guarantors, if any, or the financial securities being offered to the public or admitted to trading on a regulated market. [Removed by the decree of 25 August 2016] [Removed by decree of of 7 november 2019] Paragraph 1 - Mergers, demergers, partial mergers Forty-five days before the scheduled date of the first extraordinary general meeting called to authorise a merger, demerger or partial mergers operation, or forty-five days before the the operation completion date if no general meeting is required to authorise it, the document allowing the waiver of a prospectus and referred to in Article L. 621-8 of the Monetary and Financial Code is transmitted to the AMF. This document contains the information and is made available to the public in accordance with the procedures specified by an instruction, no less than fifteen days for partial mergers or one month for mergers or demergers before the extraordinary general meeting called to authorise the operation or before the the operation completion date if no general meeting is required to authorise it. The provisions of this article only apply to operations that fall within the scope of Article L. 621-8 IV of the Monetary and Financial Code. Paragraph 2 - Public offers unrelated to financial securities I. - This paragraph is applicable to persons or entities making an offer to the public which: Does not fall within the scope of points 1° or 2° of Article L. 411-2 of the Monetary and Financial Code or of Article L. 411-2-1 of said code; and Concerns the following securities: - shares in the mutual and cooperative banks referred to in Article L. 512-1 of the Monetary and Financial Code; or - mutual company certificates referred to in Article L. 322-26-8 of the Insurance Code; or - shares in cooperative companies incorporated in the form of a public limited company (société anonyme) falling within the scope of Article 11 of Law n° 47-1775 of 10 September 1947 establishing the status of cooperative activities. II. - By way of derogation from the rule set out in point IV of Article 211-2 , according to which the total amount of the offer mentioned in paragraph I of the same article is calculated over a twelve-month period following the date of the initial offer, for the application of the provisions of paragraph I of Article 211-2 to an offer of shares in a mutual or cooperative bank, the amount of the offer is assessed per calendar year and at the level of the mutual bank or regional cooperative. Prior to making any offer to the public on French territory, the persons or entities referred to in Article 212-38-1 draw up a draft prospectus and submit it to the AMF for prior approval. The prospectus shall contain all the information which is necessary, depending on the particular nature of the issuer and of the securities offered, to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor of the securities being offered to the public, of the rights attaching to such securities and of the conditions in which the securities are issued. The prospectus also includes: information presenting the issuing bank and the mutual or cooperative network to which it belongs; or information presenting the issuing authorised mutual insurance companies, authorised agricultural mutual insurance or reinsurance funds or companies of mutual insurance groups and the group to which they belong; or information presenting the issuing cooperative company and the cooperative network to which it belongs. The prospectus may incorporate information by reference to a document filed previously with the AMF or approved by it and also published online on the website of the mutual or cooperative bank or of the company issuing mutual company certificates or of the cooperative company issuing shares or of an entity of the group it belongs to. This information shall be the latest available to the issuer. A table enabling investors to easily find the information incorporated by cross-reference shall be inserted into the prospectus. The information contained in the prospectus shall be presented in a form that is easy to analyse and understand. The procedures and content of the prospectus to be drawn up according to the securities being offered are set out in AMF instructions for each of the three categories of securities referred to in point 1 of Article 212-38-1. Under AMF supervision, certain information may be omitted from the prospectus in the following cases: Disclosure of such information would be contrary to the public interest; Disclosure of such information would be seriously detrimental to the issuer, provided that the omission would not be likely to mislead the public; Such information is only of minor importance for the offer to the public being considered, and is not such as will influence the assessment of the financial condition and prospects of the issuer or of the guarantor, if any, of the l shares or mutual company certificates being offered to the public. Without prejudice to the adequate information of investors, the contents of the prospectus may be adapted, in exceptional circumstances and under AMF supervision, and subject to the inclusion of equivalent information, if some of the items prove to be inappropriate to the nature of the shares or mutual company certificates concerned, to the business or legal form of the issuer, the person or entity making an offer to the public. In the absence of equivalent information, the issuer, person or entity making an offer to the public shall be exempted, under AMF supervision, from including the items in question in the prospectus The list of items of information not included in the prospectus pursuant to points 1° and 2° of this article forms part of the documentation required to scrutinise the file. I. - The prospectus includes a summary note. II. - The summary note shall present, in a concise manner and in non-technical language, the key information which, together with the prospectus, provides adequate information on the essential characteristics of the shares and mutual company certificates concerned, in order to help investors considering investing in the said securities. It shall be drawn up in a standard form complying with an AMF instruction in order to make it easier to compare summaries relating to similar financial securities. III. - The summary note shall also contain a warning stating: That it should be read as an introduction to the prospectus; That any decision to invest in the shares and mutual company certificates offered to the public should be based on an exhaustive examination of the prospectus; That where a claim relating to the information contained in a prospectus is brought before a court, the plaintiff investor might, under the national legislation of the Member States of the European Union or parties to the European Economic Area, have to bear the costs of translating the prospectus before the legal proceedings are initiated; That civil liability attaches to the persons who presented the summary note only if the summary note is misleading, inaccurate or inconsistent when read with other parts of the prospectus or if it does not provide, when read together with the other parts of the prospectus, the essential information to help investors considering investing in the said securities. Within the meaning of Article 212-38-4, the key information is the essential, appropriately structured information that must be provided to investors in order to enable them to understand the nature of and risks associated with the issuer, the guarantor and the securities being offered, without prejudice to an exhaustive examination of the prospectus by investors. In light of the offer and the securities concerned, the key information includes the following elements: A brief description of the risks associated with the issuer and any guarantors, as well as the essential characteristics of the issuer and of said guarantors, including assets and liabilities and financial position; A brief description of the risks associated with investment in the securities concerned and the essential characteristics of said investment, including any rights attached to the securities; The general conditions of the offer, particularly an estimate of the expenses borne by the issuer or offeror on the investor's behalf; The reasons for the offer and the planned use of the funds raised. Articles 212-15 and 212-16 are applicable to public offers of shares in cooperative companies incorporated in the form of a public limited company (société anonyme) falling within the scope of Article 11 of Law n° 47-1775 of 10 September 1947 establishing the status of cooperative activities and not falling within the scope of Article L. 512-1 of the Monetary and Financial Code. A draft prospectus shall be filed with the AMF in the forms set out in this paragraph and in an AMF instruction by the entities referred to in Article 212-38-1 or by any person acting on behalf of said entities. The documentation needed to scrutinise the file shall be submitted to the AMF with the filing. The content and submission procedures for such documentation are specified in an AMF instruction. The AMF shall acknowledge receipt of the initial filing of the prospectus within two working days. If the dossier is incomplete, the AMF shall so inform the person or entity that filed the draft prospectus within ten working days of the date on which the draft prospectus was filed. The AMF shall serve notice of its approval within ten working days of the filing date. For the initial offer of shares or mutual company certificates to the public, the AMF shall serve notice of its approval within twenty working days of the filing date. Where the AMF finds that the draft prospectus does not meet the standards of completeness, comprehensibility and consistency necessary for its approval and/or that changes or supplementary information are needed: a) It shall inform the entity or person filing the prospectus of that fact promptly and at the latest within the time limits set out in paragraph 3, as calculated from the submission of the draft prospectus and/or the supplementary information; and b) It shall clearly specify the changes or supplementary information that are needed. In such cases, the time limit set out in paragraph 3 shall then apply only from the date on which a revised draft prospectus or the supplementary information requested are submitted to the AMF. If, when scrutinising the file, the AMF states that the documents are incomplete or that additional information must be incorporated, the time limit of ten working days shall apply only from when the AMF has received the additional information. To issue its approval on the prospectus, the AMF shall check whether the document is complete and comprehensible and whether the information it contains is consistent. Where the requirements of this Chapter have been met, and particularly where the AMF has received the declarations referred to in Articles 212-15 and 212-16 in the case provided for in Article 212-38-4, the AMF shall issue its approval of the prospectus. The issue of these declarations is not required if the offer concerns shares in the mutual or cooperative banks referred to in Article L. 512-1 of the Monetary and Financial Code or the mutual company certificates referred to in Article L. 322-26-8 of the Insurance Code. Before issuing its approval, the AMF may request additional investigations from the statutory auditors or ask for an audit to be carried out by an external specialist, appointed with its agreement, if it considers that the statutory auditors have not exercised due care. A prospectus shall be valid for twelve months after its approval, provided that it is completed by any supplement required pursuant to Article 212-38-10. Article 212-38-10 Every significant new factor, mistake or inaccuracy relating to the information included in a prospectus which may materially affect the assessment of the shares or mutual company certificates and which arises or is noted between the time when the prospectus is approved and the closing of the offer period, shall be mentioned in a supplement to the prospectus which shall be submitted to the AMF prior to its dissemination. Promotional marketing materials shall be adapted in accordance with Article 212-38-15. The AMF shall issue its approval within seven working days, as specified in Article 212-38-7. The document shall be published and disseminated with the same arrangements as for the initial prospectus. Investors who have already agreed to purchase or subscribe for the securities before the supplement is published shall have the right, exercisable within at least two working days after the publication of the supplement to the prospectus, to withdraw their acceptances, provided that the significant new factor, mistake or inaccuracy referred to in the first paragraph arose before the final closing of the offer to the public and the delivery of the securities. That period may be extended by the issuer or the offeror. The date on which this right to withdraw expires must be specified in the supplement. Once approved, the prospectus shall be filed with the AMF and made available to the public by the issuer. The prospectus must be disseminated to the public as early as possible and, in all cases, a reasonable time in advance of, and at the latest at the beginning of, the offer to the public. The prospectus shall be effectively disseminated in one of the following ways: By publication in one or more newspapers with nationwide or other wide circulation; By being made available free of charge in printed form at the issuer's registered office or from the financial intermediaries placing the shares or mutual company certificates. By posting on the website of the issuer or, if applicable, on that of the financial intermediaries placing or selling the shares or mutual company certificates. Issuers that publish their prospectus by one of the procedures mentioned in point 1° or point 2° shall also publish it by one of the procedures mentioned in point 3°. Where the prospectus is disseminated by one of the procedures mentioned in point 3°, a copy of the prospectus shall be sent free of charge to any person who requests one. The electronic version of the prospectus shall be sent to the AMF for posting on its website. I. Any promotional marketing materials relating to an offer of securities to the public referred to in Article 212-38-1, regardless of their form and dissemination method, shall be transmitted to the AMF prior to their dissemination. The promotional marketing materials referred to in the first paragraph shall: State that a prospectus has been or will be published and indicate where investors can or will be able to obtain it; Be clearly recognisable as such; Contain no false or misleading statements; Contain information that is balanced between the relative advantages and risks of an investment in the securities being offered, and consistent with the information in the prospectus, if already published, or with information which should be in the prospectus, if the latter is to be published subsequently ; Contain a notice drawing the reader's attention to the section of the prospectus on risk factors; The AMF may require that promotional marketing materials contain a warning about certain exceptional characteristics of the issuer or the guarantors, if any, or the securities being offered to the public. II. Where a prospectus has not been drawn up for an offer to the public, any promotional marketing materials shall contain a warning stating that the offer is not subject to a prospectus submitted for the approval of the AMF. All information other than promotional information about an offer of securities to the public shall be consistent with the information in the prospectus, regardless of its form and dissemination method. Where a supplement to the prospectus is published after promotional marketing material has been published, an amended version of the promotional marketing material shall be published when a new factor, material mistake or material inaccuracy mentioned in the supplement makes the previously distributed promotional marketing materially inaccurate or misleading. It shall be communicated to the AMF before its dissemination. I. - Persons or entities making an offer of financial securities to the public, as referred to in point 1° of Article L. 411-2-1 of the Monetary and Financial Code, shall be subject to the provisions of this chapter if the offer: Is not exclusively conducted on a crowdfunding website in accordance with the conditions provided by Article 325-48; and Concerns financial securities that are not admitted to trading on a regulated market, an organised multilateral trading facility within the meaning of Article 525-1 or a multilateral trading facility; and Concerns financial securities whose admission for trading on these markets is not requested. I bis. - Persons or entities making an offer referred to in point 1° of Article L. 411-2-1 of the Monetary and Financial Code of shares in cooperatives incorporated in the form of a public limited company (société anonyme) falling within the scope of Article 11 of Law n° 47-1775 of 10 September 1947 establishing the status of cooperative activities and not falling within the scope of Article L. 512-1 of the Monetary and Financial Code, shall be subject to the provisions of this chapter. The drawing up of this document is not required when the offer falls within the scope of point 1° of Article L. 411-2 of the Monetary and Financial Code or of points 2° or 3° of Article L. 411-2-1 of said code. II. – Any person or entity making an offer referred to in point 1° of Article L. 411-2-1 of the Monetary and Financial Code, of financial securities whose admission to trading on an organised multilateral trading facility as defined in Article 525-1 is requested for the first time, shall publish and make available to any interested person, prior to any subscription or purchase, an offer document drawn up under its responsibility in accordance with the rules of the relevant market and subject to the prior control of the market operator. III. – In the case of offers made via a crowdfunding website on the terms set out in Article 325-48 and which are not subject to a prospectus approved by the AMF, the issuer shall provide, via said website and prior to any subscription, a document whose content is stipulated in Article 217-1. The drawing up of this document is not required when the offer falls within the scope of point 1° of Article L. 411-2 of the Monetary and Financial Code or of points 2° or 3° of Article L. 411-2-1 of said code. Any person or entity mentioned in Article 212-43 (I) shall publish and provide to any interested person, prior to any subscription or purchase acquisition, a summary information document comprising: a presentation of the issuer and a description of its activity, its project and the use of the funds raised, accompanied in particular by its most recent accounts, if any exist, information on activity forecasts, its fundraising activities, financing and cash position, as well as organisation chart of its management team and shareholders; information on the level of participation to which the management of the issuer have personally committed within the framework of the proposed offer; exhaustive information on all the rights attached to the securities offered within the framework of the proposed offer (voting, financial and disclosure rights); exhaustive information on all the rights (voting, financial and disclosure rights) attached to securities and categories of securities not being offered within the framework of the proposed offer, and the categories of beneficiaries of such securities; a description of any provisions contained in the articles of association or an agreement and organising the liquidity of the securities, or an explicit statement that no such provisions exist; the conditions under which copies of the entries in the individual accounts of the investors in the records of the issuer, evidencing ownership of their investment, shall be delivered; a description of the risks specific to the activity and project of the issuer; If they exist, a copy of the reports of the corporate bodies to the general meetings of the most recent financial year and the current financial year and, where applicable, of copy of the report(s) of the statutory auditor(s) drawn up in the course of the most recent financial year and the current financial year. the date of the version of the summary information document. The issuer is responsible for ensuring that the information provided is complete, accurate and balanced. An AMF instruction shall stipulate the conditions for applying the provisions of this Article. The summary information document shall be filed with the AMF as provided for in an AMF instruction, prior to conducting the securities offering. The persons or entities mention in Article 212-43 (I) may not publicly claim that this document has been reviewed or checked by the AMF. I. – Any promotional marketing materials relating to an offer of financial securities to the public referred to in point 1 of Article L. 411-2-1 of the Monetary and Financial Code, regardless of their form and dissemination method, shall be transmitted to the AMF before being disseminated. The promotional marketing materials referred to in the first paragraph shall: state that a summary information document has been or will be published and indicate where investors are or will be able to obtain it; contain information that is consistent with and does not contradict the information in the summary information document, if already published, or with information which should be in the information document, if the latter is to be published subsequently; contain balanced information and not mention any alternative performance indicators concerning the issuer, unless these indicators appear in the summary information document itself. The AMF may require that promotional marketing materials contain a warning about certain exceptional characteristics of the issuer or the guarantors, if any, or the financial securities which are the subject of an offer of financial securities to the public referred to in point 1 of Article L. 411-2-1 of the Monetary and Financial Code. II. – All promotional marketing materials shall contain a warning stating that the offer is not subject to a prospectus submitted for the approval of the AMF. III. – All information other than promotional information about an offer of financial securities to the public referred to in point 1. of Article L. 411-2-1 of the Monetary and Financial Code, shall be consistent with the information in the summary information document, regardless of its form and method of dissemination. IV. – In the event that a supplement to the summary information document is published after promotional marketing materials have been published, an amended version of the promotional marketing materials shall be published and submitted to the AMF before being disseminated. Any significant new fact, material mistake or inaccuracy relating to the information included in the summary information document that is likely to materially affect the valuation of the financial securities and which arises or is noted between the filing of the document with the AMF and the closing of the offering shall be mentioned in a supplement to the information document. The content of the information document as well as the order of the information appearing in must comply with the template provided in an AMF instruction. This document shall be transmitted and consultable in the same conditions as the initial summary information document and shall be marked with the words "amended summary information document". It shall bear the date of the amendment. This document shall indicate, in its introduction, by what means investors may request the cancellation of their investment decision and the full repayment of the corresponding amount. Where applicable, this document shall clearly state that, in the absence of such a request within a reasonable time period indicated in the document, investment decisions transmitted prior to the publication of the amended document will be deemed to have been confirmed. The AMF can suspend a public offer or admission to trading on a regulated market for no more than ten consecutive trading days each time that it has reasonable grounds to suspect that the transaction would contravene applicable laws and regulations. The AMF may prohibit a public offer or admission to trading on a regulated market where: It has reasonable grounds to suspect that a public offer would contravene applicable laws and regulations; It observes that a proposed admission to trading on a regulated market would contravene applicable laws and regulations. [Removed by the decree of 14 September 2016] Persons or entities having their registered office outside France and whose financial securities are admitted to trading on a French regulated market shall appoint and elect domicile with a correspondent in France. The correspondent shall be authorised to: Receive any and all correspondence from the AMF; Forward to the AMF all documents and information provided for in laws and regulations, or in response to requests for information from the AMF under the powers granted to it by laws and regulations. This article shall not apply to issuers whose securities are admitted to trading in the compartment referred to Article 516-5. Any company mentioned in Part II of Article L. 433-1 of the Monetary and Financial Code that designates the AMF as the competent authority to supervise a takeover bid must send the AMF a statement to be posted on the AMF's website. This statement must reach the AMF no later than the first day on which the company's securities are admitted to trading on a regulated market. The statement must follow the standard format set out in an AMF instruction. In the case of an offer made via a website on the terms set out in Article 325-48 and which is not subject to a prospectus approved by the AMF, the issuer shall provide, via said website and prior to any subscription: A description of its activity and its project, accompanied in particular by its most recent accounts, information on activity forecasts and an organisation chart of its management team and shareholders; Exhaustive information on all the rights attached to the securities offered within the framework of the proposed offer (voting, financial and information rights); Exhaustive information on all the rights (voting, financial and information rights) attached to securities and categories of securities not being offered within the framework of the proposed offer, and the categories of beneficiaries of such securities; A copy of the reports of the corporate bodies to the general meetings of the most recent financial year and the current financial year and, where applicable, of copy of the report(s) of the statutory auditor(s) drawn up in the course of the most recent financial year and the current financial year. The provisions of this article do not apply to offers falling within the scope of point 1° of Article L. 411-2 of the Monetary and Financial Code or of points 2° or 3° of Article L. 411-2-1 of said code. Any new fact, material mistake or inaccuracy relating to the information included in the information document presenting the information mentioned in Article 217-1, that is likely to have a significant influence on the investment decisions and which arises or is noted between the beginning of the offering and the closing of the offering shall give rise to the drawing up of an amended information document. The content of the information document as well as the order of the information appearing in must comply with the templates provided in an AMF instruction. This document shall be transmitted and be downloadable in the same conditions as the original information document. The amended information document shall also be sent by electronic mail to the investors who paid the amount of their subscription before receiving the amended information document. This document shall indicate, in its introduction, by what means investors may request the cancellation of their decision to subscribe and the full repayment of the corresponding amount. Where applicable, this document shall clearly state that, in the absence of such a request within a reasonable time period indicated in the document, subscriptions received prior to the publication of the amended document will be deemed to have been confirmed. An instruction shall set out the conditions of application of the present article. Commission Implementing Regulation (EU) 2016/1055 of 29 June 2016 laying down implementing technical standards with regard to the technical means for appropriate public disclosure of inside information and for delaying the public disclosure of inside information in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council. For the purposes of this title: Where the issuer's financial securities are admitted to trading on a regulated market, the term "regulated information" shall mean the following documents and information: a) The annual financial report referred to in Article 222-3; b) The half-yearly financial report referred to in Article 222-4; c) The report on payments to governments, provided for in Articles L. 225-102-3 and L. 22-10-37 of the Commercial Code; d) The information and reports referred to in Article 222-9 concerning corporate governance; e) [Removed by the decree of 27 February 2017]; f) Information on the total number of voting rights and the number of shares making up the share capital referred to in Article 223-16; g) The description of buyback programmes referred to in Article 241-2; h) The news release setting out the arrangements to make a prospectus, registration document or universal registration document available; i) The inside information published pursuant to Article 17 of the Market Abuse Regulation (Regulation n° 596/2014/EU); j) A news release setting out how the information referred to in Article R. 225-83 of the Commercial Code is being made available or may be consulted; k) The information published pursuant to Article 223-21; l) The statement concerning the competent authority pursuant to Article 222-1; m) Information on the crossing of shareholding thresholds to be provided to the AMF pursuant to Article L. 233-7-II of the Commercial Code and the first paragraph of Article 223-14 I. Where the issuer has sought or approved trading of its financial securities on a multilateral trading facility operating within French territory in the case of a financial security traded exclusively on a multilateral trading facility, or where the issuer has approved trading of its financial securities on an organised trading facility operating within French territory in the case of a financial security traded exclusively on an organised trading facility, the term "regulated information" shall mean the documents and information referred to in g), h) and i). The term: "person" shall mean a natural person or legal entity. The provisions of this title also apply to the senior managers of the issuer, entity or legal entity concerned. I. - Where the AMF is the competent authority for monitoring compliance with the disclosure requirements provided for in point 1° of Article 221-1, the requisite information shall be drafted in French or in another language customary in the sphere of finance if the financial securities are admitted to trading on a regulated market in France or in a State, other than France, that is party to the European Economic Area agreement. II. - Where the AMF is not the competent authority for monitoring the information referred to in paragraph I and where the financial securities are admitted to trading on a French regulated market, the information shall be in French or another language customary in the sphere of finance. I. - The issuer shall ensure that the regulated information defined in Article 221-1 is disseminated effectively and in full, except for the information referred to in m of point 1° of Article 221-1, which is disseminated effectively and in full by the AMF on its website. II. - The issuer shall post the regulated information on its website as soon as it has been disseminated, except for the information referred to in m of point 1° of Article 221-1, which is disseminated effectively and in full by the AMF on its website. I. – The provisions of this article apply to issuers whose financial securities are admitted to trading on a regulated market, issuers who have requested or approved trading of their financial securities on a multilateral trading facility operating within French territory in the case of a security traded exclusively on a multilateral trading facility, and issuers who have approved trading of their financial securities on an organised trading facility operating within French territory in the case of a financial security traded exclusively on an organised trading facility, and for which the AMF is the competent authority for controlling regulated information. II. - Dissemination of regulated information is considered full and effective if it makes it possible to reach the widest possible audience in the shortest possible period of time between its being distributed in France and in the other Member States of the European Union or other States party to the European Economic Area (EEA) agreement. Where the issuer has requested or approved trading of its financial securities on a multilateral trading facility operating within French territory in the case of a financial security traded exclusively on a multilateral trading facility, or where the issuer has approved trading of its financial securities on an organised trading facility operating within French territory in the case of a financial security traded exclusively on an organised trading facility, the issuer must ensure the full and effective distribution of regulated information as defined in Article 221-1, or of inside information under the conditions set out in the Market Abuse Regulation (Regulation n° 596/2014/EU). The issuer is deemed to have fulfilled this requirement and the AMF filing requirement referred to in Article 221-5 when it transmits regulated information electronically to a primary information provider complying with the distribution procedures described in the Market Abuse Regulation (Regulation n° 596/2014/EU) and registered on a list published by the AMF. Regulated information shall be transmitted in full to the media in a way that ensures secure transmission, minimises the risk of data corruption and unauthorised access, and allows total certainty as to the source of the transmitted information. It shall be communicated to the media in a way that clearly identifies the issuer concerned, the purpose of the regulated information and the date and time at which the issuer transmitted it. The issuer shall rectify any shortcomings or disruptions in the transmission of regulated information as quickly as possible. The issuer shall not be held liable for systemic defects or malfunctions affecting the media to which the regulated information has been transmitted. III. - The issuer shall provide the AMF, on request, with the following: The name of the person that transmitted the regulated information to the media; Details of the security measures taken; The date and time at which the information was transmitted to the media; The means by which the information was transmitted; Details of any embargo placed on the information by the issuer, where such is the case. IV. - The issuer is deemed to have fulfilled the requirement referred to in paragraph I of Article 221-3 and the AMF filing requirement referred to in 221-5 when it transmits the regulated information electronically to a primary information provider complying with the transmission procedures described in paragraph II and registered on a list published by the AMF. V. - For the reports and information referred to in a), b), c) and d) of point 1° of Article 221-1, the issuer may distribute a news release, in accordance with the procedures provided for in this article, describing how such reports and information are to be made available. In this case, the provisions of paragraph I of Article 221-3 are waived. VI. - This disclosure must not be misleading and must be consistent with the information referred to in paragraph I of Article 221-3. The regulated information is filed electronically with the AMF by the issuer at the same time as specified in an AMF instruction. The provisions of Articles 221-3 and 221-4 apply to issuers having financial instruments, as referred to in paragraphs I and II of Article L. 451-1-2 of the Monetary and Financial Code, that are admitted to trading solely on a regulated market, even if the issuer has its registered office outside France and is not subject to the requirements of the above article. Sub-section 1 - General provisions The provisions of this section apply to issuers having their registered office in France and referred to in section I of Article L 451-1-2 of the Monetary and Financial Code. They also apply to issuers referred to in section II of Article L. 451-1-2 ibid if they have chosen the AMF as the competent authority for monitoring compliance with the disclosure requirements stipulated therein. This choice is valid for at least three years for issuers referred to in point 2° of section II of the aforementioned Article L. 451-1-2, unless: The financial securities are no longer admitted to trading on any market of a Member State of the European Union or a state party to the European Economic Area agreement The financial securities are no longer admitted to trading on the French regulated market but are admitted to trading in one or more other European Union Member States or states party to the European Economic Area agreement. This choice takes the form of a statement published in accordance with Article 221-3 and filed with the AMF in accordance with Article 221-5. Where an issuer chooses the AMF as the competent authority, its choice is made public and disclosed to the competent authority of the Member State of the issuer's registered office and, where appropriate, to the competent authorities of all Member States in the territory where its financial securities are admitted to trading on a regulated market. Where the issuer's financial securities are no longer admitted to trading on a regulated market of a Member State of the European Union or a state party to the European Economic Area agreement, or where the issuer chooses another competent authority to monitor compliance with the disclosure requirements provided for in Article L. 451-1-2 ibid, it informs the AMF thereof in accordance with the conditions and procedures described in the above sub-paragraph. If the issuer fails to make public the name of the competent authority chosen to monitor compliance with disclosure requirements within three months of the date on which its financial securities were first admitted to trading on a regulated market, the home Member State shall be the Member State in which the issuer's financial securities are admitted to trading on a regulated market. Where the issuer's financial securities are admitted to trading on a regulated market in several Member States, such States shall be considered as the competent Member States for the issuer until a subsequent choice of a single home Member State has been made and disclosed by the issuer. For an issuer having financial securities already admitted to trading on a regulated market and failing to publish its choice of competent Member State before 27 November 2015, the three-month deadline shall begin on 27 November 2015. An issuer having chosen a competent Member State to monitor compliance with its disclosure obligations and having informed the competent authorities concerned before 27 November 2015 shall be exempted from the requirement to publish its choice of competent Member State, unless such issuer chooses another competent Member State after 27 November 2015. Sub-section 2 - Annual financial reports I. - The annual financial report referred to in paragraph I of Article L. 451-1-2 of the Monetary and Financial Code shall include: The annual accounts; Where applicable, the consolidated accounts prepared in accordance with Regulation (EC) 1606/2002 of 19 July 2002 on the application of international accounting standards; A management report containing at least the information referred to in I of Article L. 225-100-1, in Article L. 22-10-35 and in the second sub-paragraph of Article L. 225-211 of the Commercial Code and, if the issuer is required to prepare consolidated accounts, in II of Article L. 225-100-1 of that Code; A statement made by the natural persons taking responsibility for the annual financial report, whose names and functions are clearly indicated, to the effect that, to the best of their knowledge, the accounts are prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities financial position and profit or loss of the issuer and the undertakings in the consolidation taken as a whole, and that the management report includes a fair review of the development and performance of the business, profit or loss and financial position of the issuer and the undertakings in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; The report of the statutory auditors on the annual accounts and, where applicable, the consolidated accounts. II. - The issuer may include in the annual financial report referred to in paragraph I the news release concerning the information and reports referred to in Article 222-9. In this case, they are not required to publish this information separately. III. – For issuers whose securities are admitted to trading on a regulated market, the annual financial report referred to in I shall be drawn up, for financial years beginning on or after 1 January 2020 inclusive, in accordance with a single electronic reporting format as defined by European Delegated Regulation 2019/815 of 17 December 2018. However, the abovementioned issuers may choose to apply this format only for financial years beginning from 1 January 2021 inclusive. In this case, they shall inform their statutory auditors of their decision to defer the obligation. Sub-section 3 - Half-yearly financial reports The half-yearly financial report referred to in paragraph III of Article L. 451-1-2 of the Monetary and Financial Code shall include: Complete or condensed accounts for the past half-year, in consolidated form where necessary, prepared either under IAS 34 or in accordance with Article 222-5; An interim management report; A statement made by the natural persons taking responsibility for the half-yearly financial report, whose names and functions are clearly indicated, to the effect that, to the best of their knowledge, the accounts are prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities financial position and profit or loss of the issuer and the undertakings in the consolidation taken as a whole, and that the interim management report includes a fair review of the information referred to in Article 222-6; The statutory auditors' report on the limited review of the aforementioned accounts. Where the legal provisions applicable to the issuer do not require a report from the statutory or regulatory auditors on the interim accounts, the issuer shall mention this in its report. I. - Where the issuer is not required to prepare consolidated accounts or apply international accounting standards, the interim accounts shall contain at least the following: Balance sheet; Income statement; Statement of changes in equity; Cash flow statement; Accounting policies and explanatory notes. These accounts may be in condensed form and the explanatory notes may contain only a selection of the most material notes. The condensed balance sheet and the condensed income statement shall show each of the headings and subtotals included in the most recent annual accounts of the issuer. Additional line items shall be included if, as a result of their omission, the half- yearly accounts would give a misleading view of the assets, liabilities, financial position and profit or loss of the issuer. The explanatory notes shall include at least enough information to ensure the comparability of the condensed half-yearly accounts with the annual accounts, as well as sufficient information and explanations to ensure a reader's proper understanding of any material changes in amounts and of any developments in the half-year period concerned, which are reflected in the balance sheet and the income statement. II. - For comparability, interim accounts shall contain the following: The balance sheet as of the end of the interim period in question and the comparative balance sheet as of the end of the immediately preceding financial year; The income statement cumulatively for the first six months of the current financial year, with a comparative income statement for the comparable period of the immediately previous financial year and the income statement of the immediately previous financial year; The statement of changes in equity cumulatively for the first six months of the current financial year, with a comparative statement of changes in equity for the immediately preceding financial year; The cash flow statement cumulatively for the first six months of the current financial year, with a comparative cash flow statement for the immediately preceding financial year. III. - The interim accounts shall be prepared on a consolidated basis if the accounts for the company's most recent financial were consolidated accounts. IV. - If the earnings per share amount is published in the accounts for the financial year, it shall also be published in the interim accounts. I. - As a minimum requirement, the interim management report shall describe the material events that occurred in the first six months of the financial year and their impact on the interim accounts. It shall describe the principal risks and uncertainties for the remaining six months of the year. II. - For issuers of shares, the half-yearly report shall also disclose, as major related parties' transactions, as a minimum, the following: Related parties' transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or the performance of the issuer during that period; Any changes in the related parties' transactions described in the last annual report that could have a material effect on the financial position or performance of the issuer in the first six months of the current financial year. Where the issuer of shares is not required to prepare consolidated accounts, it shall disclose, as a minimum, the related parties transactions referred to in Point 10 of Article R. 233-14 of the Commercial Code. [Removed by the decree of 27 February 2017] Public limited companies (sociétés anonymes) with their registered office in France and whose securities are admitted to trading on a regulated market shall publicly disclose, in accordance with the procedures set out in Article 221-3 the information and reports mentioned in Articles L. 225-37, L. 22-10-9, L. 22-10-10, L. 22-10-11, L. 225-68, L. 22-10-20 and L. 22-10-71 of the Commercial Code no later than on the day they file the report referred to in Article L. 225-100 of the Commercial Code with the clerk of the commercial court. Companies organised as partnerships limited by shares (sociétés en commandites par actions) whose securities are admitted to trading on a regulated market shall publicly disclose the information mentioned in Articles L. 226-10-1 and L. 22-10-78 of the Commercial Code in the same conditions. Other French legal entities shall publicly disclose information about the matters mentioned in the first paragraph under the same conditions as those set out in the first paragraph, if they are required to file their financial statements with the clerk of the commercial court and as soon as the annual financial statements for the previous year have been approved, otherwise. Whenever an issuer draws up a universal registration document pursuant to Article 9 (12) of Regulation (EU) n° 2017/1129 of 14 June 2017, that document may include the reports and disclosures mentioned in the first paragraph. In such case, the distribution requirements of that paragraph do not apply. Where the AMF exempts an issuer from the obligations set forth in Article L. 451-1-2, pursuant to Section VIII of Article L. 451-1-2 of the Monetary and Financial Code and Articles 222-11 to 222-16 herein, such issuer shall disseminate, keep and file the information deemed equivalent by the AMF, using the procedures defined in Articles 221-3 to 221-5. The AMF then informs the European Securities and Markets Authority of the waiver it has granted. A State that is not party to the European Economic Area (EEA) agreement shall be regarded as setting requirements equivalent to those in Point 3 of I of Article 222-3 where, under the law of that State, the management report is required to include at least the following information: a fair review of the development and performance of the business and of the position of the issuer, together with a description of the principal risks and uncertainties that it faces, so as to present a balanced and comprehensive analysis consistent with the size and complexity of the business; An indication of the important events that have occurred since the end of the financial year; Indications of the issuer's likely future development. The analysis referred to in Point 1° shall, to the extent necessary for an understanding of the issuer's development, performance or position, include both financial and, where appropriate, non-financial key performance indicators relevant to the issuer's particular business. A State that is not party to the European Economic Area Agreement shall be regarded as setting requirements equivalent to those in Point 2° of I of Article 222-3 where, under the law of that State, the issuer: Is not required to provide individual accounts for the parent company; Is required to provide consolidated financial statements including: for issuers of shares, dividends computation and ability to pay dividends; for all issuers, where applicable, minimum capital and equity requirements and liquidity issues. Must provide the AMF, at its request, with additional audited disclosures giving information on the individual accounts of the issuer as a standalone, relevant to the elements of information referred to under points (a) and (b) of 2°. This information may be drawn up under the accounting standards of the issuer's home country. A State that is not party to the European Economic Area Agreement shall be regarded as setting requirements equivalent to those in 2° of I of Article 222-3 with regard to individual accounts where, under the law of that State, the issuer is not required to provide consolidated financial statements under international accounting standards deemed to be applicable in the European Union under the terms of Article 3 of Regulation (EC) 1606/2002 and the national accounting standards of the country concerned which are equivalent to such standards. If such financial information is not in line with those standards, it must be presented in the form of restated financial statements. The individual accounts must be audited independently. A State that is not party to the European Economic Area Agreement shall be regarded as setting requirements equivalent to those in Article 222-6 where, under the law of that State, the issuer must provide a set of condensed financial statements and an interim management report that includes as a minimum: A review of the period covered; Indications of the issuer's likely future development for the remaining six months of the financial year; For issuers of shares and if already not disclosed on an ongoing basis, major related parties' transactions. A State that is not party to the European Economic Area agreement shall be regarded as setting requirements equivalent to those in Point 4° of I of Article 222-3 and in Point 3° of Article 222-4 where, under the law of that State, one or more persons within the issuer take responsibility for the annual and half-yearly financial information, and in particular for the following: 1° The compliance of the financial statements with the applicable reporting framework or set of accounting standards ; 2° The fairness of the management review included in the management report. For the purposes of this section, “issuer” means (i) any issuer who has requested or approved admission of its financial securities to trading on a regulated market operating within French territory, (ii) any issuer who has requested or approved trading of its financial securities on a multilateral trading facility operating within French territory in the case of a financial security traded exclusively on a multilateral trading facility, and (iii) any issuer who has requested trading of its financial securities on an organised trading facility operating within French territory in the case of a financial security traded exclusively on an organised trading facility. Information provided to the public must be accurate, precise and fairly presented. Commission Delegated Regulation (EU) 2016/522 of 17 December 2015 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council as regards an exemption for certain third countries public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers' transactions Commission Implementing Regulation (EU) 2016/1055 of 29 June 2016 laying down implementing technical standards with regard to the technical means for appropriate public disclosure of inside information and for delaying the public disclosure of inside information in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council When an issuer or a participant in the market for emissions allowances defers publication of privileged information under the conditions set out in Article 17 of the market abuse regulation (Regulation (EU) No. 596/2014), the Autorité des marchés financiers may require explanations for this deferred publication. These explanations must be provided without further delay. Any material change to the inside information already made public, and which falls within the scope of the provisions of Article 17 of Regulation (EU) n° 596/2014 of the European Parliament and the Council of 16 April 2014 on Market Abuse, is subject to the publication obligation provided by this article. Any person that is preparing a financial transaction liable to have a significant impact in the market price of a financial instrument, or on the financial position and rights of holders of that financial instrument, must disclose the characteristics of the transaction to the public as soon as possible. If confidentiality is temporarily necessary to carry out the transaction and if the person mentioned in the preceding sentence is able to ensure such confidentiality, he may assume responsibility for deferring disclosure of those characteristics. Where a person has publicly disclosed his intentions and subsequently his intentions no longer conform to his initial declaration, he is required to inform the public promptly of his new intentions. All the information referred to in Articles 223-2 to 223-7 must be disclosed to the public in the form of a news release distributed in accordance with Article 221-3. The AMF may request that the issuers and persons mentioned in Articles 223-2 to 223-7 publish, within an appropriate period of time, information that the AMF deems necessary for investor protection and orderly markets. Failing such publication, the AMF itself may disclose the information. All issuers must ensure that the public enjoys equal and simultaneous access to the information sources and channels that the issuer or its advisors make available specifically to investment analysts, particularly with regard to financial transactions. By way of derogation from the provisions of the first paragraph, where the transaction involves equity securities submitted for the first time to trading on a regulated market or organised multilateral trading facility, the financial analysts appointed by member institutions of the syndicate in charge of performing the transaction, or by the group to which these institutions belong, may receive information prior to its public dissemination, subject to compliance with the provisions of Article 315-1 and in the conditions specified in an AMF instruction. Commission Delegated Regulation (EU) 2015/761 of 17 December 2014 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to certain regulatory technical standards on major holdings Sub-section 1 - Major shareholdings Paragraph 1 - Common provisions I. - The participation thresholds referred to in Article L. 233-7 of the Commercial Code shall be calculated on the basis of the shares and voting rights owned, plus, even if the person concerned does not itself hold shares or voting rights elsewhere, the shares and voting rights treated as if they were owned pursuant to Article L. 233-9 of said code. These are calculated in relation to the total number of shares making up the capital of the company and the total number of voting rights attached to these shares. The total number of voting rights is calculated on the basis of all the equities to which voting rights are attached, including equities whose voting rights have been suspended. II. - Pursuant to Point 4°, Section I of Article L. 233-9 of the Commercial Code, the person required to make the notification referred to in Part I shall take account of the maximum number of issued shares that it is entitled to acquire on its own initiative alone, immediately or at the end of a maturity period, under an agreement or a financial instrument, without set-off against the number of shares that said person is entitled to sell under an another agreement or financial instrument. The financial instruments referred to in Point 4°, Section I of said article are, inter alia: Bonds that are exchangeable or redeemable in shares; Futures and forward contracts; Options, whether exercisable immediately or at the end of a maturity period, and regardless of the level of the share price relative to the option strike price. Where the option can be exercised only if the share price reaches a threshold stipulated in the contract, it shall be treated in the same way as a share once this threshold is reached; if not, it is subject to the information requirement mentioned in the third paragraph of Section I of Article L. 233-7 of the Commercial Code. III. - Pursuant to Point 4° bis of Section I of Article L. 233-9 of the Commercial Code, the person required to make the notification referred to in Part I shall take account of issued shares covered by an agreement or cash-settled financial instrument and having an economic effect for said person that is equivalent to owning said shares, irrespective of whether said agreement or financial instrument carries the right to physical settlement or cash settlement. This applies in particular to: Options, whether exercisable immediately or at the end of a maturity period, and regardless of the level of the share price relative to the option strike price; Warrants; Securities repurchase agreements; Securities financing agreements; Contracts for difference; Equity swaps; Any financial instrument exposed to a basket of shares or an index. The number of shares or voting rights to be taken into account by the reporting person in the case of financial instruments referenced to a basket of shares or an index shall be calculated based on the relative importance of the share in the basket or the index if one of the following conditions is fulfilled: the shares represent 1% or more of the same class of shares issued by the issuer; the shares represent 20% or more of the total value of the securities in the basket or index. Where a financial instrument is referenced to a series of baskets of shares or indices, the shares and voting rights held through the individual baskets of shares or indices shall not be accumulated for the purpose of calculating the thresholds set out in paragraph 1. The number of shares or voting rights to be taken into account by the reporting person having an agreement or a financial instrument carrying the right to cash settlement shall be calculated by multiplying the maximum number of shares and voting rights covered by the agreement or financial instrument by the delta of the agreement or instrument. The delta shall be calculated using a generally accepted standard pricing model. A generally accepted standard pricing model shall be a model that is generally used in the finance industry for that financial instrument and that is sufficiently robust to take into account the elements that are relevant to the valuation of the instrument. The elements that are relevant to the valuation shall include at least all of the following: interest rate; dividend payments; time to maturity; volatility; price of underlying share. When determining delta, the holder of the financial instrument shall ensure all of the following: that the model used covers the complexity and risk of each financial instrument; that the same model is used in a consistent manner for the calculation of the number of voting rights to be taken into account by the reporting person. Information technology systems used to carry out the calculation of delta shall ensure consistent, accurate and timely compliance with the time period stipulated in Article 223-14. The number of voting rights shall be calculated daily based on the last closing price of the underlying share. There shall be no set-off with any short position held by the reporting person as a result of another agreement or cash-settled financial instrument. I. - Where the holder of the agreements or financial instruments referred to in Points 4° or 4° bis of Section I of Article L. 233-9 of the Commercial Code comes into possession of shares covered by said agreements or instruments and in doing so exceeds one of the thresholds referred to in Section I of Article L. 233-7 of said code, whether alone or in concert, these shares shall be subject to a new disclosure, as provided in Article L. 233-7 of the code. The same applies to the voting rights attached to these shares. II. - Where the same shares and voting rights can be aggregated in accordance with several of the cases referred to in Section I of Article L. 233-9 of the Commercial Code, the person required to make the disclosure provided for in Section I of Article L. 233-7 of the code shall aggregate them only once. I. - Pursuant to Point 2° of Part II of Article L. 233-9 of the Commercial Code, the following shall not be treated as shares or voting rights held by the person required to provide the notification provided for in Part I of Article L. 233-7 of the aforementioned code: equities held in a portfolio managed by an investment service provider controlled by that person within the meaning of Article L. 233-3 of the Commercial Code in connection with an asset management service, if the provider is able to exercise the voting rights attached to these equities only on the instructions of its client or if it provides assurance that the asset management business is conducted separately from all other activities. II. - Application of Part I of this Article and Point 1° of Part II of Article L. 233-9 of the Commercial Code shall be subject to the immediate submission of the following information to the AMF by the person required to provide the notification: The list of the management companies or investment service providers, citing their competent supervisory authorities or, failing that, that no authority is responsible for their supervision, but without mentioning the issuers concerned; A statement to the effect that the person required to provide the notification complies with the requirements of this article for each management company or investment service provider concerned. Said person shall keep the list mentioned in Point 1° up to date. III. - The person mentioned in Part II must be able to prove to the AMF at its demand that: The person's organisational structures, along with those of the management company or the investment service provider, are set up in such a way that the provider exercises the voting rights independently and that the provider and the person required to provide the notification have established procedures and rules of conduct aimed at preventing the disclosure of information about the exercise of voting rights between said person and the management company or investment service provider; The persons who set the procedures for exercising voting rights shall act independently; If the person mentioned in Part II is a customer of the management company or the provider or if said person holds a share of the assets managed by the provider, there shall be a written agency agreement clearly establishing a mutually independent relationship between said person and the management company or the investment service provider. IV. - The provisions of Article L. 233-9 of the Commercial Code shall not apply if the management company or the investment service provider is able to exercise voting rights only on the direct or indirect instructions of the person required to provide the notification mentioned in Point I the aforementioned Article L. 233-7 or of any other person controlled by that person within the meaning of the aforementioned Article L. 233-3. For the purposes of this paragraph: "Direct instruction" shall mean any instruction given by the person required to provide the notification or any person controlled by that person within the meaning of Article L. 233-3 of the Commercial Code, stipulating how the management company or the investment service provider should exercise the voting rights under given circumstances; "Indirect instruction" shall mean any general or specific instruction given in any form by the person required to provide the notification or any person controlled by that person within the meaning of Article L. 233-3 of the Commercial Code that limits the discretion of the management company or the investment service provider in the exercise of the voting rights in order to serve the commercial interests of the person required to provide the notification or the controlled person. Point II of Article L. 233-9 of the Commercial Code shall apply to investment providers whose registered offices are not located in States party to the European Economic Area Agreement and which would have been authorised under the terms of Article 5, paragraph 1 of Directive 85/611/EEC, or in the case of asset management, under the terms of Section A, Point 4 of Annex I to Directive 2004/39/EC if their registered offices, or in the case of investment service providers only, their central offices, were located in States party to the European Economic Area Agreement, when under the legislation of those States: The management company or the investment service provider must be free, under all circumstances, to exercise the voting rights attaching to the assets under its management, independently of the person controlling it; The management company or the investment service provider must not take into consideration the interest of the person controlling it or any person controlled by that person in the event of a conflict of interest; The person required to provide the notification shall comply with the provisions of Point 1° of the last paragraph of Part II of Article 223-12 and file a statement with the AMF to the effect that it complies with the requirements stipulated in Points 1° and 2° for each management company or investment service provider concerned. The person required to provide the notification shall be subject to the provisions of Part III of Article 223-12. I. - The notification requirements provided for in Parts I, II and III of Article L. 233-7 of the Commercial Code do not apply to equities: 1° Acquired solely for the clearing, settlement or delivery of financial instruments under the short-term settlement cycle lasting no more than three trading days after the transaction; 2° Held by an investment services provider in its trading book within the meaning of Directive 2006/49/EC of the Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions, provided that: These equities represent 5% or less of the share capital or voting rights of the issuer; The voting rights attached to these equities are not exercised nor otherwise used to intervene in the management of the issuer; The threshold referred to in the previous paragraph shall be calculated on the basis of the shares and voting rights owned, plus the shares and voting rights treated as if they were owned pursuant to Article L. 233-9 of the Commercial Code. These are calculated in relation to the total number of shares making up the capital of the company and the total number of voting rights attached to these shares. II. - The notification requirements provided for in Parts I, II and III of Article L. 233-7 of the Commercial Code shall not apply to any market maker whose shareholding breaches the threshold of 5% of the share capital or voting rights in connection with market-making activities, provided: That it does not intervene in the issuer's management; That it does not exert any influence on the issuer to buy such equities or to support the price of such equities. III. - A market maker shall notify the AMF within five trading days of starting its activity that it is making or intends to make a market for a given issuer. It shall also notify the AMF within the same period when its stops making a market for the issuer concerned. This notification shall be made using a standard form to be defined by an AMF Instruction. IV. - A market maker shall submit to the AMF at its request: Means of identifying the equities or financial instruments concerned. The market maker shall register them in a separate account, if it cannot identify them by any other means; Where applicable, any agreements between the market maker and the market undertaking, or the issuer. I. - The persons required to make the notification referred to in Section I of Article L. 233-7 of the Commercial Code shall file it with the AMF no later than the close of trading on the fourth trading day after the shareholding threshold has been crossed. For the purposes of the preceding paragraph, the AMF shall post the calendar of trading days on the different regulated markets established or operating in France to its website. II. - The information mentioned in Part I must include: The identity of the reporting person; Where applicable, the identity of the natural person or legal entity entitled to exercise voting rights on behalf of the reporting person; The date on which the threshold was breached; The reason why the threshold was breached; The resulting situation in terms of shares and voting rights; Where applicable, the type of aggregation with shares and voting rights held by the reporting person under Article L. 233-9 of the Commercial Code and, where appropriate, the main points of the agreement mentioned in Points 4° and 4° bis of Section I of Article L. 233-9 of the aforementioned code; Where applicable, the chain of undertakings controlled within the meaning of Article L. 233-3 of the Commercial Code through which the shares and voting rights are held; Where applicable, the number of shares acquired further to a securities financing transaction; The signature of the person required to provide the notification. III. - The notification shall also indicate: The number of securities giving future access to shares to be issued and to the voting rights attached thereto, notably normal warrants and covered warrants, bonds convertible into shares, and bonds convertible into or exchangeable for new or existing shares; If the conditions set in Point 4°, Section I of Article L. 233-9 of the Commercial Code are not satisfied, the issued shares that the reporting person is entitled to acquire under an agreement or a financial instrument, notably the options referred to in the last paragraph of Section II of Article 223-11, in the cases stipulated therein; IV. - Where Point 4° of Section I of Article L. 233-9 of the Commercial Code applies or in the cases provided for in Section III, the notification shall also include a description of each type of financial instrument or the agreement, with the following details: The expiry or maturity date of the instrument or agreement; Where applicable, the date or the period at which the shares will or can be acquired; The name of the issuer of the share concerned; The principal characteristics of this instrument or agreement, in particular: The conditions in which the instrument or agreement carries the right to acquire shares; The maximum number of shares to which the instrument or the agreement carries the right or which the holder or beneficiary can acquire, without set-off against the number of shares that this person is entitled to sell pursuant to another financial instrument or another agreement; V. - Where Point 4° bis of Section I of Article L. 233-9 of the Commercial Code applies, the declaration shall also include a description of each type of agreement or physically settled financial instrument, in accordance with Section IV, as well as a description of each type of agreement or cash-settled financial instrument, with the following details: The principal characteristics of this instrument or agreement, in particular the maximum number of shares to which it is indexed or referenced, without set-off against the number of shares on which the person subject to the notification requirement holds a short position as a result of an agreement or cash-settled financial instrument; The delta of the instrument or the agreement, which is used to determine the number of shares and voting rights aggregated by the reporting person. VI. - The notification takes the form of the standard notification provided in an AMF instruction. It is filed with the AMF in accordance with an AMF instruction. It is disclosed to the public by the AMF within three trading days from receipt of the full notification. It shall be drafted in French or another language that is customary in the sphere of finance. In the case provided for in Point 8° of Part I of Article L. 233-9 of the Commercial Code, the notification mentioned in Article 223-14 may take the form of a single notification, provided that it clearly explains what the situation will be with regard to voting rights when the proxy holder is no longer able to exercise them after the proxy expires. In this case, the proxy holder is no longer required to give notice when its shareholding goes under the thresholds stipulated in Article L. 233-7 of the Commercial Code after the proxy expires. Paragraph 2 - Provisions applicable to organised multilateral trading facilities The provisions of paragraph 1 of this sub-section shall apply to the organised multilateral trading facilities referred to in Article 524-1 when a person comes into possession, under the conditions set forth in Articles L. 233-7 et seq. of the Commercial Code, of more than one-half or nineteen-twentieths of the capital or voting rights. The provisions of this sub-section shall apply to issuers of financial instruments that have been moved from trading on a regulated market to trading on an organised multilateral trading facility within the meaning of Article 524-1, for a period of three years starting from the admission date, under the terms of Article L. 233-7-1 of the Commercial Code. Sub-section 2 - Information about the total number of voting rightsand shares making up the share capital Each month, companies whose shares are admitted to trading on a regulated market in a State party to the European Economic Area Agreement or on an organised multilateral trading facility within the meaning of Article 524-1 shall disclose, in accordance with the procedures set out in Article 221-3, the total number of voting rights, determined according to the stipulations of the second paragraph of Article 223-11, and the number of shares making up their share capital, if these figures have changed relative to previous disclosures. The provisions of Article 223-16 shall apply when the issuer has its registered office in a State that is not a party to the European Economic Area agreement and comes under AMF jurisdiction for the supervision of compliance with the requirement set out in Article L. 412-1 of the Monetary and Financial Code. A third country shall be deemed to apply requirements equivalent to those set out in Article 223-16 where the issuer is required to disclose to the public the total number of voting rights and capital within thirty calendar days of any change in such total number. Sub-section 3 - Statements of intent and changes of intent I - The notification provided for in Section VII of Article L. 233-7 of the Commercial Code shall indicate: The methods of financing the acquisition and the arrangements therefor: the notifier shall indicate in particular whether the acquisition is being financed with equity or debt, the main features of that debt, and, where applicable, the main guarantees given or received by the notifier. The notifier shall also indicate what portion of its holding, if any, it obtained through securities loans. If the acquirer is acting alone or in concert; If it plans to cease or continue its purchases; If it intends to take control of the company; The strategy it intends to pursue in relation to the issuer; The operations for carrying out that strategy: Any plans for a merger, reorganisation, liquidation, or substantial partial transfer of the assets of the issuer or of any other entity it controls within the meaning of Article L. 233-3 of the Commercial Code; Any plans to modify the business of the issuer; Any plans to modify the memorandum and articles of association of the issuer; Any plans to delist a category of the issuer's financial securities; Any plans to issue the issuer's financial securities. Its intentions as regards the unwinding of the agreements and instruments referred to in Points 4° and 4° bis of Section I of Article L. 233-9 of the Commercial Code, if it is party to such agreements or instruments. Any agreements on a securities financing transaction involving the shares or voting rights of the issuer; Whether it intends to request its appointment or the appointment of one or more persons as a director on the executive board or supervisory board. II. - Any person that provides portfolio management services for third parties as a regular business is not required to provide all the information provided for in Section I, on the following conditions: It crosses the threshold of one-tenth or three-twentieths of the capital or voting rights of the issuer in the normal course of business; It declares that it does not intend to take control of the company or to request its appointment or the appointment of one or more persons as a director on the executive board or supervisory board; It carries on its business independently from any other business. In this case the declaration shall take the form of a standard clause contained in an AMF instruction. III. - The initiator of a takeover bid that comes into possession of more than one-tenth, three-twentieths, one-fifth or one-quarter of the capital or the voting rights of the target company during the offer period or subsequent to the bid shall be exempt from Section VII of Article L. 233-7 of the Commercial Code if the offer document referred to in Article 231-18 has been disclosed to the public. IV. - The AMF shall disclose to the public the information referred to in Section VII of Article L. 233-7 of the Commercial Code. The AMF shall publicly disclose the information mentioned in Article L. 233-11 of the Commercial Code. The AMF shall specify in an instruction how such information is to be transmitted to it. Sub-section 1 - Information on proposals to amend the articles of association The issuers referred to in Article 222-1 shall inform both the AMF and the persons that manage the EEA regulated markets to which their shares are admitted to trading of any proposals to amend their articles of association. Such communication shall be made without delay but at the latest on the date of calling the general meeting. I. - In the event that a company, whose registered office is in France and whose shares are admitted to trading on a French regulated market or for which an application for admission to trading on such a market has been filed, decides to apply or cease applying the provisions set forth in Articles L. 233-35 to L. 233-39 of the Commercial Code, it shall notify the AMF of amendments to its articles of association as soon as these are made, so that the AMF can post this information on its website. II. - The following are also subject to the provisions of Part I: Any company whose registered office is in France and whose shares are admitted to trading on a regulated market in a Member State of the European Union or in a State party to the European Economic Area (EEA) Agreement, other than France, or for which an application for admission to trading on such a market has been filed; Any company whose registered office is in a Member State of the European Union or in a State party to the EEA Agreement, other than France, and whose shares are admitted to trading on a French regulated market or for which an application for admission to trading on such a market has been filed. Sub-section 2 - Other information Notwithstanding section 1 of this chapter, the issuers referred to in Article 222-1 shall make public without delay, and in accordance with Article 221-3: Any change in the rights attaching to the various classes of shares, including changes in the rights attaching to derivative instruments issued by the issuer and giving access to the shares of that issuer; Any change to the terms and conditions of issuance that may directly affect the rights of holders of financial instruments other than equities; Commission Implementing Regulation (EU) 2016/523 of 10 March 2016 laying down implementing technical standards with regard to the format and template for notification and public disclosure of managers' transactions in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council. The provisions of this section apply to French issuers referred to in paragraph I of Article L. 621-18-2 of the Monetary and Financial Code. They also apply to companies whose financial securities are admitted to trading on an organised multilateral trading facility within the meaning of Article 524-1. In accordance with the last paragraph of Article L. 621-18-2 of the Monetary and Financial Code, notifications are not required for transactions carried out by a person referred to in the aforementioned article if the total amount of such transactions does not exceed EUR 20,000 in a calendar year. The report referred to in Article L. 225-100 of the Commercial Code contains a summary statement of the transactions referred to in Article L. 621-18-2 of the Monetary and Financial Code, which have been made during the past financial year and have been reported. Commission Implementing Regulation (EU) 2016/347 of 10 March 2016 laying down implementing technical standards with regard to the precise format of insider lists and for updating insider lists in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council Without prejudice to the provisions of Article 223-6, in particular when the market for the financial instruments of an issuer is subject to large price swings or unusual trading volumes, the AMF may require persons to publicly disclose their intentions within a set deadline, where there is reason to believe they are preparing a takeover bid, either alone or in concert with others within the meaning of Article L. 233-10 of the Commercial Code. This shall be the case, for example, in the event of discussions between the issuers concerned or the appointment of advisors with a view to preparing a public offer. The information is publicly disclosed in a news release submitted in advance to the AMF for approval and in accordance with Article 221-3. Where the persons mentioned in Article 223-32 state their intention to file a draft offer, the AMF sets the date on which they must publish a release describing the terms of the draft offer, or, depending on the circumstances, file a draft offer. The news release referred to in the first paragraph should mention the financial terms of the draft offer, any agreements that could affect its execution, the equity interest held in the issuer in question, any conditions that must be satisfied before the draft offer is filed, and the proposed timetable. The AMF may request any information it deems necessary. If the terms of the draft offer are not disclosed or if the draft offer is not filed within the deadline mentioned in the first paragraph, the persons in question are deemed not to have the intention of filing a draft offer and are subject to the provisions of Article 223-35. When a person makes the characteristics of a draft offer public under the terms of Articles 223-6 or 223-33, including the nature of the offer and the planned price or exchange ratio, that person shall immediately notify the AMF and the AMF shall so notify the market by means of a publication. This publication shall mark the beginning of the pre-offer period, as defined in Article 231-2 (5°). If the person referred to in the first paragraph abandons the planned offer, it shall immediately notify the AMF. In the circumstances referred to in the previous paragraph, or if a draft offer is not filed within the deadline mentioned in Article 223-33, the AMF shall notify the market by means of a publication. If the persons mentioned in Article 223-32 indicate that they do not intend to file a draft offer, or if they are deemed not to have such an intention pursuant to the final paragraph of Article 223-33, they may not file a draft offer for a period of six months starting from when they made their statement or from the expiry of the deadline mentioned in the final paragraph of Article 223-33, unless they provide evidence of major changes in the environment, situation or shareholding structure of the persons concerned, including the issuer itself. During the period mentioned in the first paragraph, these persons may not place themselves in a situation in which they are obliged to file a draft offer. If they increase, by 2% or more, the number of equity securities and securities giving access to capital or voting rights that they hold in the issuer, they must report this immediately and indicate the objectives that they intend to pursue through to the expiry of the period. The information mentioned in the previous paragraph shall be publicly disclosed according to the conditions and procedures set forth in Article 222-22. When an issuer of financial instruments that are traded on a regulated market plans to apply for admission of its financial instruments to trading on an organised multilateral trading facility within the meaning of Article 524-1, it shall so notify the public at least two months before the planned date for the admission of the financial instruments to trading on the relevant multilateral trading facility under the terms of V of Article L. 421-14 of the Monetary and Financial Code. The notice shall specify the reasons therefor and the consequences for shareholders and the public, following procedures that are identical to those stipulated in Article 221-3. The notice shall also include the timetable for the move. If the issuer concerned by the first paragraph decides to apply for admission of its financial instruments to trading on an organised multilateral trading facility within the meaning of Article 524-1, after the general meeting stipulated in Article L. 421-14 of the Monetary and Financial Code, it shall immediately notify the public, following procedures that are identical to those stipulated in Article 221-3. The notice shall specify the reasons therefor and the consequences for shareholders and the public. It shall also specify the procedures for the move. The notice shall also include the timetable for the move. Regulation 236/2012 of the European Parliament and Council dated 14 March 2012 concerning short selling and certain aspects of contracts for the exchange of credit risk sets out transparency rules applicable to net short positions. The information referred to in Article L. 22-10-48 of the Commercial Code is transmitted electronically to the AMF by the persons referred to in that article in the manner specified in an AMF instruction. The issuer concerned publishes this information on its website as soon as possible and no later than the business day after it has been received. Sub-section 1 - Scope This title applies to: All public offers made to holders of financial instruments traded on a regulated market in a European Union Member State or a State party to the EEA Agreement, including France, where the AMF is the competent authority in the cases provided for in Parts I and II of Article L. 433-1 of the Monetary and Financial Code, by a person acting alone or in concert within the meaning of Articles L. 233-10 and L. 233-10-1 of the Commercial Code, with the aim of acquiring some or all of the financial instruments concerned; Public offers concerning financial instruments that are admitted to trading on an organised multilateral trading facility within the meaning of Article 524-1, under the conditions provided for by Articles L. 433-1 (IV), L. 433-3 (II) and L. 433-4 (V) of the Monetary and Financial Code; Buyout offers of financial instruments that are no longer admitted to trading on a regulated market or on an organised multilateral trading facility within the meaning of Article 524-1; Public offers concerning financial instruments that are no longer admitted to trading on a regulated market in order to be admitted to trading on an organised multilateral trading facility within the meaning of Article 524-1, for a period of three years beginning from said admission, under the conditions provided for by Article L. 433-5 of the Monetary and Financial Code. The AMF may apply these rules, excepting those governing buyout offers with squeeze-outs, and squeeze-outs, to public offers for financial instruments issued by companies whose registered offices are not in a Member State of the European Union or a State party to the EEA Agreement, where these instruments are admitted to trading on a French regulated market. For the purposes of this Title, the financial securities are those referred to in Section II of Article L. 211-1 of the Monetary and Financial Code and all equivalent instruments issued under foreign law. For the purposes of this Title, the direct or indirect holding of a fraction of voting rights is assessed on the total number of voting rights, calculated on the basis of all shares to which voting rights are attached, including shares whose voting rights have been suspended. Sub-section 2 - Definitions The offeror is any natural or legal person or legal entity that files a draft offer or on whose behalf one or more investment services providers file such draft offer; The target company is the issuer of the financial instruments to be acquired through the offer; The persons concerned are the offeror, the target company, and any persons or entities acting in concert with one of the preceding parties; The service providers concerned are investment services providers or the French or foreign institutions sponsoring the offer or advising the persons concerned by the offer; The pre-offer period is the period of time between the publication by the AMF for the purposes of the first paragraph of Article 223-34 and the start of the offer period or, if a draft offer is not filed, the publication by the AMF for the purposes of the last paragraph of Article 223-34; The offer period is the time between the publication by the AMF of the main provisions of the draft offer filed with the AMF, for the purposes of Article 231-14, and the publication of the outcome of the offer, or, where appropriate, the outcome of the re-opening of the offer for the purposes of Article 232-4; The offer term is the time between the opening and closing dates of the offer as published by the AMF for the purposes of Article 231-32. Sub-section 3 - General principles To allow an offer to be conducted in an orderly fashion in the best interests of investors and the market, the parties concerned shall respect the principles of free interplay of offers and counter-offers, equal treatment and information for all holders of the securities of the persons concerned by the offer, market transparency and integrity, and fairness of transactions and competition. The persons concerned by the offer shall comply with the rules of this title during the offer period. Once a draft offer has been filed, any restrictive clause agreed by the parties concerned by the offer or their shareholders that could have an impact on the assessment of the offer or its outcome, subject to assessment by the courts of its validity, must be disclosed to the parties concerned by the offer, the AMF and the public. If it was not possible to mention the clause in the offer document(s), because of the date on which the agreement was concluded or for another reason, the signatories shall, as soon as the agreement has been concluded, publish a news release detailing the content of the clause in accordance with Article 221-3. Save for the exceptions mentioned in Article 233-1, the offer must be for all the equity securities as well as any securities giving access to the capital and voting rights of the target company. During the public offer period, the offeror and the target company shall ensure that their acts, decisions and declarations do not compromise the corporate interest or the equal treatment and information of holders of the securities of the companies concerned. If the Board of Directors or the Management Board, after obtaining the authorisation of the Supervisory Board of the companies concerned, should decide to make a decision which is likely to cause the offer to fail, they shall inform the AMF to this effect. An offer may consist of: a single offer proposing a purchase of the target securities, an exchange for existing securities or securities to be issued, or a payment in cash and securities; an alternative offer; a principal offer with one or more non-severable subordinate options. Where the securities provided in exchange are not liquid securities admitted to trading on a regulated market in a Member State of the European Union or a State party to the EEA Agreement, the offer must include a cash option. If, in the twelve months before the offer is filed, the offeror, acting alone or in concert, has purchased, for cash, securities giving it more than 5% of the shares or voting rights of the target company, the offer must include a cash option. Where the offer consists of an alternative offer or a single offer proposing payment in cash and securities, the AMF shall assess the validity of the offeror's designation of it as a public cash offer or public exchange offer. The offeror may give holders the option of selling their securities at a later date, provided that the option is exercisable within a reasonable time, that it is subordinate to the principal offer, and that exercise of the option is unconditionally guaranteed by the institution sponsoring the offer as defined in Article 231-13. Any arrangements that consist in offering payment at a later date of the difference between the future market price and the future offer price must contain guarantees and advantages equivalent to those of a deferred sale. I. - 1° Any public offer made following the normal procedure referred to in Chapter II of this Title, at the close of which the offeror, acting alone or in concert within the meaning of Article L. 233-10 of the Commercial Code, does not hold a number of shares representing a fraction of more than 50% of the share capital or voting rights, shall be null and void. This threshold shall be determined following the rules set out in Article 234-1. 2° However, when reaching a majority seems impossible or unlikely for reasons unrelated to the characteristics of the offer, the AMF may, at the request of the offeror, authorise this threshold to be waived or lowered to below 50% of the share capital or voting rights, particularly where: a) the target company is already controlled, within the meaning of Article L. 233-3 of the Commercial Code, by a person other than the offeror, who is not acting in concert with him within the meaning of Article L. 233-10; b) commitments not to tender to the offer have been given by one or several shareholders of the target company, in particular if the application of the threshold referred to in 1° obliges the offeror to acquire at least two-thirds of the securities likely to be tendered to the offer; c) there are one or several competing offers; d) provisions of law, regulation or bylaw prevent any majority control being acquired. The AMF shall rule on the basis of the principles set forth in Article 231-3. II. - Without prejudice to the provisions referred to in I, where the offer is not subject to the terms of Chapter IV of this title, the offeror may stipulate in its offer that a number of securities must be tendered, expressed as a percentage of the share capital or voting rights, below which it reserves the right to withdraw its offer. An offeror making draft offers for two or more different companies may stipulate that if the threshold or thresholds set pursuant to Article 231-9 is/are reached in one of the offers, it will declare the offer to have succeeded only if this threshold is reached in the other offer or offers. While the offers are open, the offeror may withdraw this condition or the threshold condition referred to in Article 231-9 II, notably in the case of competing or improved offers on one of the target companies. If, under competition rules, notice of the draft offer must be given to the European Commission, the Autorité de la concurrence or the competent authority in this regard in another State party to the EEA Agreement or the United States of America, the offeror may stipulate the condition precedent of obtaining the decision provided for in Article 6-1 a) or b) of EC Regulation 139/2004, the authorisation provided for in Article L. 430-5 of the Commercial Code, or any authorisation of the same nature issued by the foreign State. An offeror that seeks to assert such provisions shall provide the AMF with a copy of the notices to the authorities concerned or any document attesting to the steps taken to inform those authorities and shall keep the AMF informed of the progress of the procedure. The offer shall lapse if the proposed transaction becomes subject to the procedure of Article 6-1 (c) of EC Regulation 139/2004, or the procedure of Article L. 430-5 (III), point 3, of the Commercial Code, or becomes subject to a similar procedure before the competent authority of a foreign State. The offeror shall disclose whether it is seeking to pursue the intended transaction with the authorities to which the case has been referred. The provisions of the previous paragraphs also apply to a draft offer of which, under competition rules, notice must be given to a foreign competent authority other than those previously mentioned, if the procedure followed for the purposes of obtaining said authorisation is subject to a time frame compatible with a period of ten weeks beginning from the opening of the offer, unless the AMF agrees to extend the offer timetable. The AMF then rules in light of the principles defined in Article 231-3, after having obtained the opinion of the competent body of the target company. Where the proposed offer calls for remittal of securities to be issued, the irrevocability of the offeror's commitments entails an obligation to propose a resolution to the general meeting of the issuing company's shareholders authorising issuance of the securities under the conditions and clauses of the proposed offer, as consideration to persons tendering their securities to the offer, unless the company's governing body has already obtain an express delegation of authority to this effect. Depending on the applicable provisions of law, regulation or bylaw governing the offeror, the AMF may authorise the offeror to make opening of the offer conditional on its being authorised by a general meeting of shareholders, provided that such a meeting has already been called before the draft offer is filed. I. - The draft offer shall be filed by one or more investment services providers authorised to act as underwriter(s) and acting on behalf of the offeror(s). The filing is made by means of a letter addressed to the AMF guaranteeing the tenor and irrevocable nature of the commitments made by the offeror. This letter must be signed by at least one of the sponsoring institutions. II. - This letter shall stipulate: 1° The aims and intentions of the offeror; 2° The number and type of securities of the target company that the offeror already holds, alone orin concert, or may hold on its own initiative, as well as the date and terms on which such holdings were acquired in the last twelve months or may be acquired in the future; 3° The price or exchange ratio at which the offeror proposes to acquire the target securities, the basis on which such price or ratio was determined, and the proposed conditions of payment or exchange; 4° If applicable, the conditions provided pursuant to Articles 231-9 II to 231-12. 4°a If the withdrawal threshold referred to in point 1° of Article 231-9 I is applicable to the offer, the number of shares and voting rights represented by this threshold on the date when the offer was filed and, where appropriate, the reasons for which the offeror has applied to the AMF for application of point 2° of Article 231-9 I. 5° The specific procedures by which the financial instruments of the target company will be acquired and, where applicable, the identity of the investment services provider appointed to acquire them on behalf of the offeror. 6° In the cases provided for in Article L. 2312-47 of the Labour Code, whether the procedure to inform and consult the works council of the target company referred to in Article L. 2312-46 of the Labour Code had begun on the announcement of the offer. III. - The letter shall be accompanied by: 1° The draft offer document drawn up by the offeror, alone or jointly with the target company. In the cases provided for in Article 261-1, the offeror's draft offer document may not be drawn up jointly with the target company; 2° Copies of any prior notices given to other bodies empowered to authorise the proposed transaction. IV. - In the case provided for in paragraph III of Article L. 433-3 of the Monetary and Financial Code, the letter shall also be accompanied by: 1° The offer document that has been filed or a draft of the offer document that will be filed; 2° Any other document constituting a binding commitment proving that an irrevocable and fair draft offer has been or will be filed for all the equity securities and securities giving access to the capital or voting rights of the company of which more than 30% of the shares or voting rights is held, where such holding constitutes an essential part of the target company's assets. V. - In all cases, an electronic version of the draft offer document must be transmitted to the AMF for posting on its website. The AMF shall make public the main provisions of the draft offer. Such publication shall signal the beginning of the offer period. Once the draft offer has been filed, the Chairman of the AMF may ask the market undertaking that runs the regulated market on which the target company's securities are admitted to trading to halt trading in those securities under the terms of Article L. 421-15 of the Monetary and Financial Code. Under the terms of Articles L. 424-5 and L. 425-3 of the Monetary and Financial Code, the AMF Chairman may also ask the person running a multilateral trading facility to suspend trading in the securities of the target company or a systematic internaliser to suspend its activity with regard to those securities. Such request may also extend to other securities concerned by the draft offer. The request shall made to all market undertakings, multilateral trading facility operators and systematic internalisers trading in the target securities, as necessary. I. - Once the offer period begins, the draft offer document shall be made available to the public free of charge at the offices of the offeror and the sponsoring institution(s). Where the offer document has been prepared jointly with the target company, it shall also be made available at the offices of the target company and the organisations engaged as paying agent for the target company's securities. Where the registered office of the offeror or sponsoring institution is outside France, the offer document must be made available at the offices of an investment services provider in France designated for this purpose by the offeror or sponsoring institution. The draft offer document shall also be published on the website of the offeror and, if it was prepared jointly with the target company, on the website of the target company, provided that these companies have websites. II. - In all cases, a copy of the draft offer document must be sent free of charge to any person who requests it. III. - On or before the date that the draft offer is filed with the AMF, a news release shall be issued. The offeror shall ensure that the release is distributed in accordance with Article 221-3. This news release shall present the main elements of the draft offer document and explain how the document is being made available. IV. - The draft offer document and the news release mentioned in Part III shall include the words: "This offer and the draft offer document are subject to AMF approval". The target company may, once the news release mentioned in Part III of Article 231-16 has been published, issue its own news release in accordance with Article 221-3 to inform the public of the opinion of its Board of Directors or Supervisory Board or, in the case of a foreign company, the competent governing body, on the benefits of the offer or the consequences of the offer for the target company, its shareholders and its employees. Where applicable, the news release shall mention the findings of the report by the independent appraiser appointed pursuant to Article 261-1 and the findings of the company economic and social committee opinion referred to in Article L. 2312-46 of the Labour Code. If the news release is published before the appraiser submits his report or the works council of the target company submits the opinion referred to in Article L. 2312-46 of the Labour Code, the target company shall issue another release when the report or the opinion is published, mentioning the appraiser's findings, the reasoned opinion of the governing bodies referred to in the first paragraph and the findings of the works council opinion. In all cases, if the independent appraiser has not completed his assignment or has not been appointed by the time the offeror files its draft offer document, the target company shall issue a news release to inform the public of the identity of the independent appraiser as soon as the offeror publishes its draft document or as soon as the appraiser is appointed. The AMF may request any disclosure that it deems necessary. The draft offer document prepared by the initiator, which must meet the content requirements specified in an AMF instruction, shall mention: The identity of the offeror; The terms of the offer, including in particular: a) The proposed price or exchange ratio, based on generally accepted objective valuation criteria, the characteristics of the target company and the market for its securities; b) The number and type of securities that it promises to acquire; c) The number and type of securities of the target company that the offeror already holds directly, indirectly or in concert, or may hold on its own initiative, as well as the date and terms on which such holdings were acquired in the last twelve months or may be acquired in the future; d) Where applicable, the conditions to which the offer is subject pursuant to Articles 231-9 II to 231-12; e) The planned timetable for the offer; f) Where applicable, the number and type of securities tendered in exchange by the offeror; g) The terms of financing for the transaction and the impact of those terms on the assets, activities and financial results of the companies concerned; h) If the withdrawal threshold referred to in 1° of Article 231-9 I is applicable to the offer, the number of shares and voting rights represented by this threshold on the date when the offer was filed and, where appropriate, the reasons for which the offeror has applied to the AMF for application of 2° of Article 231-9 I. Its intentions for at least the coming twelve months with regard to the industrial and financial strategy of the companies concerned, where applicable, its specific commitments and intentions formalised within the framework of the procedure to inform and consult the economic and social committee of the target company, referred to in Article L. 2312-46 of the Labour Code, and continued public trading on a regulated market of the equity securities or securities giving access to the capital of the target company; Its policy with respect to employment. In particular, the offeror shall indicate, based on the data available to it and its intentions in the matter of industrial and financial strategy as mentioned in Point 3° above, any foreseeable changes in the size and composition of the workforce; The law applicable to contracts between the offeror and holders of the target company's securities following the offer, and competent jurisdictions; Agreements relating to the offer to which the offeror is party or of which it is aware, as well as the identity and characteristics of persons with which it is acting in concert or persons acting in concert with the target company within the meaning of Articles L. 233-10 and L. 233-10-1 of the Commercial Code and of which the offeror is aware ; If relevant, the opinion and the reasons therefor of the Board of Directors or Supervisory Board, or, in the case of a foreign offeror, the competent governing body, regarding the benefits of the offer or the consequences of the offer for the offeror, its shareholders and its employees; and the voting procedures by which this opinion was obtained, with the possibility for dissenting members to request that their identity and position be mentioned; In the case provided for in Part III of Article L. 433-3 of the Monetary and Financial Code, a commitment to file an irrevocable and fair draft offer for all the equity securities and securities giving access to the capital or voting rights of the company of which more than 30% of the shares or voting rights is held, where such holding constitutes an essential part of the target company's assets; If relevant, the report by the independent appraiser mentioned in Article 261-3; Procedures for making available the information mentioned in Article 231-28. The specific procedures by which the financial instruments of the target company will be acquired and, where applicable, the identity of the investment services provider appointed to acquire them on behalf of the offeror. The offer document shall bear the signature of the initiator, or of its legal representative, declaring that the information contained therein is accurate. The offer document shall also include a declaration by the legal representatives of the sponsoring institutions as to the accuracy of the information about the presentation of the offer and the information used to appraise the proposed price or exchange ratio. The reply document of the target company, which must meet the content requirements specified in an AMF instruction, shall mention: 1° The agreements mentioned in Article 231-5; 2° The information mentioned in Article L. 22-10-11 of the Commercial Code, updated where applicable as at the date of the offer, to the best of the company's knowledge; 3° The independent appraiser's report in the cases provided for in Article 261-1. In order to protect its legitimate interests, the target company may assume responsibility for not disclosing certain information in the independent appraiser's report, provided that there is no risk that this non-disclosure might mislead the public; 3°bis In the cases provided for in Articles L. 2312-42 to L. 2312-51 of the Labour Code, the opinion of the economic and social committee of the target company and, where applicable, the chartered accountant's report prepared on behalf of the works council pursuant to the provisions of Article L. 2312-45 of the Labour Code; 4° The reasoned opinion of the Board of Directors or Supervisory Board or, in the case of a foreign company, the competent governing body, specifies: the diligence it has conducted for the purposes of preparing this opinion, in the conditions set out by an AMF instruction; the benefits of the offer or the consequences of the offer for the target company, its shareholders and its employees, and, where applicable, the measures it has implemented or decided to implement that are likely to cause the offer to fail. In the case of any new measures likely to cause the offer to fail, the company shall publish a news release to inform the market to this effect; the voting procedures by which this opinion was obtained are set out, with the possibility for all members to request that their identity and position be stated. If the competent corporate body should adopt a reasoned opinion that is different from the project proposed by the ad hoc committee referred to in paragraph III of Article 261-1, it shall state its reasons in this opinion. 5° If they are available and different from the opinion mentioned in point 4°, comments by the economic and social committee or, failing that, of staff members; 6° Whether members of the corporate bodies mentioned in point 4° intend to tender their securities to the offer, specifying in particular, if the offer has several legs, the leg to which they intend to tender their securities, where such is the case; 7° The procedures for making available the information mentioned in Article 231-28. The reply document shall bear the signature of the legal representative of the target company, declaring that the information contained therein is accurate. I. - The AMF shall have ten trading days from the beginning of the offer period to determine whether the draft offer complies with applicable laws and regulations. II. - In the cases provided for in Article 261-1 and for offers under the terms of Articles L. 2312-42 to L. 2312-51 of the Labour Code, the statement of compliance shall be issued no earlier than five trading days after the target company has filed its draft reply document. III. - In all cases, the AMF may request any supporting documentation or guarantees that it deems appropriate, as well as any further information that it needs for its assessment of the draft offer, the draft offer document or the reply document. In this case, the time period is suspended. It resumes once the information requested has been received. To determine whether the draft offer complies with applicable laws and regulations, the AMF shall examine: 1° The aims and intentions of the offeror. 2° Where applicable, the type and characteristics of and market for any securities proposed in exchange; 3° Any conditions of the offer pursuant to Articles 231-9 and 231-10; 3° bis If the withdrawal threshold referred to in 1° of Article 231-9 I is applicable to the offer, the number of shares and voting rights represented by this threshold on the date when the offer was filed and, where appropriate, the reasons for which the offeror has applied to the AMF for application of 2° of Article 231-9 I; 4° The information in the draft offer document; 5° In the cases provided for in Article 261-1, the financial terms of the offer, notably with respect to the independent appraiser's report and the reasoned opinion of the Board of Directors, the Supervisory Board, or, in the case of a foreign offeror, the competent governing body. The AMF may ask the offeror to modify the draft offer if the AMF believes that it may contravene the legal and regulatory provisions mentioned in the first paragraph, and notably the principles referred to in Article 231-3. In the cases and in accordance with the conditions set forth in Section 2 of Chapter II and in Chapters III to VII of this title, the AMF shall assess application of the special provisions governing the proposed price or exchange ratio. Where the draft offer meets the requirements of Articles 231-21 and 231-22, the AMF shall publish on its website a reasoned statement of compliance that also constitutes an approval of the offer document. Where the document does not meet the requirements, the AMF shall refuse to issue a statement of compliance for the draft offer and shall publish its decision on its website. Where appropriate, the AMF shall set a date for resumption of trading in the securities concerned if trading is still suspended and shall so notify the persons referred to in Article 231-15. In the cases mentioned in Part III of Article L. 433-1 of the Monetary and Financial Code, where the offer concerns equity securities that are also admitted to trading on a market not located in a Member State of the European Union or a State party to the EEA Agreement, whether regulated or not, where the AMF does not claim jurisdiction, and where an offer document has been prepared in compliance with a procedure governed by a competent foreign authority, the AMF may exempt the offeror and the target company from the obligation to prepare an offer document and a reply document, provided that the offeror and the target company publish, jointly or separately, a news release subject to review by the AMF. The release, which must be distributed in accordance with Article 221-3 by the author, shall present the main elements of the offer document. In such cases, only Articles 231-36, 231-46, 231-48, 231-49, 231-51 and 231-52 shall be applicable. The information called for in Articles 231-5, 231-18 and 231-19, if not included in the offer document, must be included in the news release. Once the offer document has been approved by the competent authority of another Member State of the European Union or a State party to the EEA Agreement, the offeror and the target company are exempt from preparing an offer document and a reply document, provided that their application is accompanied by a copy of the offer document approved by the competent authority and translated in French. This document should be published in accordance with the procedures provided for in Article 231-27. I. - 1° The target company shall file a draft reply document with the AMF no later than on the fifth trading day following publication by the AMF of its statement of compliance. 2° Exceptionally, if an independent appraiser has been appointed pursuant to Article 261-1, the target company shall file its draft reply document no later than on the twentieth trading day after the beginning of the offer period. 3° Where the offer is filed by a shareholder who already holds, either directly or indirectly, alone or in concert within the meaning of Article L. 233-10 of the Commercial Code, at least half of the capital and voting rights of the target company, the latter cannot file its draft reply document before expiry of a period of fifteen trading days following the filing of the draft offer document by the offeror. 4° For offers in which the economic and social committee must be informed and consulted pursuant to the provisions of Articles L. 2312-42 to L. 2312-51 of the Labour Code, the target company shall file a draft reply document by the date of the later of the following two events: a) Where an independent appraiser has been appointed pursuant to Article 261-1, no later than twenty trading days after the beginning of the offer period; b) In other cases, no later than fifteen trading days after the beginning of the offer period; In any event, the draft reply document may not be filed before the opinion of the works council of the target company or the date on which the works council is deemed to have been consulted as provided by Article L. 2312-46 of the Labour Code. II. - The electronic version of the draft reply document shall be sent to the AMF for posting on its website. As soon as it has been filed, the draft reply document shall be made available to the public in accordance with the procedures set out in Paragraphs I and II of Article 231-16 and shall contain the wording referred to in Paragraph IV of the said article. No later than when it is filed with the AMF, it shall be the subject of a news release distributed by the target company in accordance with Article 221-3. This news release presents the main elements of the draft reply document, explains how the document is being made available, and contains the wording referred to in Paragraph IV of Article 231-16. III. - Except in the cases provided for in Paragraph II of Article 231-20, the AMF shall have five trading days from the filing of the draft reply document to issue its approval in accordance with Article 231-20. During this time, the AMF may request any additional information that it deems necessary for its review. In this case, the time period is suspended. It resumes once the information requested has been received. Public distribution of the AMF-approved offer document drawn up by the offeror, alone or jointly with the target company, must occur before the opening date of the offer and no later than the second trading day following issuance of the statement of compliance. The offer document approved by the AMF must be distributed in one of the following forms: Publication of the document in at least one daily newspaper with nationwide circulation that covers economic and financial news; Publication of a summary of the offer document on the same conditions as in a), when the offer document is made available free of charge at the offices of the offeror and the sponsoring institution(s); or publication of a news release, distributed in accordance with Article 221-3 under the offeror's responsibility, specifying that the offer document is available as described above. Where the registered office of the offeror or sponsoring institution is outside France, the offer document must be made available at the offices of an investment services provider in France designated for this purpose by the offeror or sponsoring institution. Where the offer document has been prepared jointly with the target company, the document shall also be made available free of charge at the offices of the target company and the organisations engaged as paying agent for the target company's securities. In all cases, a copy of the document must be sent free of charge to any person who requests it, and an electronic version of the offer document must be sent to the AMF for posting on its website The target company sends its reply document to the offeror as soon as the AMF has issued its approval. The reply document must be distributed in one of the following forms: Publication of a summary of the reply document on the same conditions as in a), when the reply document is made available free of charge at the offices of the target company or the organisations engaged as paying agent for its securities; or publication of a news release, distributed in accordance with Article 221-3 under the offeror's responsibility, specifying that the document is available as described above. In all cases, a copy of the reply document must be sent free of charge to any person who requests it, and an electronic version must be sent to the AMF for posting on its website. The approved offer and reply documents published and made available to the public shall always be identical to the original versions approved by the AMF. I.- Disclosures about the legal, financial, accounting and other characteristics of the offeror and the target company, which must meet the content requirements specified in an AMF instruction, shall be filed with the AMF and made available to the public no later than the day before the offer opens, in accordance with the procedures referred to in points 2° and 3° of Article 231-27. The reports by the statutory auditors of the offeror and the target company must also be filed with the AMF under the same conditions. II. - Foreign offerors shall appoint, with the assent of the AMF, a statutory auditor to verify the translation of the financial statements and notes, as well as the relevance of any supplements and adaptations thereto. The statutory auditor shall send a letter to the offeror when it completes its work on the translation of these elements and shall state its observations, if any. The offeror shall forward a copy of the completion letter to the AMF. These provisions shall also apply to foreign target companies. III. - For the application of waiver provided for in Article 1, paragraphs (4) f) and (5)e of Regulation (EU) n° 2017/1129, the statutory auditors shall declare that any pro forma has been properly prepared in accordance with the indicated basis and that the accounting basis complies with the offeror's accounting policies. The offeror's statutory auditors shall examine all the information from the offeror referred to in Paragraph I and any updates or corrections thereto. This overall examination and any special verifications shall be carried out in accordance with a standard that is applicable to statutory auditors. They shall draw up a completion letter for their work, in which they inform the offeror about any reports issued. Upon completion of their overall examination and any special verifications that may have been made in accordance with the aforementioned professional standard, they shall state their observations, if any. The offeror shall forward a copy of the completion letter to the AMF. IV. - No later than the day before the offer opens, the offeror, the target company and at least one of the sponsoring institutions shall file a declaration certifying that all the information required under this article has been filed and has or will be disseminated within the timeframe stipulated in paragraph I. If the AMF finds an omission or a material inaccuracy in the content of the information mentioned in Article 231-28, it shall inform the offeror or the target company, as appropriate, of this fact. The offeror or target company is then required to amend the information and file the corrections with the AMF. Any omission or inaccuracy, with regard to this General Regulation or to AMF instructions, that could manifestly distort an investor's assessment of the proposed transaction shall be considered as material. These corrections shall be made available to the public as soon as possible, in accordance with Points 2° and 3° of Article 231-27. The AMF may postpone the closing date of the offer to give holders of securities at least five trading days to respond following publication of the information mentioned in Article 231-29. The offer timetable is set based on the distribution date of the joint offer document of the offeror and the target company or the reply document of the target company. The offer opens on the trading day after the latest of the following events: Distribution of the approved offer document prepared by the offeror (where applicable, jointly with the target company) or, in the cases provided for by Article 261-1, distribution of the reply document prepared by the target company; Distribution of the information mentioned in Article 231-28; Where applicable, receipt by the AMF of any prior authorisations required by law. The AMF publishes the opening and closing dates of the offer and the release date of the outcome of the offer. Persons wishing to tender their securities to the offer must send their orders to an authorised provider during the offer period. At any time during the offer period, the AMF may postpone the closing date of the offer. The AMF publishes the results of the tender offer, which are transmitted to it by the market operator concerned or by the sponsoring institution, as the case may be. The parties concerned by the offer, their officers and directors and their advisers shall demonstrate particular vigilance in their statements. Any advertisement, regardless of its form and method of dissemination, shall be communicated to the AMF before being disseminated. Such advertisements shall: State that an offer document or reply document has been or will be published and indicate where investors are or will be able to obtain it; Be clearly recognisable as advertisements; Contain no information that could mislead the public or discredit the offeror or the target company; Be consistent with the information contained in the news releases, the offer document and the reply document; Where applicable and at the request of the AMF, contain a warning about certain exceptional characteristics of the offeror, the target company, or the financial instruments concerned by the offer. The provisions of this article shall also apply during the pre-offer period. Any additional information not included in the offer document approved by the AMF must be made public in a news release. The author of the release shall ensure that it is distributed in accordance with Article 221-3. Sub-section 1 - Trading by the offeror and persons acting in concert with it I. - The restrictions on trading in the securities concerned by a public offer do not apply to acquisitions resulting from a voluntary agreement entered into after the beginning of the offer period or the pre-offer period, as applicable. II. - During the pre-offer period, the offeror and persons acting in concert with it shall not acquire any of the securities of the target company. III. - During the offer period, the offeror and persons acting in concert with it may not acquire any securities of the target company if the offer is subject to one of the conditions mentioned in Articles 231-10 and 231-11. IV. - Without prejudice to the provisions of Article 231-41 and of III of this article, the offeror and persons acting in concert with it may acquire the securities of the target company after the start of the offer period and until the opening of the offer. In the case of a public offer under the terms of Chapter II of this title, such acquisitions shall be made without making the offeror, either alone or in concert, cross the thresholds set out in Articles 234-2 and 234-5. In the case of a public offer under the terms of Chapters III and VI of this title, such acquisitions shall be limited to 30% of the existing securities targeted by the offer, for each category of shares targeted. V. - Without prejudice to the provisions of Article 231-41 and of III of this article, the offeror and persons acting in concert with it may acquire the securities of the target company from the opening of the offer until the publication of the outcome. During the reopening of the offer, the offeror may carry out its offer by acquiring the securities targeted, if the offer is fully settled in cash and provided that at the close of the initial offer period it holds more than 50% of the share capital and voting rights of the target company. VI - From the closing of the offer until the publication of the outcome, the offeror and the persons acting in concert with it may not sell any securities of the target company. I. - In the case of a public offer under the terms of Chapter II of this title, if the offeror and the persons acting in concert with it proceed to acquire securities of the target company, any acquisition made at a price higher than the offer price shall automatically cause this price to be raised to at least 102% of the stipulated price and, beyond that, to the price actually paid, regardless of the quantities of securities acquired, and regardless of the price at which they were acquired, and the offeror shall not be able to amend the other terms of the offer. After the deadline set out in Article 232-6 for submitting an improved offer and until the publication of the outcome of the offer, the offeror and the persons acting in concert with it may not acquire securities of the target company at a price higher than the offer price. II. - In the case of a public offer under the terms of Chapters III and VI of this title, or the case of the reopening of a public offer under the terms of Chapter II, any trading in the securities of the target company by the offeror and the persons acting in concert with it shall be carried out: Based on an order drawn up at the offer price, in the case of a market acquisition, or at the offer price and only at that price, in the case of an off-market acquisition, from the beginning of the offer period until the opening of the offer; At the offer price and only at that price, from the opening of the offer until the publication of the outcome. Sub-section 2 - Trading by the target company and persons acting in concert with it I. - During the offer period, the target company, when it is applying the provisions of Article L. 233-33 I or II of the Commercial Code and such provisions are not ruled out pursuant to Article L. 233-33 III of the same Code, and the persons acting in concert with it may not trade in the company's equity securities or securities providing access to the company's equity or financial instruments linked to these securities. II. - If an offer falls under the terms of Chapter II of this title and is fully settled in cash, the target company when it is applying the provisions of Article L. 233-33 I or II of the Commercial Code may continue to execute a share buy-back programme during the offer period, provided that the general meeting resolution that authorised the programme expressly provided for it and, if it is a measure that may cause the offer to fail, provided that its implementation is subject to approval or confirmation by the general meeting. III. - The provisions of this article also apply during the pre-offer period. Sub-section 3 - Trading by persons concerned by a public exchange offer or a public cash and exchange offer If all or part of the offer is to be settled in securities, the persons concerned by the offer may not, during the offer period, trade in: The equity securities or securities giving access to the equity of the target company or financial instruments linked to these securities; The equity securities or securities giving access to the equity of the company issuing the securities offered in exchange or financial instruments linked to these securities. However, a company issuing the equity securities to pay for a public offer may continue to trade in its own securities as part of a share buy-back programme implemented in accordance with the provisions of Article L. 22-10-62 of the Commercial Code and of Regulation (EC) 2273/2003 of the European Commission of 22 December 2003, or of an equivalent foreign regulation. Sub-section 4 - Trading by the service providers concerned The provisions of Articles 231-38 to 231-41 shall apply to proprietary trading by any services provider concerned as well as by any company belonging to the same group. The service providers concerned shall monitor compliance with these restrictions on a daily basis. They shall make the results of their diligence and oversight available to the AMF. In particular, they shall answer any question from the AMF about the trades that they make during an offer period and they shall be capable of demonstrating that they comply with the provisions of this title. I. - By way of derogation from the provisions of the first paragraph of Article 231-42, the services provider concerned and any company belonging to the same group are authorised to trade in the securities concerned by the offer or derivatives linked to these securities in transactions for their own account or on behalf of their group under the following conditions: The trading involves staff members with resources, objectives and responsibilities that are distinct from those involved in the offer and that they are separated by an "information barrier"; The trading is in line with usual practices with regard to risk hedging linked to customer transactions or market making; The positions and changes in liabilities resulting from proprietary trading do not deviate significantly from the usual pattern; The service provider has taken all necessary steps to make a prior assessment of the effects of any proprietary trading to avoid influencing the outcome of the offer and unduly influencing the prices of the securities concerned; The trading complies with the principles set out in Article 231-3. II. - The service provider concerned shall adapt its internal procedures to the specific characteristics of each offer and to the features of the market for the securities of the target company and, where appropriate, the securities offered in exchange in order to ensure compliance with the provisions of this article. It shall set the requirements for proprietary trading in the financial instruments concerned, if it allows such trading. III. - The provisions of this article shall also apply if the service provider concerned or a company in its group is the offeror or the target company in a public offer. The provisions of this section shall apply from the beginning of the pre-offer period until the end of the offer period. The provisions of Sub-section 1 apply to any person or entity, including the persons concerned by the offer. Investment services providers are subject to the provisions of Sub-section 2. The fractions of 1%, 2% and 5% referred to in this section are determined in accordance with the assimilation methods provided for by Article L. 233-9 of the Commercial Code, except those provided for in Point 3° of Section II of this article. The offeror shall immediately notify the AMF of the identity of the investment services provider(s) responsible for presenting the draft offer. The persons concerned by the offer shall immediately notify the AMF of the identity of the investment services providers or institutions advising them. Any changes in the information referred to in the preceding paragraphs shall be notified to the AMF immediately. I. - The following persons and entities must report daily to the AMF on the transactions they have carried out resulting in or likely to result in a transfer of ownership in the securities or voting rights targeted by the offer, including any transactions involving financial instruments or agreements that have a similar economic effect to that of owning said securities: The persons concerned by the offer; Persons or entities that hold on their own or in concert at least 5% of the share capital or voting rights in the target company; Persons or entities that hold on their own or in concert at least 5% of the securities other than shares targeted by the offer; Members of the Boards of Directors, Supervisory Boards or Executive Boards of the persons concerned by the offer; Persons or entities that have on their own or in concert increased their holding to 1% or more of the equity of the target company, or 1% or more of the total securities other than shares targeted, since the beginning of the offer period or, where appropriate, the pre-offer period, for as long as they hold such a quantity of securities. The transactions that must be declared include in particular: The acquisition, sale, subscription, lending or borrowing of the securities targeted by the offer; The acquisition or sale of any financial instrument or the conclusion of any agreement that has a similar economic effect to that of owning the securities targeted by the offer, regardless of how it is settled; The exercise of the share allocation right attached to the said financial instruments or the execution of the said agreements. II. - The reports must specify: The identity of the person filing the report and the person or entity that controls it within the meaning of the relevant provisions; The trade date; The trade execution venue; The number of securities traded and the trade price; The number of securities and voting rights held after the trade by the person reporting, acting alone or in concert. The reports must be filed with the AMF by the next trading day using the form defined in an AMF Instruction. The AMF shall be entitled to ask the reporting entity for any details or further information that it deems necessary. III. - In the case of a public offer involving settlement in the securities of the offeror, trades in the securities of both the offeror and the target company must be reported under the same conditions and according to the same procedures. A person or entity required to report transactions relating to one or other of the companies must report its transactions in the securities of both companies. Without prejudice to Articles L. 233-7 and following of the Commercial Code, any person or entity, with the exception of the offeror, that has increased its holding of shares on its own or in concert by 2% or more of the share capital of the target company or that has increased its holding of shares if it holds over 5% of the share capital and voting rights, since the beginning of the offer period or, as appropriate, the beginning of the pre-offer period, shall be required to report the objectives that it intends to pursue with regard to the ongoing offer to the AMF immediately. The provisions of the first paragraph shall also apply to securities other than shares targeted by the offer. The report shall stipulate: whether the person or entity having increased its interest is acting alone or in concert; the objectives of this person or entity with regard to the offer, especially if it intends to continue making acquisitions and, if the offer has been filed, whether it intends to contribute the securities acquired to the offer. The AMF shall be entitled to ask the reporting entity for any details or further information that it deems necessary. The AMF shall publish the reports filed with it under the terms of Articles 231-46 and 231-47. Exceptionally, the AMF may adapt the format of the publication of the declarations made to it pursuant to Articles 231-46 and 231-47 if the declarant proves that the publication may cause it harm, particularly in the sense that it would give rise to a market risk. Sub-section 2 - Special provisions for investment services providers Any investment services provider or custody account keeper involved in transmitting orders shall draw the attention of customers that cross one of the thresholds set in Articles 231-46 and 231-47 to the reporting requirements applying to them. Paragraph 1 - Provisions applying to the service providers concerned Without prejudice to the provisions of Article L. 621-18-4 of the Monetary and Financial Code, if the financial instruments of the offeror are not admitted for trading on a regulated market, the service providers concerned shall draw up and keep an up-to-date list of the persons that have been given access to inside information relating to the offer. The list shall include: The name or business name of each of the persons; The reason for their appearing on the list; The date of their inclusion on the list. I. - The service providers concerned shall report their position in the securities targeted by the offer to the AMF on a daily basis if they have increased their holding to 1% or more of the share capital of the target company, or 1% or more of the total securities other than shares targeted, since the beginning of the offer period, or the beginning of the pre-offer period, where appropriate, for as long as they hold that quantity of securities. The number of securities held by the person reporting; The number of securities that the service provider concerned shall hold under the terms of any financial instrument or agreement that has a similar economic effect to that of owning the securities targeted by the offer. Paragraph 2 - Provisions applying to other investment services providers The provisions of Articles 231-46 to 231-48 shall apply to investment services providers other than the service providers concerned, unless: Their trading is in line with usual practices with regard to arbitrage or hedging of risks associated with customer transactions or market making; The positions and changes in liabilities resulting from proprietary trading do not deviate significantly from the usual pattern. In the cases referred to in 1° and 2° above, the provisions of Article 231-51 shall apply. The criteria set forth in this article are assumed not to be met once the investment services provider comes to hold more than 5% of the capital or voting rights of the target company. The effects of statutory restrictions on the number of votes held by individual shareholders at general meetings, mentioned in Articles L. 225-125 and L. 22-10-47 of the Commercial Code, shall be suspended during the first general meeting following the close of the offer where the offeror, acting alone or in concert, has acquired more than two-thirds of the shares or voting rights of the target company. Where provided for by the articles of association, the effects of statutory restrictions on the exercise of voting rights attached to the equities of the company, and the effects of clauses in agreements concluded after 21 April 2004 providing for restrictions on the exercise of voting rights attached to the equities of the company, shall be suspended during the first general meeting following the close of the offer where the offeror, acting alone or in concert, has acquired more than one-half of the shares or voting rights of the target company. Where provided for by the articles of association, the extraordinary powers held by certain shareholders to appoint and dismiss directors, members of the Supervisory Board, members of the Management Board, Chief Executive Officers and Deputy Chief Executive Officers shall be suspended during the first general meeting following the close of the offer where the offeror, acting alone or in concert, has acquired more than one-half of the shares or voting rights of the target company. Where the offeror, acting alone or in concert, holds less than one-half of the shares or voting rights of the target company, only the standard offer procedure shall apply. The term of the offer is twenty-five trading days. If the draft reply document is filed after the compliance ruling is published, the period starting on the day after the dissemination of reply document and ending with the closing of the offer shall be twenty-five trading days, without exceeding thirty-five trading days from the opening of the offer. Exceptionally, when the offeror asserts the provisions of Article 231-11, the closing date and timetable of the offer are set after the AMF has received the documents supporting the authorization by the competition authorities mentioned in the first point of Article 231-11. In agreement with the AMF, the market operator concerned announces the conditions and deadlines for account-keeping institutions to deposit securities tendered to the offer and for delivery and settlement in securities or cash, as well as the date on which the outcome of the offer will be available. Orders of persons wishing to tender their securities to the offer may be cancelled at any time up to and including the closing date of the offer. In principle, the outcome of the offer is published no later than nine trading days after the closing date. If the AMF determines that the offer has succeeded, the market operator announces the terms of settlement and delivery for the securities acquired by the offeror. If the AMF determines that the offer has not succeeded, the market operator announces the date on which the target securities will be returned to the account-keeping institutions. If the offer is subject to an acceptance threshold or a withdrawal threshold, the AMF publishes a provisional result as soon as the market operator notifies it of the total number of securities tendered for centralisation by authorised intermediaries. Unless it is unsuccessful, any offer made following the normal procedure shall be re-opened within ten trading days of publication of the final outcome. The guarantee of the irrevocability of the offeror's commitments referred to in Article 231-13, shall also concern the re-opening of the offer. The AMF shall publish the timetable for the re-opened offer, which must last ten or more trading days. However, if the offeror proceeds directly to a squeeze-out in accordance with Articles 237-1 and seq., the initial offer need not be re-opened, on condition that a squeeze-out was mentioned in the offeror's statement of intentions and that it is filed no later than ten trading days after publication of the outcome of the offer. At any time after the opening of the offer but no later than five trading days before it closes, a competing proposed offer on the securities of the target company or one of the target companies may be filed with the AMF. An offeror may improve upon the terms of its original offer or the most recent competing offer until no later than five trading days before the offer closes. To be declared compliant, a competing public cash offer or an improved cash offer must be at least 2% higher than the price stated in the public cash offer or the previous improved cash offer. In all other cases, the AMF declares compliant any competing draft offer or improved offer which, assessed in the light of Articles 231-21 and 231-22, significantly improves upon the terms offered to holders of the target securities. However, a competing or improved offer may be declared compliant if, without modifying the terms of its previous offer, the offeror removes or lowers the acceptance threshold below which the offer will not be declared successful. Where the AMF declares an improved offer to be compliant, it determines whether to postpone the closing date of the offer(s) and to void orders tendering securities to the earlier offer(s). Except when the terms of its offer are raised automatically, an offeror that raises its preceding offer must prepare an additional document to supplement the offer document submitted for AMF review in accordance with Article 231-20. This supplemental document specifies how the terms of the new offer are improved relative to those of the preceding offer, indicating the changes of the various items required by Article 231-18. The opinion and reasons therefor of the Board of Directors or Supervisory Board or, in the case of a foreign company, the competent governing body of the target company, including the information specified in Article 231-19, are communicated to the AMF. This information is made public as specified in Article 231-37. A competing offer is opened in accordance with the provisions of Article 231-32. Where the AMF determines the timetable for the competing offer, it aligns the closing dates of all competing bids on the furthermost date, without prejudice to the provisions of Article 231-34. Where a competing offer is opened, all orders to tender securities to the earlier offer shall be null and void. The offeror may withdraw its offer within five trading days of publication of the timetable for a competing offer or improved competing offer. If it does so, it must inform the AMF of its decision, which is made public. The offeror may also withdraw an offer if it is frustrated or if the target company adopts measures that modify its substance, either during the offer or in the event that the offer is successful, or if the measures taken by the company make the offer more costly for the offeror. He can only use this option with the prior authorization of the AMF, which shall rule on the basis of the principles set forth in Article 231-3. When a period of more than ten weeks has elapsed since the public announcement of the opening of an offer, the AMF may, with a view to expediting comparison of competing offers and with due observance of the order of their filing, set deadlines for filing each successive improved offer. The AMF announces its decision and specifies the implementation procedures. The deadline may not be less than three trading days from the publication of the AMF's decision on each improved offer. When a period of more than ten weeks has elapsed since the opening of an offer, the AMF may, with a view to hastening the outcome of the outstanding offers, decide to use a cut-off bid procedure. The AMF sets a date by which each of the offerors must either inform the AMF that its offer is maintained on the same terms or file a final improved offer. Where applicable, the AMF rules on the compliance of the improved offer(s) and sets the final offer closing date. In such case, notwithstanding Article 232-6, no improved offer may be filed unless a new competing offer has been filed, declared compliant and opened. The simplified offer procedure may be used in the following cases: an offer by a shareholder that already holds directly or indirectly, alone or in concert within the meaning of Article L. 233-10 of the Commercial Code, one-half or more of the target company's equity and voting rights; an offer by a shareholder that, following an acquisition, holds directly or indirectly, alone or in concert within the meaning of Article L. 233-10 of the Commercial Code, one-half or more of the target company's equity and voting rights; an offer for no more than 10% of the voting equity securities or voting rights of the target company, taking into account the voting equity securities and voting rights that the offeror already holds, directly or indirectly; an offer by a person, acting alone or in concert within the meaning of Article L. 233-10 of the Commercial Code, for preference shares, investment certificates or voting rights certificates; an offer by a company to buy back its own shares, pursuant to Article L. 225-207 of the Commercial Code; an offer by a company to buy back its own shares, pursuant to Article L. 22-10-62 of the Commercial Code; an offer by the issuing company for securities giving access to its equity; an offer by the issuing company to exchange debt securities that do not give access to capital for equity securities or securities that do give access to its capital. The simplified public cash offer shall be carried out by purchasing securities on the terms and following the procedures stipulated at the opening of the offer. In the case of a limited offer referred to in points 3°, 5° and 6° of Article 233-1 and in Articles 233-4 and 233-5, or in the case of simplified exchange offer, or if the circumstances and the procedures of the transaction warrant it, the offer shall be centralised by the market undertaking concerned or by the sponsor institution under the supervision of the market undertaking. The offer period for a simplified offer may be limited to ten trading days in the case of a cash offer and to fifteen trading days in other cases, with the exception of a buyback offer pursuant to Article L. 225-207 of the Commercial Code. In the case of a cash offer under the terms of Point 1° of Article 233-1 and subject to the provisions of Articles 231-21 and 231- 22, the price stipulated by the offeror may not, unless the AMF gives its consent, be lower than the price determined by calculating the average stock market prices, weighted by trading volume for sixty trading days prior to the publication of the notice referred to in the first paragraph of Articles 223-34 or, failing that, prior to publication of the notice of filing of the draft offer referred to in Article 231-14. For the purposes of this calculation, the prices and volumes used shall be the ones on the regulated market where the shares of the target company are most liquid. In the case of an offer for investment certificates or voting rights certificates, the offeror may limit itself to acquiring a quantity of voting rights certificates or investment certificates equivalent to the number of such investment certificates or voting rights certificates, respectively, that it already holds. If the person making a simplified offer has been authorised to reserve the right to scale down the sale or exchange orders made in response to its offer, the scaling-down is done on a proportional basis, subject to any necessary adjustments. Orders made in response to a buyback offer filed pursuant to Point 5° of Article 233-1 are scaled down in accordance with the provisions of the Commercial Code. In such cases, the offeror may not trade in the securities concerned. For the purposes of this Chapter, equity securities shall mean voting securities if a company's equity capital consists partly of non-voting securities. The fractions of capital or voting rights referred to in this Chapter are determined in accordance with the threshold calculation methods set by Articles L. 233-7 and L. 233-9 of the Commercial Code. The agreements and instruments referred to in Points 4° and 4° bis of Section I of Article L. 233-9 of the Commercial Code are not taken into account when determining the fractions of capital or voting rights referred to in this Chapter The financial instruments to be taken into account pursuant to point 4° of section I of Article L. 233-9 of the Commercial Code are: Bonds exchangeable for shares; Futures; Options, whether exercisable immediately or at a future date, regardless of the level of the share price relative to the exercise price of the option; where the option can be exercised only on condition that the share price reaches a level specified in the contract, it is counted as a share once that level is reached. The agreements to be taken into account are those referred to in point 4° of section I of Article L. 233-9 of the Commercial Code; where the agreement can be exercised only on condition that the share price reaches a level specified in the contract, the shares covered by the agreement are counted once that level is reached. Where a natural or legal person, acting alone or in concert within the meaning of Article 233-10 of the Commercial Code, comes to hold more than 30% of a company's equity securities or voting rights, such person is required, on its own initiative, to inform the AMF immediately thereof and to file a proposed offer for all the company's equity securities, as well as any securities giving access to its capital or voting rights, on terms that can be declared compliant by the AMF. The provisions of Chapter I and, as appropriate, Chapters II or III of this Title are applicable to mandatory tender offers. Natural or legal persons acting alone or in concert within the meaning of Article 233-10 of the Commercial Code are subject to the requirements of the first paragraph when, as a result of a merger or an asset contribution, they come to hold more than 30% of a company's capital or voting rights. Where an offer under the terms of this chapter has become null and void pursuant to Article 231-9 I, the offeror is deprived of the voting rights attached to the shares it holds in the target company on the terms set out in Part II of Article L. 433-1-2 of the Monetary and Financial Code. The AMF may authorise, under terms that are made public, a temporary breach of the thresholds referred to in Articles 234-2 and 234-5 if the breach results from a transaction that is not intended to gain or increase control of the company, within the meaning of Article L. 233-2 of the Commercial Code, and if it lasts no longer than six months. The person(s) concerned shall undertake not to exercise the corresponding voting rights during the period of resale of the securities. The provisions of Article 234-2 apply to natural or legal persons, acting alone or in concert, who directly or indirectly hold between 30% and one-half of the total number of equity securities or voting rights of a company and who, within a period of less than twelve consecutive months, increase such holding by at least 1% of the company's total equity securities or voting rights. The provisions of Article 234-2 apply to natural or legal persons, acting alone or in concert, who directly or indirectly hold between 30% and one-half of the total number of equity securities or voting rights of a company, whose offer has become null and void pursuant to Article 231-9 I and who increase this holding in the share capital or voting rights. Persons who, alone or in concert, hold directly or indirectly between 30% and one-half of a company's capital or voting rights must keep the AMF informed of any change in such holdings. The AMF shall make these disclosures public. When a proposed offer is filed pursuant to Articles 234-2 and 234-5, the proposed price must be at least equivalent to the highest price paid by the offeror, acting alone or in concert within the meaning of Article 233-10 of the Commercial Code, in the twelve-month period preceding the event that gave rise to the obligation to file a proposed offer. The AMF may request or authorise a price modification if this is warranted by a manifest change in the characteristics of the target company or in the market for its securities, and notably in the following cases: if events liable to materially alter the value of the securities concerned occurred in the twelve-month period before the draft offer was filed; if the target company is in recognised financial difficulty; if the price mentioned in the first paragraph results from a transaction that includes related items involving the offeror, acting alone or in concert, and the seller of the securities acquired by the offeror over the last twelve months. In these cases, or in the absence of transactions by the offeror, acting alone or in concert, in the securities of the target company over the twelve-month period referred to in the first paragraph, the price is determined based on generally accepted objective valuation criteria, the characteristics of the target company and the market for its securities. The AMF may determine that there is no requirement to file a proposed offer if the thresholds referred to in Articles 234-2 and 234-5 are breached by one or more persons as a result of their having declared themselves to be acting in concert with: one or more shareholders who already held, alone or in concert, the majority of a company's equity or voting rights, provided such shareholders remain predominant; One or more shareholders that already held, alone or in concert, between 30% and one-half of a company's equity or voting rights, provided that such shareholders maintain a larger holding and that, upon the formation of this concert party, they do not exceed one of the thresholds referred to in Articles 234-2 and 234-5. Where more than 30% of the capital or voting rights of a company whose equity securities are admitted to trading on a regulated market in a Member State of the European Union or a State party to the EEA agreement, including France, is held by another company and constitutes one of its essential assets, the AMF may determine that a proposed public offer need not be filed when a group of persons acting in concert acquires control of that other company, within the meaning of laws and regulations applicable to it, provided that one or more members of the concert party already had such control and remain predominant. In all the above cases, as long as the balance of shareholdings within a concert party is not altered significantly relative to the situation at the time of the initial declaration, there is no need to make a public offer. The AMF may waive the mandatory filing of a tender offer if the person(s) concerned demonstrate to it that one of the conditions listed in Article 234-9 is met. The AMF rules after examining the circumstances in which the threshold(s) have been or will be breached, the structure of ownership of the equity and voting rights and, where applicable, the conditions on which the transaction has been or will be approved by a general meeting of the target company's shareholders. The cases in which the AMF may grant a waiver are as follows: 1° Transmission by way of gift between natural persons, or distribution of assets by a legal person in proportion to the rights of its members. 2° Subscription to a capital increase by a company in recognised financial difficulty, subject to the approval of a general meeting of its shareholders. 3° Merger or asset contribution subject to the approval of a general meeting of shareholders. 4° Merger or asset contribution subject to the approval of a general meeting of shareholders, combined with an agreement between shareholders of the companies concerned establishing a concert party. 5° Reduction in the total number of equity securities or voting rights in the target company. 6° Holding of a majority of the company's voting rights by the applicant or by a third party, acting alone or in concert. 6° bis Holding of a majority of the company's share capital by the applicant or by a third party, acting alone or in concert, further to an offer made following the normal procedure referred to in Chapter II of this Title. 7° Resale or other comparable disposal of equity securities or voting rights between companies or persons belonging to the same group. 8° Without prejudice to section III of Article L. 433-3 of the Monetary and Financial Code, acquisition of control, within the meaning of applicable laws and regulations, of a company which directly or indirectly holds more than 30% of the capital or voting rights of another company whose equity securities are admitted to trading on a regulated market in a Member State of the European Union or a State party to the EEA agreement, including France, and which does not constitute an essential asset of the company over which control has been acquired. 9° Merger or contribution of a company which directly or indirectly holds more than 30% of the capital or voting rights of a company under French law whose equity securities are admitted to trading on a regulated market in a Member State of the European Union or a State party to the EEA agreement, including France, and which does not constitute an essential asset of the merged or contributed company. 10° Allocation of double voting rights between 3 April 2014 and 31 December 2018 under the conditions set out in Article 7, V of Act 2014-384 of 29 March 2014, as amended by Article 194 of Act 2015-990 of 6 August 2015. In the case of transactions subject to the approval of the target company's shareholders, the AMF may rule on a waiver application before a general meeting is held, provided it has precise information about the intended transaction. In the other cases mentioned in Article 234-9 and in the situations referred to in Articles 234-4 and 234-7, the AMF may make its ruling before the relevant transaction is carried out, based on the nature, circumstances and timetable of the transaction as well as the supporting documents provided by the person(s) concerned. The AMF is to be kept informed of the course of events and, if the transaction is not carried out according to the initial terms, may declare its previous decision to be null and void. Where it grants a waiver or determines that there is no requirement to file an offer, the AMF publishes its decision on its website and discloses any commitments made by the applicant(s). For the application of the provisions of this chapter, the one-third threshold that applied before 1 February 2011 to holdings of capital and voting rights shall apply in place of the 30% threshold to any person, acting alone or in concert within the meaning of Article L. 233-10 of the Commercial Code, who on 1 January 2010 directly or indirectly held between 30% and one-third of the capital or voting rights, and shall continue to apply as long as the holding remains between these two thresholds. The same applies to any person, acting alone or in concert within the meaning of Article L. 233-10 of the Commercial Code, who, after 1 January 2010, directly or indirectly held between 30% and one-third of the capital or voting rights as a result of a binding commitment entered into before 1 January 2010, and shall continue to apply as long as the holding remains between these two thresholds. Persons acting alone or in concert within the meaning of Article L. 233-10 of the Commercial Code who on 1 February 2011 directly or indirectly held between 30% and one-third of the capital or voting rights and who are not covered by the foregoing paragraphs must reduce their holding below 30% of the capital and voting rights before 1 February 2012. If they fail to do so, they will be subject to the provisions of Articles 234-1 to 234-10. All natural or legal persons concerned by these provisions shall report their holdings of capital and voting rights to the AMF without delay. The AMF publishes the list of persons who have made such declarations. Without prejudice to the provisions of Article 231-1 (4°), the provisions of this chapter apply exclusively to companies whose equity securities are admitted to trading on an organised multilateral trading facility within the meaning of Article 524-1. The provisions of Articles 234-5, 234-7 (2°), 234-7, paragraph 4, and 234-11 are not applicable. The provisions of Chapter IV, with the exception of those mentioned above, apply with a threshold of 50% instead of 30%. The provisions of Articles 236-5 and 236-6 are not applicable. In addition to the cases referred to in Article 234-9, the AMF may also grant a waiver from the obligation to file a draft public offer in the following cases: Subscription to a reserved capital increase, subject to the approval of the general meeting of shareholders; Exercise of the share allocation right attached to securities giving access to the share capital if the reserved issue of such securities has previously been subjected to the approval of the general meeting of shareholders. Where the majority shareholder(s) hold, in concert within the meaning of Article L. 233-10 of the Commercial Code, 90% or more of the shares or voting rights in a company whose shares are or were admitted to trading on a regulated market in a Member State of the European Union or in a State party to the EEA Agreement, including France, any holder of voting equity securities who is not part of the majority group may apply to the AMF to require the majority shareholder(s) to file a draft buyout offer. Once it has made the necessary verifications, the AMF rules on such application in the light of, inter alia, the state of the market for the securities concerned and the information provided by the applicant. If the AMF declares the application to be acceptable, it notifies the majority shareholder(s), which must then file a draft buyout offer, within a time limit set by the AMF and drawn up in terms that can be deemed compliant by it. Where the majority shareholder(s) hold, in concert within the meaning of Article L. 233-10 of the Commercial Code, 90% or more of capital or the voting rights in a company whose investment certificates and, if applicable, voting rights certificates, are or were admitted to trading on a regulated market in a Member State of the European Union or in a State party to the EEA Agreement, including France, any holder of such certificates who is not part of the majority group may apply to the AMF to require the majority shareholder(s) to file a buyout offer for those securities. The majority shareholder(s) holding, in concert within the meaning of Article L. 233-10 of the Commercial Code, 90% or more of the shares or voting rights in a company whose shares are or were admitted to trading on a regulated market in a Member State of the European Union or in a State party to the EEA Agreement, including France, may file with the AMF a draft buyout offer for the equity securities, and any other securities giving access to the capital or voting rights in the company, that they do not already hold. The majority shareholder(s) holding, in concert within the meaning of L. 233-10 of the Commercial Code, 90% or more of the shares or voting rights in a company whose investment certificates and, if applicable, voting rights certificates are or were admitted to trading on a regulated market in a Member State of the European Union or in a State party to the EEA Agreement, including France, may file with the AMF a draft buyout offer for those securities. Where a public limited company (société anonyme) whose equity securities are admitted to trading on a regulated market is converted to a limited partnership with shares (société en commandite par actions), the person(s) that controlled it prior to conversion, or the active partners in the limited partnership with shares, are required to file a draft buyout offer once a resolution regarding the conversion has been adopted at a general meeting of shareholders. The draft offer cannot include a minimum acceptance condition and must be drawn up in terms that can be declared compliant by the AMF. The offeror informs the AMF whether it reserves the right, depending on the result of the offer, to request that all equity securities and securities giving access to the capital and voting rights of the company be delisted from the regulated market on which they are traded. The natural or legal persons that control a company within the meaning of Article L. 233-3 of the Commercial Code must inform the AMF: When they intend to ask an extraordinary general meeting of shareholders to approve one or more significant amendments to the company's articles or bylaws, in particular the provisions concerning the company's legal form or disposal and transfer of equity securities or the rights pertaining thereto; When they decide in principle to proceed with the merger of that company into the company that controls it or with another company controlled by the latter; to sell or contribute all or most of the company's assets to another company; to reorient the company's business; or to suspend dividends for a period of several financial years. The AMF evaluates the consequences of the proposed changes in the light of the rights and interests of the holders of the company's equity securities or voting rights and decides whether a buyout offer should be made. The draft offer cannot include a minimum acceptance condition and must be drawn up in terms that can be declared compliant by the AMF. In the case set out in point 1° of Article 233-1, the provisions relating to the offer price in Article 233-3 apply. The public buyout offer shall be carried out by purchasing securities on the terms and following the procedures stipulated at the opening of the offer during ten or more trading days, or if the circumstances and the procedures of the transaction warrant it, the offer shall be centralised by the market undertaking concerned or by the sponsor institution under the supervision of the market undertaking. If the public buyout offer includes a securities settled leg and a cash settled leg, with no reduction in orders, the offeror may acquire the securities targeted under the terms and conditions stipulated in the cash settled leg, by way of derogation from the provisions of Article 231-41. Following any public offering and within three months of the close of the offer, securities not tendered by minority shareholders may be transferred to the offeror, provided that they represent not more than 10% of the shares and voting rights, in return for compensation. Similarly, securities that give or could give access to capital may be transferred to the offeror, provided that the equity securities that could potentially be created, through conversion, subscription, exchange, redemption or any other means, from untendered securities that give or could give access to the company's capital, plus existing but untendered equity securities, do not represent more than 10% of all the equity securities that exist and that could be created. Implementation of the squeeze-out procedure provided for in this article is subject to the following provisions. Where a buyout offer is filed, the offeror informs the AMF whether it intends, depending on the result of the offer, to implement a squeeze-out. I. - The AMF rules on whether the proposed squeeze-out is compliant, in accordance with Articles 231-21 and 231-22, except when the squeeze-out includes the cash settlement proposed in the last offer and one of the two following conditions is met : The squeeze-out follows a public offering subject to the provisions of Chapter II; The squeeze-out follows a public offering for which the AMF has the valuation mentioned in Part II-2 of Article L. 433-4 of the Monetary and Financial Code and the report by the independent appraiser mentioned in Article 261-1. II. - When the AMF rules on whether the proposed squeeze-out is compliant, the offeror provides, in support of its proposed squeeze-out, the valuation mentioned in part II-2 of Article L. 433-4 of the Monetary and Financial Code The AMF also has the report of the independent appraiser mentioned in Article 261-1. Where a squeeze-out is to be implemented, the parties concerned must draw up a draft squeeze-out document in accordance with the conditions and procedures set out in Articles 231-16 to 231-20. The squeeze-out document(s) are submitted to the AMF for approval in accordance with Articles 231-16 to 231-20. and disclosed to the public in accordance with Article 231-27. Disclosures providing information on the legal, financial, accounting and other characteristics of the target company are filed with the AMF and made publicly available in accordance with the conditions and procedures set out in Articles 231-28 to 231-30. Content requirements for these disclosures are stipulated in an AMF instruction. III. - Where the AMF does not rule on whether the squeeze-out is compliant, the offeror informs the AMF of its intention to implement the squeeze-out. The AMF publishes the implementation date for the squeeze-out. The offeror publishes a news release in accordance with Article 221-3 and is responsible for its distribution. Content requirements for these news releases are stipulated in an AMF instruction. The offeror designates a custody account-keeper to take charge of centralising the compensation payments (hereinafter "the centraliser"). The offeror requesting the squeeze-out deposits the amount corresponding to the compensation for securities not tendered in the public offering in a reserved account with the centraliser. Compensation is calculated net of all expenses Where the AMF declares a draft squeeze-out to be compliant or where the AMF does not rule on whether the squeeze-out is compliant when the majority shareholder or group informs the AMF of its intention to proceed with a squeeze-out, the shareholder or group shall place a notice informing the public of the squeeze-out in a newspaper carrying legal notices published in the vicinity of its registered office. The statement of compliance shall specify the date on which it becomes enforceable. The time period between the release and the enforcement of the statement cannot be less than the time period referred to in Article R. R. 621-44 of the Monetary and Financial Code. The statement shall result in the delisting of the relevant securities from the regulated market where they are traded. The freezing of funds and crediting of compensation to holders that have not tendered their securities to the public offering takes place at the date on which the AMF's statement becomes enforceable. Where the AMF does not rule on whether the squeeze-out is compliant, the provisions of the preceding paragraph shall apply as from implementation of the squeeze-out. Custody account-keeping institutions transfer any securities not tendered to the last offer into the name of the offeror, who pays the corresponding compensation into a reserved account opened for this purpose in accordance with the provisions of Article 237-4. As soon as the statement of compliance becomes enforceable, or, if the AMF does not rule on compliance, as soon as the squeeze-out is implemented, the relevant securities shall be delisted from the regulated market(s) where they were traded and, where appropriate, from the multilateral trading facilities where they were traded. At the same date, the custody account-keeping institutions transfer any securities not tendered to the buyout offer into the name of the offeror, who pays the corresponding compensation into a reserved account opened for this purpose. Where the offeror requested a squeeze-out at the time the proposed buyout offer was filed, the funds are frozen the day after the offer closes. At the date the funds are frozen, the custody account-keeper credits the accounts of securities holders affected by the squeeze- out with the compensation that is due them The centraliser, acting on behalf of the offeror and throughout the entire period during which it holds the funds, places an annual notice in a newspaper of national circulation inviting former shareholders who have not been compensated to exercise their rights. Where the centraliser has paid out all frozen funds corresponding to compensation payable to securities holders that did not respond to the public offer, it places an appropriate announcement in a newspaper of national circulation. It is then no longer required to place the annual notice mentioned above. Unallocated funds are held by the centraliser for ten years and paid to the Caisse des Dépôts et Consignations at the end of this period. These funds are at the disposal of the legal beneficiaries, but revert to the French State after thirty years. During the period of a public buyout offer prior to a squeeze-out, where the offeror holds at least 90% of the shares and voting rights in the target, only the investment service provider(s) designated by the offeror is(are) authorised to acquire the securities concerned on the offeror's behalf. Persons seeking to acquire securities subject to an offer referred to in the previous paragraph must obtain them solely from the investment service provider(s) designated by the offeror. The sole beneficiaries of the facility whereby the offeror covers brokerage commissions up to an amount set by it, including, where applicable, stock exchange tax, shall be those sellers whose securities were registered on their account prior to the opening of a simplified tender offer in which the offeror has explicitly declared its intention, if the conditions allow it after the offer, to request the implementation of a squeeze-out; To this end, except in the case referred to in the first paragraph of Article 237-9, the market operator concerned puts in place a procedure for centralising orders placed in response to such offer. Requests for refunds must be accompanied by documentary evidence of the sellers' rights. This chapter applies to the acquisition of debt securities that do not give access to equity and are admitted to trading on a French regulated market or an organised multilateral trading facility. Where an issuer has acquired more than 10% of the securities representing a single bond issue on or off the market in one or more transactions, it shall so notify the market within four trading days by means of a news release to be disseminated in accordance with the procedures stipulated in Article 221-4. Further acquisitions of the same bond issue are subject to the same disclosure requirement for each additional 10% of the securities acquired in one or more transactions. The 10% threshold shall be calculated on the basis of the number of securities issued, including any subsequent issues granting identical rights to the holders. The number of securities used for calculating whether a threshold has been crossed is the number of securities bought less the number of securities sold. Issuers of debt securities that have bought back securities during the past half-year shall, within ten trading days after the close of the half-yearly or annual accounts, publish the number of securities remaining in circulation and the number of securities they hold in accordance with Article L. 213-1 A of the Monetary and Financial Code, for each of their bond issues. This information is to be posted on their website or disseminated in accordance with section II of Article 221-4. The orderly acquisition procedure shall be defined as an initiative by the issuer, its agent or a third party to set up a centralised facility that enables the issuer to offer all holders of a single issue the option of selling or exchanging some or all of the debt securities that they hold, while ensuring equal treatment of all holders. The procedure for orderly acquisition of debt securities shall be announced by means of a news release disseminated in accordance with the procedures stipulated in Article 221-4 and shall comply with the relevant market abuse rules defined by the market abuse directive (regulation no. 596/2014/ EU). An AMF Instruction shall stipulate the information to be included in the news release referred to in Article 238-4 when the orderly acquisition procedure involves debt securities having been offered to the public in France, except for those mentioned in points 1° or 2° of Article L. 411-2 of the Monetary and Financial Code or Article L. 411-2-1 of said code. Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilisation measures The provisions of this title shall apply to companies whose equity securities are listed on a regulated market or are the subject of a request for admission to a regulated market and to companies whose equity securities are traded on a multilateral trading facility or are the subject of a request for admission to a multilateral trading facility, and that carry out share buybacks in accordance with Articles L. 22-10-62, L. 225-209-2 and L. 225-217 of the Commercial Code. They shall also apply to all issuers of securities equivalent to those mentioned above, issued under foreign law and either listed on a regulated market or on an organised multilateral trading facility or the subject of a request for admission to a regulated market or to a multilateral trading facility. I. - Before the beginning of operations in a share buyback programme, issuers must publish, in accordance with the procedures set out in Article 221-3, a description of the programme in accordance with the provisions of Delegated Regulation (EU) 2016/1052 of 8 March 2016. II. - During the term of the share buyback programme, any change to any of the information listed in the description must be made public as soon as possible in accordance with the procedures set out in Article 221-3. The issuer shall not be required to publish the programme description if the annual financial report referred to in paragraph I of Article L. 451-1-2 of the Monetary and Financial Code, the registration document, the universal registration document or the base document includes all of the information that must appear in the programme description pursuant to Article 241-2. In accordance with Article 221-3, the issuer shall distribute a statement explaining the way it intends to make this description available. I.- Any issuer carrying out transactions in its own shares in the context of a buyback programme under the terms of Article 5 of the market abuse regulation (regulation no. 596/2014/EU) shall declare such transactions to the AMF electronically and according to the procedure defined in an AMF instruction. These declarations shall be disseminated fully and effectively in accordance with Article 221-3. II.- Any issuer carrying out transactions in its own shares in the context of a buyback programme shall declare such transactions monthly to the AMF electronically and according to the procedure and format defined in an AMF instruction. Persons holding more than 10% of the issuer's share capital, as well as the issuer's directors, must report the number of securities that they have sold to the issuer. To benefit from the exemption provided for by Article 13 of Regulation (EU) no. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse, any issuer using an accepted market practice shall comply with the requirements set out in the AMF decision that established this accepted market practice in application of the above-mentioned Regulation. By derogation from paragraph I of Article 241-4, any issuer carrying out transactions in its own shares in the context of a market practice accepted by the AMF shall declare such transactions to the AMF and publish them within the terms of the accepted market practice concerned and according to the procedure and format defined in an AMF instruction. Information provided to the public, regardless of the medium, with a view to trading in financial instruments on a recognised foreign market or regulated market of the European Economic Area must be accurate, precise and truthful. It must contain no false or deceptive statement that could mislead the client. Products proposed through an act of solicitation shall be suitable to the members of the public being solicited. If there is no adequate assurance that clients are being informed of the associated risks, the AMF may order the interested party or any other person taking part in the distribution of such products, in any way, to halt the marketing or trading thereof. Before any transaction on a recognised foreign market in financial instruments, the market operator that runs that market shall draw up a disclosure document in the market itself and the various financial instruments that it proposes. This disclosure document, in French, must be made available to financial intermediaries by the market operator. It shall state or describe the following: the foreign market is recognised by the Minister for the Economy, under the terms of Article D. 423-1 of the Monetary and Financial Code. The various ways in which orders are placed and executed, when these have consequences for the person initiating the order. The legal nature of the products, the technical characteristics thereof and, if applicable, the evidence supporting the advertised risks and returns. The validity date of the aforementioned information. This disclosure document must be provided by the financial intermediary to each prospective client, or transmitted to him electronically, before the placing of the client's first order to buy or sell a financial instrument admitted to trading on the recognised foreign market. For transactions on a market in derivative financial instruments, if the client does not trade on that market in the ordinary course of business, this document must be sent by registered letter with return receipt, or via the Internet, with the financial intermediary recording the date on which the client viewed or downloaded it. No one may receive, directly or indirectly, orders or funds from the client until seven days after the date that the disclosure document was delivered, viewed onscreen or downloaded, or before the financial intermediary has received a certification bearing the handwritten or electronic signature of the client and stating, "I have read the disclosure document relating to {name of the recognised market}, transactions on that market, and the commitments that I will take on by virtue of my participation in such transactions." This waiting period applies only to the first order, however. Before any transaction on a regulated market in derivative financial instruments in the European Economic Area, and in compliance with the obligations of Section 3 of Chapter I of Title 2 of Book III, the financial intermediary shall provide or transmit electronically to each client the following information: A statement that the regulated market in derivative financial instruments appears on the list of regulated markets of the European Economic Area published in the Official Journal of the European Union. The various ways in which orders are placed and executed, when these have consequences for the client. The legal nature of the products, the technical characteristics thereof and, if applicable, the evidence supporting the announced risks and returns. If the client does not trade in the market in question in the ordinary course of business, no one may receive orders or funds from him, directly or indirectly, before the financial intermediary has received a certification bearing his signature and stating, "I have read the disclosure document relating to {name of the EEA regulated market in derivative financial instruments}, transactions on that market, and the commitments that I will take on by virtue of my participation in such transactions." This certification is needed only for the first order. Any advertisement or message disseminated by the foreign market must include the information that it has been recognised by the Minister for the Economy, under the terms of Article D. 423-1 of the Monetary and Financial Code, or that it is on the list of regulated markets in the European Economic Area published in the Official Journal of the European Union. All advertisements or messages disseminated by the financial intermediary with a view to trading in financial instruments on a recognised foreign market must contain the following information: Name, address, legal form of the person referred to in Article D. 423-3 of the Monetary and Financial Code, making a public offering; Name and address of that person's correspondent in France, if applicable. The identity of the foreign authority that has authorised that person to conduct a financial activity. A statement that the foreign market has been recognised by the economy minister of France pursuant to Article 1 of the aforementioned Decree. The minimum term, if any, of the recommended investments. The law that will apply in the event of a dispute, and the courts competent to hear such dispute. The availability of an arbitration procedure, if applicable. All advertisements or messages disseminated by the financial intermediary with a view to trading on a regulated market in derivative financial instruments of the European Economic Area must mention that the market appears on the list of such markets published in the Official Journal of the European Union. The AMF: Shall receive, for information, the disclosure document drawn up by the market operator that runs the recognised foreign market. Shall request that all recognised foreign markets keep it informed of any substantial changes in the way they operate and send it data on their activities in French territory, as specified in an AMF instruction. May require the market operator that runs a recognised foreign market to make available to the AMF all information needed to support the claims or statements appearing in the disclosure document provided for in Article 251-3 and, if need be, may request modification thereof. May require any person referred to in Article D. 423-3 of the Monetary and Financial Code to produce any elements likely to support the claims or representations made in the advertisements or messages referred to in Article 251-4, and to require their amendment, as needed. Only Articles 251-1, 251-2, 251-4 and 251-5 apply to recognised markets in derivative financial instruments on commodities in the European Economic Area, when such market is operated by a market operator that also runs a regulated market in the derivative financial instruments appearing on the list of such markets published in the Official Journal of the European Union. I. - The target company of a takeover bid shall appoint an independent appraiser if the transaction is likely to cause conflicts of interest within its Board of Directors, Supervisory Board or competent governing body that could impair the objectivity of the reasoned opinion mentioned in Article 231-19 or jeopardise the fair treatment of shareholders or bearers of the financial instruments targeted by the bid. The situations described below, in particular, constitute such cases: If the target company is already controlled by the offeror, within the meaning of Article L. 233-3 of the Commercial Code, before the bid is launched; If the senior managers of the target company or the persons that control it, within the meaning of Article L. 233-3 of the Commercial Code, have entered into an agreement with the offeror that could compromise their independence; If the controlling shareholder, within the meaning of Article L. 233-3 of the Commercial Code, does not tender its securities to a buyback offer launched by the company for its own securities; If the offer is related to one or more transactions that could have a significant impact on the price or exchange ratio of the proposed offer; If the offer pertains to financial instruments in multiple categories and is priced in a way that could jeopardise the fair treatment of shareholders or bearers of the financial instruments targeted by the bid; If the non-equity financial instruments mentioned in point 1° of Part II of Article L. 211-1 of the Monetary and Financial Code that give or could give direct or indirect access to the shares or voting rights of the offeror or of a company belonging to the offeror's group are provided as consideration for the takeover of the target company. II. - The target company shall also appoint an independent appraiser before implementing a squeeze-out, subject to the provisions of Article 237-3. III. - The independent appraiser shall be appointed, in the conditions set out in an AMF instruction, by the competent corporate body of the target company, on the proposal of an ad hoc committee composed of at least three members and comprising a majority of independent members. This committee shall conduct the follow-up of the appraiser's work and prepare a reasoned draft opinion. I. - Where the target company is not able to set up the ad hoc committee referred to in paragraph III of Article 261-1, it shall submit to the AMF, in the conditions specified in an AMF instruction, the identity of the independent appraiser it is considering appointing. II. - Where the AMF notes that the appraisal report contains material shortcomings, it may ask the target company to appoint a new independent expert at its own expense for the purpose of issuing a new fairness opinion in the conditions set out in Paragraph I of Article 262-1. The same applies whenever the report does not disclose a conflict of interest or when it contains material inconsistencies or gaps. In the case provided for in the previous paragraph, the target company shall submit to the AMF, in the conditions specified in an AMF instruction, the identity of the independent appraiser it intends to appoint. III. - In the cases referred to in paragraphs I and II of this article, the AMF may, where applicable, oppose the appointment of the independent appraiser proposed by the target company, within a period of ten trading days, when it has reasonable grounds for considering that the appraiser does not provide sufficient skills and guarantees, notably of independence, to carry out their assignment. Where the AMF requests clarifications or further information from the target company, this time period shall be suspended until such information is received. Any issuer that carries out a reserved capital increase at a discount to the market price greater than the maximum discount authorised for capital increases without pre-emptive subscription rights and giving a shareholder, acting alone or in concert within the meaning of Article L. 233-10 of the Commercial Code, control over the issuer within the meaning of Article L. 233-3 of the aforementioned code, shall appoint an independent appraiser who will apply the provisions of this title. Any issuer or offeror carrying out a takeover bid may appoint, in the conditions set out in Paragraph III of Article 261-1, an independent appraiser who will apply the provisions of this title. I. - The independent appraiser must not be placed in a conflict of interest in relation to the parties concerned by the public offer or transaction and their advisors. An AMF instruction shall describe situations in which the independent appraiser is considered to be placed in a conflict of interest, although this shall not constitute an exhaustive list. The independent appraiser shall not work repeatedly with the same sponsoring institution(s) or within the same group if the regular nature of such work could compromise his independence. II. - The appraiser shall prepare a statement certifying that there are no known past, present or future ties between him and the parties concerned by the offer or transaction and their advisors that could compromise his independence or impair the objectivity of his assessment when carrying out the appraisal. If there is the risk of a conflict of interest but the appraiser deems this unlikely to compromise his independence or impair the objectivity of his assessment, he shall mention this risk in his statement, including relevant supporting information. I. - The independent appraiser draws up a report on the financial terms of the offer or transaction. The content of said report is specified in an AMF instruction. In particular, the report contains the statement of independence mentioned in Paragraph II of Article 261-4, a description of the verifications performed and a valuation of the company in question. The report's conclusion takes the form of a fairness opinion. No other type of opinion shall count as a fairness opinion. II. - Once appointed, the appraiser must have sufficient time to prepare the report mentioned in Paragraph I, taking into account the complexity of the transaction and the quality of the information provided to them. That period of time may not be less than twenty trading days. Without prejudice to the period of time mentioned previously, in the case provided by point 3° of Paragraph I of Article 231-26, the appraiser may not submit his report before expiry of the period of fifteen trading days mentioned in that article. If the appraiser should be given a new assignment following on from the first one, he is not required to comply with a further additional time period of twenty trading days. In his report, he shall provide justification of the time used to carry out his assignment, as extended. III. - Where the expert considers that he has not had sufficient time to prepare their report, given the developments in his assignment or any delays in the necessary documents and information being made available for him to carry out that assignment, he submits a report without a fairness opinion and explains the reasons for that. I. - In the cases provided for in Article 261-2, the issuer shall distribute the report by the independent appraiser at least ten trading days before the general meeting convened to authorise the transaction, or, where the meeting has exercised its powers of delegation, as soon as possible after the decision by the Board of Directors or Management Board. The report shall be distributed by: making it available free of charge at the issuer's registered office; publishing a news release in accordance with Article 221-3; publishing it on the issuer's website. II. - An issuer that appoints an independent appraiser pursuant to Article 261-3 shall follow the procedures set forth in Part I when publishing the appraiser's report. A professional association of independent appraisers may be recognised, at its request, by the AMF. I.- The professional association shall draw up a code of conduct setting out the basic principles with which its members must comply. Members of the association may adapt these principles to reflect their size and organisation. II. - The code of conduct shall set out, inter alia: the principles governing the independence of appraisers; the expertise and resources that appraisers must have; the rules of confidentiality to which they are subject; procedures for taking on and carrying out appraisals and quality controls to verify work done by association members. III. The code of conduct shall detail the disciplinary action applicable in the event of breaches. IV. - The code of conduct may be consulted at any time at the association's registered office by any person who so requests. The code shall also be published on the association's website provided the association has such a site. The association must have the staff and technical resources needed to carry out its mission on an ongoing basis. The technical resources shall include, inter alia, a data storage facility for the retention of documents, in particular reports by independent appraisers belonging to the association, for at least five years. Recognition of a professional association shall be subject to prior filing of an application with the AMF containing: the articles (statuts) of the association; a curriculum vitae and an extract from the judicial record (casier judiciaire) for each of the association's legal representatives; a three-year projected budget for the association; a draft code of conduct; a description of the human and technical resources that will enable the association to meet its obligations under this chapter. In deciding whether to recognise an association, the AMF shall review the application mentioned in Article 263-4 to assess whether the association, based on its filing, fulfils the conditions set forth in Articles 263-2 and 263-3. The AMF may ask the association to provide any further information it considers necessary to reach its decision. The association shall inform the AMF promptly of any changes in key items in the initial application for recognition, notably concerning its senior management, organisation or supervision. The association shall inform the AMF promptly of disciplinary action taken against any of its members and shall make available to the AMF the minutes of meetings by the management bodies and general meetings of shareholders. I. - The AMF may revoke its recognition of an association if said association no longer meets the conditions of its initial recognition. When the AMF is considering revocation, it shall so inform the association and shall tell it the reasons therefor. The association shall have one month from receipt of such notification to submit any observations it may have. II. - When the AMF decides to revoke its recognition, the association shall be notified of this by registered letter with return receipt. The AMF shall inform the public of the revocation by means of a news release posted on its website. The decision shall specify the timetable and method for implementing the revocation. The association must inform its members that its authorisation has been revoked. In this Book III, “financial instrument” means financial instruments as defined by Article L. 211-1 of the Monetary and Financial Code and the units referred to in Article L. 229-7 of the Environmental Code. Unless otherwise provided, the present Title is applicable: I.- To investment services providers. For the purposes of this Title, the term "investment service provider" shall designate investment services providers other than asset management companies. II. - To the branches of a person that is authorised in a country that is party to the Agreement on the European Economic Area other than France to provide the investment services referred to in Article L. 532-18-1 of the Monetary and Financial Code, in accordance with sub-paragraph 2 of Article L. 532-18-1 and Article L. 532-18-2 of the said Code; III. - To the branches of companies of third countries that are authorised to provide the investment services referred to in Article L. 532-48 of the Monetary and Financial Code, or to the branches of credit institutions referred to in I of Article L. 511-10 of said Code when they provide investment services, in accordance with II of Article L. 532-50; IV. - To the relevant persons defined in paragraph 1 of Article 2 of Commission Delegated Regulation (EU) No. 2017/565 of 25 April 2016 for the provisions of Chapters II, III, IV and V of the present Title. For the above-mentioned persons, these constitute a professional obligation. The provisions of Chapters IV and V of this Title shall apply under the same conditions to the relevant persons referred to in IV within the branches referred to II and III above. Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive Commission Delegated Regulation (EU) 2017/592 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the criteria to establish when an activity is considered to be ancillary to the main business Commission Delegated Regulation (EU) 2017/1018 of 29 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards specifying information to be notified by investment firms, market operators and credit institutions Commission Delegated Regulation (EU) 2017/1943 of 14 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards on information and requirements for the authorisation of investment firms Commission Delegated Regulation (EU) 2017/1946 of 11 July 2017 supplementing Directives 2004/39/EC and 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for an exhaustive list of information to be included by proposed acquirers in the notification of a proposed acquisition of a qualifying holding in an investment firm Commission Implementing Regulation (EU) 2017/1945 of 19 June 2017 laying down implementing technical standards with regard to notifications by and to applicant and authorised investment firms according to Directive 2014/65/EU of the European Parliament and of the Council I. – When the applicant plans to provide an investment service or an activity referred to in Article R. 532-2 of the Monetary and Financial Code, its programme of operations shall be presented in accordance with Article R. 532-1 of said Code. II.- When an investment services provider plans to modify its authorisation relating to an investment service or activity referred to in Article R. 532-2 of the Monetary and Financial Code in accordance with Article L. 532-3-1 of said Code, the AMF will notify its decision regarding the programme of operations within the time period indicated in II of Article R. 532-6 of this same Code. III. – As part of the procedure for authorisation of the branches of investment companies of third countries referred to in III of Article 311-1 by the French Prudential Supervision and Resolution Authority (Autorité de contrôle prudentiel et de résolution), set out in Article L. 532-48 of the Monetary and Financial Code, and prior to the granting of this authorisation, the AMF will notify its decision regarding the programme of operations of the applicant in accordance with Article R. 532-4 of said Code. If the AMF finds that an investment services provider no longer meets the conditions for the approval of its programme of operations, it shall so inform the Prudential Supervision and Resolution Authority. Règlement délégué (UE) 2017/578 de la Commission du 13 juin 2016 complétant la Directive MIF 2 par des normes techniques de réglementation précisant les exigences relatives aux accords et aux systèmes de tenue de marché ; Règlement délégué (UE) 2017/589 de la Commission du 19 juillet 2016 complétant la Directive MIF 2 par des normes techniques de réglementation précisant les exigences organisationnelles applicables aux entreprises d'investissement recourant au trading algorithmique. To ensure compliance with all of the professional obligations referred to in II of Article L. 621-15 of the Monetary and Financial Code, the investment services provider shall implement the compliance policy and the procedures relative to the responsibilities of the management body laid down in Articles 22 and 25 of Commission Delegated Regulation 2017/565 of 25 April 2016. The compliance officer referred to in Paragraph 3 of Article 22 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 shall hold a professional license issued under the conditions defined in Section 4 of this Chapter. Senior management shall apprise the investment services provider's board of directors, its supervisory board or, failing that, its body responsible for supervision, if such a body exists, of the appointment of the compliance officer. I.- The investment services provider shall ensure that natural persons acting on its behalf have the minimum qualification as well as a sufficient level of knowledge. II. - It verifies that the persons carrying out one of the following functions can prove they have the minimum level of knowledge set forth in Point 1° of II of Article 312-5: a) asset manager, within the meaning of Article 312-4; b) head of financial instrument clearing, within the meaning of Article 312-4; c) head of post trade services, within the meaning of Article 312-4; d) persons referred to in Article 312-21. III. - The investment services provider shall not carry out the verification provided for in II with regard to persons employed as at 1 July 2010. Persons having passed one of the examinations referred to in Point 3° of II of Article 312-5 shall be deemed to have the minimum knowledge required to perform their duties. IV. - To conduct the verification referred to in II, the investment services provider has six months from the date on which the employee starts to perform one of the above functions. However, where the employee has been taken on under a work/study contract, as provided in Articles L. 6222-1 and L. 6325-1 of the labour code, the investment services provider may not conduct such verification. If it decides to hire the employee when his or her training period finishes, the investment services provider shall ensure that he or she has the minimum qualification as well as a sufficient level of knowledge as referred to in I, at the latest by the end of the contract training period. The investment services provider shall ensure that any employee whose minimum knowledge has not yet been verified is appropriately supervised. An asset manager is any person authorised to take investment decisions in connection with an individual investment mandate; A head of financial instrument clearing is a natural person representing the clearing member before the clearing house with respect to transaction registration, risk organisation and supervision, and the related financial instrument clearing functions; A head of post-trade services is a person who assumes direct responsibility for custody account keeping, settlement, depositary functions, securities administration or securities services for issuers. I. - The AMF has formed a Financial Skills Certification Board. the Financial Skills Certification Board issues opinions at the request of the AMF concerning certification of the professional knowledge of natural persons acting under the authority or on behalf of an investment services provider and performing one of the functions referred to in Articles 312-3 (II), 314-9 and 314-10 ; The Financial Skills Certification Board issues opinions at the request of the AMF on the need to introduce optional or mandatory modules in addition to the content of minimum knowledge, and on the functions subject to these modules; when rendering opinions, the Financial Skills Certification Board considers the possibility of establishing equivalencies with similar schemes abroad. II. - Further to an opinion of the Financial Skills Certification Board, the AMF: Determines the content of the minimum knowledge to be acquired by natural persons acting under the authority or on behalf of an investment services provider and performing one of the functions referred to in Articles 312-3 (II), 314-9 and 314-10. It shall publish that content: defines the content of the modules completing the minimum knowledge mentioned in 1°. It shall publish the content of these modules; ensures that the content of this minimum knowledge and complementary modules is updated; determines and verifies the arrangements for the examinations and complementary modules that validate acquisition of knowledge; certifies examinations for a two-year period within four months of the filing of applications. This deadline shall be extended as necessary until requests for further information are met. This certification can be renewed for a three-year period. the AMF shall charge an application fee when applications for certification are filed. III. The Financial Skills Certification Board has at least seven members: one person appointed from among its own members by the AMF Board; at least four members named by the AMF on the basis of their professional skills, after consulting with the main professional associations representing investment services providers; two independent persons named by the AMF and skilled in the fields of education or vocational training in finance. The member of the AMF Board chairs the Financial Skills Certification Board. However, in the event of a temporary absence of the chairperson lasting no more than six months, the Financial Skills Certification Board shall choose another of its members to chair its meetings. In the event of an absence of more than six months or if the chairperson is permanently unable to fulfil their duties, the Board shall appoint another of its members as its chairperson, for the remainder of the chairperson's term of office. The members of the Financial Skills Certification Board are appointed for a renewable three-year term. The chairperson of the Financial Skills Certification Board will continue in office until the end of their term as member of the Board. The AMF publishes a list of members. IV. - The Financial Skills Certification Board shall draw up bylaws and present them to the AMF Board. V. - Members of the Financial Skills Certification Board receive no remuneration for their duties. The chair of the Financial Skills Certification Board shall be compensated in accordance with the conditions set out in the AMF's internal rules. The investment services provider shall comply with the following obligations to safeguard its clients' rights in relation to the financial instruments belonging to them: It must keep such records and accounts as are necessary to enable them at any time and immediately to distinguish assets held for one client from assets held for other clients, and from its own financial instruments. It must maintain its records and accounts in a way that ensures their accuracy, and in particular, their correspondence to the financial instruments held by clients, and that enables them to be used as an audit trail; It must conduct periodic reconciliations between its internal accounts and records and those of the third parties with whom the clients' financial instruments are held. It must take the necessary steps to ensure that any client financial instruments deposited with a third party can be identified separately from the financial instruments belonging to the third party and from the financial instruments belonging to the investment services provider by means of differently titled accounts on the books of the third party or other equivalent measures that achieve the same level of protection; If the law applicable in the territory in which the third party holds the financial instruments prevents that party from complying with the previous subparagraph, the third party shall inform affected clients that they are not covered by this protection. It must introduce adequate organisational arrangements to minimise the risk of loss or diminution of clients' assets or of rights in connection with those financial instruments resulting from misuse of the financial instruments, fraud, poor administration, incorrect record-keeping or negligence. The investment services provider shall ensure that the statutory auditor makes a report at least every year to the AMF on the adequacy of the arrangements made by the service provider, pursuant to points of Article II 7° and 9° L. 533-10 of the Monetary and Financial Code and this sub-section. The investment services provider using a third party to hold its clients' financial instruments shall exercise all due skill, care and diligence in the selection, appointment and periodic review of the third party and of the arrangements made by said party for the holding of those financial instruments. The investment services provider shall take into account the expertise and market reputation of the third party, as well as any legal or regulatory requirements or market practices related to the holding of those financial instruments that could adversely affect clients' rights. If the investment services provider propose to use a third party to hold its clients' financial instruments then this investment services provider shall choose a third party that is located in a country that has specific regulations and supervision regarding the holding of financial instruments on behalf of a client, and shall select that third party from among those subject to the specific regulations and supervision and do so in accordance with the provisions of Article 312-8. The investment services provider may not use a third party to hold its clients' financial instruments if that third party is located in a State that is not party to the European Economic Area agreement and that does not regulate the holding of financial instruments on behalf of another person, unless one of the following conditions is met: The nature of the financial instruments or of the investment services connected with those instruments requires them to be deposited with a third party in the State that is not party to the European Economic Area agreement. If the financial instruments are held on behalf of a professional client, that client makes a written request to the investment services provider to have them held with a third party in the State that is not party to the European Economic Area agreement. The requirements set forth in Articles 312-9 and 312-10 shall also apply if the third party uses another third party to perform one of its functions in the areas of holding or custody of financial instruments. I.- The investment services provider may not enter into securities financing transactions in respect of financial instruments held by it on behalf of a client or otherwise use such financial instruments for its own account, for the account of another person or for the account of one of its other clients, unless the client has given his prior express consent for the use of the instruments on specified terms, as evidenced by his signature or an equivalent alternative mechanism. The use of that client's financial instruments must be restricted to the specified terms to which the client has consented. II. - The investment services provider may not enter into securities financing transactions in respect of financial instruments held by it on behalf of a client in an omnibus account maintained by a third party, or otherwise use financial instruments held in such an account for its own account or for the account of another person unless at least one of the following conditions is met: Each client whose financial instruments are held on an omnibus account must have given consent in accordance with I. The investment services provider must have systems and controls to ensure that only financial instruments belonging to clients who have given prior consent in accordance with I are so used. The investment services provider' records shall include data on the client on whose instructions the financial instruments have been used and on the number of financial instruments used belonging to each client who has given his consent, so as to enable the correct allocation of any loss of financial instruments. III. – A “securities financing transaction” means a transaction as defined by Article 3 (11) of Regulation (EU) 2015/2365 of 25 November 2005 on transparency of securities financing transactions and of reuse. Security interests, liens or rights of set-off over client financial instruments enabling a third party to dispose of client's financial instruments in order to recover debts that do not relate to the client or provision of services to the client are not permitted except where this is required by applicable law in a third country jurisdiction in which the client financial instruments are held. If the investment services provider is obliged to create such security interests, liens or rights of set-off, it must disclose that information to its clients indicating to them the risks associated with those arrangements. Where security interests, liens or rights of set-off are established by the service provider in respect of client financial instruments, or where the service provider has been informed that they are established, they shall be recorded in client contracts and the service provider's own accounts to ensure that these financial instruments are clearly identified as belonging to the client, particularly in the event of an insolvency. I.- The investment services provider shall make information pertaining to clients' financial instruments readily available to the following persons or entities: the AMF; the mandataire judiciaire, administrateur judiciaire, liquidateur and commissaire à l'exécution du plan referred to in Annex B of Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings; the Resolution College of the Autorité de contrôle prudentiel et de résolution. II.- The information to be made available shall include: related internal accounts and records that readily identify the balances of financial instruments held for each client; the place where financial instruments are held by the service provider as well as details on the accounts opened with third parties and on agreements entered into with such entities; details of any outsourced tasks relating to the holding of financial instruments and details of third parties carrying out such tasks; key individuals of the service provider involved in related processes, including those responsible for oversight of the service provider's requirements in relation to the safeguarding of client financial instruments; and agreements making it possible to establish client ownership over financial instruments. The investment services provider shall take appropriate measures to prevent the unauthorised use of client financial instruments for its own account or the account of any other person, such as: the conclusion of agreements with clients on measures to be taken by the investment services provider in case the client does not have provision on its account at the settlement date, such as the borrowing of the corresponding financial instruments on behalf of the client or unwinding the position; the close monitoring by the service provider of its projected ability to deliver on the settlement date and the putting in place of remedial measures if this cannot be done; and the close monitoring and prompt requesting of undelivered financial instruments outstanding on the settlement day. Where the investment services provider has taken part in a securities financing transaction, it shall adopt specific arrangements for every client to ensure that, in the event that a client loans financial securities, the borrower provides appropriate collateral. The service provider shall monitor the continued appropriateness of such collateral and take the necessary steps to maintain the balance with the value of client financial instruments. The investment services provider shall not enter into arrangements which are prohibited under Article L. 533-10 (II) (9) of the Monetary and Financial Code. I.- The investment services provider should consider the appropriateness of title transfer collateral arrangements used with professional clients and eligible counterparties with regard to the relationship between the client's obligations to the provider and the client financial instruments and funds subject to the abovementioned arrangements. At the request of the AMF, the service provider must be able to demonstrate, by any means, that it has undertaken these steps. II.- When considering the appropriateness of using title transfer collateral arrangements pursuant to I, the investment services provider shall take into account all of the following factors: there is a sufficiently strong present or future connection between the client's obligations towards the service provider and the use of title transfer collateral arrangements; the amount of financial instruments and funds subject to the title transfer collateral arrangement does not substantially exceed the client's obligations, or is not unlimited, and whether the client has an obligation of any kind towards the service provider; and if all client financial instruments and funds are subject to title transfer collateral arrangements, irrespective of the respective obligations of each client towards the service provider. III.- When using title transfer collateral arrangements pursuant to I, the investment services provider should warn professional clients and eligible counterparties about the risks incurred and about the effects of title transfer collateral arrangements on the client's financial instruments and funds. The investment services provider should appoint a single officer who shall possess the requisite skills and authority and be placed specifically in charge of issues relating to the service provider's compliance with its obligations in terms of safeguarding client financial instruments and funds. The investment services provider may decide, while taking care to ensure compliance with this sub-section, whether the single officer shall be devoted solely to this assignment or whether the officer can discharge these duties effectively while also carrying out other duties. The following relevant persons must hold a professional license issued by the AMF or the investment services provider under the terms of Articles 312-29 and 312-36: Traders of financial instruments; Clearers of financial instruments; Compliance officers for investment services; Investment analysts. 1° Traders of financial instruments are natural persons empowered to commit the person under whose responsibility or on whose behalf they are acting in transactions in financial instruments for its own account or for a third party. 2° Clearers of financial instruments are natural persons empowered to commit a clearing-house member vis-à-vis the clearing house. 3° Compliance officers for investment services are the persons referred to in Article 312-2. 4° Investment analysts are the relevant persons defined in Paragraph 2 of Article 2 of Regulation (EU) 2017/565 of 25 April 2016. A natural person may perform one of the functions referred to in Article 312-20 on a trial basis or temporarily, without holding the required professional licence, for a maximum period of six months that can be renewed once. Use of this exception by an investment services provider for traders, clearers and investment analysts shall require the prior consent of the compliance officer for investment services. The function of compliance officer for investment services may only be performed on a trial basis or temporarily with the prior consent of the AMF. Issuance of a professional license shall require the applicant to compile an request for authorisation, which shall be submitted to the investment services provider issuing the license or to the AMF. The request for authorisation shall include the items stipulated in an AMF instruction. The request for authorisation shall be retained by the investment services provider that issues the licence or by the AMF for ten years after the licensee has ceased to perform the functions that gave rise to the issuance of the professional licence. Where a person provisionally ceases to perform the activity that required a professional licence, such interruption shall not result in withdrawal of the licence. The person shall be deemed to have permanently ceased engaging in the activity that gave rise to the issuance of the license when the interruption lasts longer than one year, unless the AMF grants an exception. When a person definitively ceases to perform the function for which a professional licence was issued, the licence shall be withdrawn. The license shall be withdrawn by the investment services provider that issued it or by the AMF, as the case may be. If a professional license has been issued by the AMF, the investment services provider on whose behalf the license-holder is acting shall notify the AMF immediately upon the definitive cessation of activity referred to in the preceding paragraph. Whenever an investment services provider takes disciplinary measures against a person holding a professional licence because of a breach of the professional obligations, it shall so notify the AMF within one month. The AMF shall keep a register of professional licences. For this purpose, the person issuing or revoking the professional license referred to in 1°, 2°, 3° and 4° of Article 312 20 shall notify the AMF of the identities of the persons whose licenses are issued or revoked within one month. The AMF shall be notified of the appointments of the compliance officers referred to in 3° of Article 312-20. The information in the register of professional licences shall be retained for ten years after licences have been revoked. Sub-section 2 - Professional licences issued by the AMF The AMF shall issue the professional licenses of the persons performing the functions of compliance officers for investment services. For this purpose, the AMF shall organise a professional examination under the terms referred to in Articles 312-33 to 312-35. However, where investment services providers appoint one of their senior managers to the function of compliance officer, that person shall hold the relevant professional license. He shall not be required to pass the examination provided for in the first paragraph. Before issuing the professional license, the AMF shall verify: that the relevant natural person is fit and proper, that he is familiar with the professional requirements and capable of performing the functions of a compliance officer for investment services. that pursuant to II of Article 312-3, the investment services provider has conducted an internal verification or an examination as stipulated in 3° of II of Article 312-5 to ensure that the relevant person has the minimum knowledge mentioned in 1° of II of Article 312-5. that the investment services provider complies with the provisions of Paragraph 3 of Article 22 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016. The AMF may waive the examination requirement for a person who has performed comparable functions with another investment services provider with equivalent business activities and organisational structures, provided that person has already passed the examination and the investment services provider planning to appoint him has already presented a candidate who passed the examination. If an investment services provider requires professional licenses for several compliance officers for investment services, the AMF shall ensure that the number of license holders is proportionate to the nature and the risks of the investment services provider's business activities, scale and organisational structure. Investment services providers shall provide precise written definitions of the attributions of each professional license holder. The examination shall consist of interviews of professional license applicants by a jury. The applicants shall be presented by the investment services providers on whose behalf they are to perform their functions. The AMF shall hold the examinations at least twice a year. It shall decide who sits on the jury, set the examination dates and determine the amount of examination fees. This information shall be made known to investment services providers. The AMF shall collect the examination fees from the investment services providers presenting applicants. The members of the jury referred to in the first paragraph of Article 312-33 shall be: An active compliance officer, chair; The head of an operational function with an investment services provider; A member of the AMF's staff. If an applicant feels that a member of the jury has a conflict of interest with regard to him, he may ask the AMF to be examined by another jury. If it deems that the conditions referred to in Article 312-30 have been met, the jury shall propose that the AMF issue a professional license. However, if the jury deems that the applicant has the necessary qualities to perform the function of compliance officer for investment services but that the investment services provider does not grant him proper independence or does not provide him with adequate resources, the jury may propose that the issuance of a professional license be subject to the condition that the investment services provider remedies the situation and notifies the AMF of the measures taken for this purpose. If outsourcing of the function of compliance officer for investment services is planned, the jury may be asked for its opinion. Sub-section 3 - Professional licenses issued by investment services providers Professional licences referred to in 1°, 2° and 4° of Article 312-20 shall be issued by the investment services providers under whose authority or on whose behalf the professional license holders are acting. Before any of the professional licences referred to in Article 312-36 are issued, the compliance officer for investment services shall ensure that the applicant is fit and proper, that it has met the procedural requirements established by the investment services provider to ascertain that applicants are cognisant of their professional obligations, and that it meets the conditions set forth in Article 312-3. The compliance officer may obtain from AMF, upon request made by registered or hand-delivered letter with acknowledgment of receipt, a record of any disciplinary actions that the AMF has taken against the applicant during the previous five years. Investment services providers shall notify the AMF of the issuance of the professional licenses referred to in 1°, 2°, 3° and 4° of Article 312-20 within one month. The AMF may ask the investment services provider to forward a copy of the license application. Any person to whom a professional licence is issued shall be personally informed of that fact. If the investment services provider's authorisation is revoked, the AMF may require said provider to retain all the relevant records for the five-year period stipulated in Article L. 533-10 (III) of the Monetary and Financial Code. The AMF may, in exceptional circumstances, require investment services providers to retain any or all those records for the seven year period stipulated in Article L. 533-10 (III) of the Monetary and Financial Code, to the extent justified by the nature of the instrument or transaction, if that is necessary to enable it to exercise its supervisory functions. The purpose of recording telephone conversations shall be to facilitate monitoring to ensure that transactions are lawful and that they comply with clients' instructions. The compliance officer may listen to the recordings of telephone conversations made pursuant to Article 76 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016. If the compliance officer does not himself listen to the recording, it may not be listened to without his agreement or the agreement of a person designated by him. Investment services providers shall retain information about the monitoring and assessments referred to in Point a) of Paragraph 2 of Article 76 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 in accordance with the requirements referred to in Article 76 of the same Regulation. Within four-and-a-half months of the end of the financial year, the investment services provider providing portfolio management services for third parties shall send the AMF the information specified on the annual data sheet. The provisions of this section shall apply to investment service providers who provide the investment service mentioned in 4 of Article L. 321-1 of the Monetary and Financial Code. The following terms shall have the following meanings for the purposes of this Section: “counterparty risk” means the risk of loss for the individual portfolio resulting from the fact that the counterparty to the transaction or to a contract may default on its obligations prior to the final settlement of the transaction's cash flow; “liquidity risk” means the risk that a position in the portfolio cannot be sold, liquidated or closed out at limited cost in an adequately short time frame and that the ability of the investment service provider to liquidate positions in an individual portfolio in accordance with the contractual requirements of the portfolio management mandate, is thereby compromised; “market risk” means the risk of loss for the individual portfolio resulting from a fluctuation in the market value of positions in the portfolio attributable to changes in market variables, such as interest rates, foreign exchange rates, equity and commodity prices, or an issuer's creditworthiness; “operational risk” means the risk of loss for the individual portfolio resulting from inadequate internal processes and failures in relation to people and systems of the investment service provider or from external events, and includes legal and documentation risk and risk resulting from the trading, settlement and valuation procedures operated on behalf of the individual portfolio; “board of directors” means the board of directors, executive board or any equivalent body of the investment service provider. Sub-section 1 - Risk management policy and risk measurement Paragraph 1 - Permanent risk management function I - The investment service provider shall establish and maintain a permanent risk management function. II.- The permanent risk management function shall be hierarchically and functionally independent from operating units. However, the investment service provider may derogate from this obligation where the derogation is appropriate and proportionate in view of the nature, scale, diversity and complexity of its business and of the individual portfolios it manages. The investment service provider shall be able to demonstrate that appropriate safeguards against conflicts of interest have been adopted so as to allow an independent performance of risk management activities, and that its risk management process satisfies the requirements of Article L. 533-10-1 of the Monetary and Financial Code. III.-The permanent risk management function shall: a) Implement the risk management policy and procedures; b) Ensure compliance with the system for limiting the risks of individual portfolios; c) Provide advice to the board of directors as regards the identification of the risk profile of each individual portfolio managed; d) Provide regular reports to the board of directors and, where it exists, the supervisory function, on: the consistency between the current levels of risk incurred by each individual portfolio managed and the risk profile agreed for that portfolio; the compliance of each individual portfolio managed with relevant risk limiting systems; the adequacy and effectiveness of the risk management process, indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies; e) Provide regular reports to the senior management outlining the current level of risk incurred by each individual portfolio managed and any actual or foreseeable breaches of their limits, so as to ensure that prompt and appropriate action can be taken. Where appropriate in view of the nature, scale and complexity of its business and of the individual portfolios it manages, the investment service provider may apply the obligations of c, d and e for each type or profile of individual portfolio managed. IV.-The permanent risk management function shall have the necessary authority and access to all relevant information necessary to fulfil the tasks set out in III. Paragraph 2 - Risk management policy I.- The investment service provider shall establish, implement and maintain an adequate and documented risk management policy which identifies the risks to which the individual portfolios it manages are or might be exposed to. II.- The risk management policy shall comprise such procedures as are necessary to enable the investment service provider to assess, for each individual portfolio it manages, the exposure of said portfolio to market, liquidity and counterparty risks, and the exposure of the individual portfolios to any other risks, including operational risks, which may be material for the individual portfolios it manages. III.- The risk management policy shall address at least the following: a) The techniques, tools and arrangements that enable them to comply with the obligations set out in Article 312-48; b) The allocation of responsibilities within the investment service provider pertaining to risk management. IV.- The investment service provider shall ensure that the risk management policy referred to in I states the terms, contents and frequency of reporting of the risk management function referred to in Article 312-45 to the board of directors and to senior management and, where appropriate, to the supervisory function. V.- For the purposes of this article, investment service providers shall take into account the nature, scale and complexity of their business and the individual portfolios they manage. Paragraph 3 - Assessment, monitoring and review of risk management policy The investment service provider shall assess, monitor and periodically review: a) The adequacy and effectiveness of the risk management policy and procedures, and of the arrangements, processes and techniques referred to in Article 312-48; b) The level of compliance by the investment service provider and the relevant persons referred to in Article 2 of Delegated Regulation 2017/565 of the Commission of 25 April 2016 with the risk management policy and with the arrangements, processes and techniques referred to in Article 312-48; c) The adequacy and effectiveness of measures taken to address any deficiencies in the performance of the risk management process or shortcomings in these arrangements and procedures, including any failure by the relevant persons to comply with the requirements of these arrangements or procedures. Sub-section 2 - Risk management processes, counterparty risk exposure and issuer concentration I.- Investment service providers shall adopt adequate and effective arrangements, processes and techniques to measure and manage at any time the risks which the individual portfolios they manage are or might be exposed to. Those arrangements, processes and techniques shall be proportionate to the nature, scale and complexity of the business of the investment service providers and of the individual portfolios they manage, and be consistent with the risk profile of the individual portfolios managed. II.- For the purposes of I, investment service providers shall take the following actions for each individual portfolio they manage: a) put in place such risk measurement arrangements, processes and techniques as are necessary to ensure that the risks of taken positions and their contribution to the overall risk profile are accurately measured on the basis of sound and reliable data and that the risk measurement arrangements, processes and techniques are adequately documented; b) conduct, where appropriate, periodic back-tests in order to review the validity of risk measurement arrangements which include model-based forecasts and estimates; c) conduct, where appropriate, periodic stress tests and scenario analyses to address risks arising from potential changes in market conditions that might adversely impact the individual portfolios they manage; d) establish, implement and maintain a documented system of internal limits concerning the measures used to manage and control the relevant risks for each individual portfolio taking into account all risks which may be material to the individual portfolio as referred to in Article 312-44 and ensuring consistency with the risk profile of the individual portfolios; e) ensure that the current level of risk complies with the risk limiting system as set out in d) for each individual portfolio; f) establish, implement and maintain adequate procedures that, in the event of actual or anticipated breaches of the risk limiting system for the individual portfolio, result in timely remedial actions in the best interests of its clients. III.-Investment service providers shall use an appropriate liquidity risk management process for each individual portfolio they manage. This procedure shall, in particular, ensure that the investment service provider's ability to liquidate positions in an individual portfolio in accordance with the contractual requirements of the portfolio management mandate. In this Chapter, any person or entity referred to in Article L. 533-24 of the Monetary and Financial Code that designs or manufactures a financial instrument, which encompasses the creation, development, issuance and design of financial instruments, shall be, as the case may be: I.- A person or entity referred to in Article 311-1 (I to III). II.- A person or entity authorised to provide one or several investment services in a State party to the European Economic Area agreement other than France, equivalent to that referred to in I. III.- A person other than those referred to in I or II above. Unless otherwise specified, in this Chapter, “manufacturer” means the persons and entities referred to in I. The provisions of section 2 of this Chapter are applicable to the distributors referred to in Article L. 533-24-1 of the Monetary and Financial Code and Article 311-1 (I to III). The manufacturer shall comply with the provisions of this section when it manufactures financial instruments. It shall comply, in a way that is appropriate and proportionate, with the provisions of Articles 313-4 to 313-17, taking into account the nature of the financial instrument, the investment service and the target market for the financial instrument. The manufacturer shall establish, implement and maintain procedures and measures to ensure the manufacturing of financial instruments complies with the provisions on proper management of conflicts of interest, including remuneration. In particular, the manufacturer shall ensure that the manufacturing of the financial instrument, including its features, does not adversely affect end clients or does not lead to problems with market integrity by enabling it to mitigate or transfer its own risks or exposure to any underlying assets of the financial instrument that it already holds on own account. The manufacturer must analyse potential conflicts of interest each time a financial instrument is manufactured. In particular, it shall assess whether the financial instrument creates a situation where end clients may be adversely affected if they take, by investing in, buying, selling or establishing such an instrument: an exposure opposite to the one held by the manufacturer before investing in, purchasing or establishing the financial instrument; or an exposure opposite to the one that the manufacturer wants to hold after investing in, selling or establishing the financial instrument. The manufacturer should consider whether the financial instrument may represent a threat to the orderly functioning or to the stability of financial markets before deciding to proceed with the launch of the financial instrument. The manufacturer shall ensure that relevant staff involved in the manufacturing of financial instruments possess the necessary expertise to understand the characteristics and risks of these financial instruments. The manufacturer shall ensure that senior managers mentioned as applicable in points 1° and 2° of Articles L. 533-25 and L. 511 51 of the Monetary and Financial Code or in Article R. 123-40 of the Commercial Code have effective control over the financial instrument governance process. It shall ensure that compliance reports to the senior managers mentioned in the previous subparagraph include information about the financial instruments manufactured by it, including information on the distribution strategy for these instruments. It shall make the reports available to the AMF on request. The manufacturer shall ensure that the compliance function checks and monitors the development and periodic review of financial instrument governance arrangements in order to detect any risk of failure by it to comply with the obligations set out in this section. Where several manufacturers or one or several manufacturers and one or several other persons referred to in Article 313-1 (II) or (III) collaborate to develop, issue or design a financial instrument, these persons shall outline their mutual responsibilities under this collaboration in a written agreement. The manufacturer shall identify at a sufficiently granular level the potential target market for each financial instrument and specify the type(s) of client for whose needs, characteristics and objectives the financial instrument is compatible. As part of this process, it shall identify any group(s) of clients for whose needs, characteristics and objectives the financial instrument is not compatible. Where manufacturers or one manufacturer and one or several other persons referred to in Article 313-1 (II) collaborate to manufacture a financial instrument, only one target market needs to be identified. Where the manufacturer is not also the distributor of a financial instrument, and where the financial instrument is distributed through one or several distributors, the manufacturer shall determine the financial instrument's compatibility with the needs and characteristics of clients based on: their theoretical knowledge of and past experience with: the financial instrument or similar financial instruments; and financial markets; and the needs, characteristics and objectives of potential end clients. I.- The manufacturer shall undertake an analysis for each financial instrument that it manufactures to assess: the risks of poor outcomes for end clients posed by the financial instrument; and in which circumstances these outcomes may occur. II.- It shall assess the financial instrument under negative conditions covering what would happen if, for example: the market environment deteriorates; the manufacturer or a third party involved in manufacturing and or functioning of the financial instrument experiences financial difficulties or other counterparty risk materialises for the manufacturer or the third party; the financial instrument fails to become commercially viable; or demand for the financial instrument is much higher than anticipated, compromising its financial position or disrupting the market of the underlying assets. The manufacturer shall determine whether a financial instrument meets the identified needs, characteristics and objectives of the target market, including by examining the following elements: the financial instrument's risk/reward profile is consistent with the target market; and financial instrument design is driven by features that are in the client's interest and not by a business model that relies on poor client outcomes if the instrument is to be profitable for the manufacturer. The manufacturer shall consider the charging structure proposed for the financial instrument, including by examining the following: financial instrument's costs and charges are compatible with the needs, objectives and characteristics of the target market; costs and charges do not undermine the financial instrument's return expectations, such as where the costs or charges equal, exceed or remove almost all the expected tax advantages linked to a financial instrument; and the charging structure of the financial instrument is appropriately transparent for the target market, and does not disguise charges or make them too complex to understand. The manufacturer shall ensure that the provision of information to distributors includes information about the appropriate channels for distribution of the financial instrument, the financial instrument approval process and the target market assessment and is of an adequate standard to enable distributors to understand and recommend or sell the financial instrument properly. The manufacturer shall review the financial instruments it manufactures on a regular basis, taking into account any event that could materially affect the potential risk to the identified target market. It shall consider if the financial instrument remains consistent with the needs, characteristics and objectives of the target market and if it is being distributed to the target market, or is reaching clients for whose needs, characteristics and objectives the financial instrument is not compatible. I.- The manufacturer shall: review, if it is aware of any event that could materially affect the potential risk to investors, any financial instrument prior to: any further issue of financial instruments with similar characteristics; any issue of a financial instrument that is fungible with a previously issued financial instrument; or any new financial contract; and conduct reviews at regular intervals to assess whether the financial instrument functions as intended. II.- It shall determine how regularly to review manufactured financial instruments based on relevant factors, including factors linked to the complexity or the innovative nature of the investment strategies pursued. III.- It shall also identify crucial events that would affect the potential risk or return expectations of the financial instrument, such as: the crossing of a threshold that will affect the return profile of the financial instrument; or the solvency of certain issuers whose securities or guarantees may impact the performance of the financial instrument. IV.- When such events occur, it shall take appropriate action which may consist in: providing relevant information on the event and its consequences on the financial instrument to the clients or the distributors of the financial instrument if the manufacturer does not offer or sell the financial instrument directly; changing the financial instrument approval process; stopping further issuance of the financial instrument; changing the financial instrument's contractual stipulations to avoid any unfair terms; considering whether the sales channels through which the financial instruments are distributed are appropriate where it becomes aware that the financial instrument is not being sold as envisaged; contacting the distributor to discuss a modification of the distribution process; terminating the relationship with the distributor; or informing the AMF. The distributor, when deciding the range of financial instruments manufactured by itself or other persons and services it intends to offer or recommend to clients, shall comply, in a way that is appropriate and proportionate, with the requirements laid down in Articles 313-19 to 313-27, taking into account the nature of the financial instrument, the investment service and the target market for the financial instrument. Distributors shall also comply with the provisions of this section when offering or recommending financial instruments manufactured by a manufacturer referred to in Article 313-1 (III). It shall have in place effective arrangements to ensure that it obtains sufficient information about these financial instruments from the person mentioned in the previous subparagraph. It shall determine the target market for each financial instrument, even if the target market was not defined by the manufacturer referred to in Article 313-1 (I to III). The distributor shall have in place adequate financial instrument governance arrangements to ensure that financial instruments and services it intends to offer or recommend are compatible with the needs, characteristics, and objectives of an identified target market and that the intended distribution strategy is consistent with the identified target market. It shall identify and assess the circumstances and needs of the clients it intends to focus on, so as to ensure that clients' interests are not compromised as a result of commercial or funding pressures. As part of this process, it shall identify any group(s) of clients for whose needs, characteristics and objectives the financial instrument or service is not compatible. The distributor shall obtain from the manufacturer or the person referred to in Article 313-1 (II) information to gain the necessary understanding and knowledge of the financial instruments its intend to recommend or sell in order to ensure that these instruments will be distributed in accordance with the needs, characteristics and objectives of the identified target market. The distributor shall also take all reasonable steps to ensure it also obtains adequate and reliable information from any person referred to in Article 313-1 (III) to ensure that financial instruments will be distributed in accordance with the characteristics, objectives and needs of the target market. Where relevant information is not publicly available, the distributor shall take the necessary steps to obtain such relevant information from the person referred to in Article 313-1 (III) or from anyone acting on that person's behalf. Acceptable publicly available information is information which is clear, reliable and produced to meet legal or regulatory requirements, such as investor disclosure requirements under Directive 2003/71/EC of 4 November 2003 or Directive 2004/109/EC of 15 December 2004. This obligation applies to products sold on primary and secondary markets and shall apply in a proportionate manner, depending on the degree to which publicly available information is obtainable and the complexity of the product. The distributor shall use the information obtained from the persons referred to Article 313-1 (I to III) and information on its own clients to identify the target market and distribution strategy. When a distributor acts both as a manufacturer and a distributor, only one target market assessment shall be required. When deciding the range of instruments and services that it offers or recommends and the respective target markets, the distributor shall establish and maintain procedures and measures to ensure compliance with all applicable provisions under Directive 2014/65/EU of 15 May 2014 including those relating to client disclosure, assessment of suitability or appropriateness of the financial instrument for the client, inducements and proper management of conflicts of interest. Particular care shall be taken when it intends to offer or recommend new financial instruments or there are variations to the services it provides. The distributor shall periodically review and update its financial instrument governance arrangements in order to ensure that they remain robust and fit for their purpose, and take appropriate actions where necessary. The distributor shall review the financial instruments it distributes and the services it provides on a regular basis, taking into account any event that could materially affect the potential risk to the identified target market. It shall assess whether the instrument or service remains consistent with the needs, characteristics and objectives of the identified target market and whether the intended distribution strategy remains appropriate. It shall modify the identified target market and if necessary update the product governance arrangements if it becomes aware that it has wrongly identified the target market for a specific financial instrument or service or that the instrument or service no longer meets the expectations of the identified target market, and notably if the financial instrument becomes illiquid or very volatile due to market changes. The distributor shall ensure that its compliance function checks the conditions and procedures for the development and periodic review of financial instrument governance arrangements in order to detect any risk of failure to comply with the obligations set out in this section. The distributor shall ensure that relevant persons possess the necessary expertise to understand the characteristics and risks of the financial instruments that it intends to distribute and the services provided as well as the needs, characteristics and objectives of the identified target market. The distributor shall ensure that senior managers mentioned as applicable in points 1° and 2° of Articles L. 533-25 and L. 511-51 of the Monetary and Financial Code or in Article R. 123-40 of the Commercial Code or the management body of an asset management company have effective control over the financial instrument governance process to determine the range of financial instruments that it distributes and the services provided to the target markets. It shall ensure that the compliance reports referred to in Article 22(2)(c) of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 provided to the senior managers mentioned in the previous subparagraph include information about the financial instruments distributed and the services provided. The compliance reports shall be made available to the AMF on request. The distributor shall provide to the relevant manufacturer or person referred to in Article 313-1 (II) with information on sales and, where appropriate, information on the reviews that it has conducted pursuant to Articles 313-21 to 313-23 to support the manufacturer or person referred to in Article 313-1 (II) when it carries out the reviews referred to in Articles 313-9, 313-16 and 313 17. Where different distributors work together in the distribution of a financial instrument or service, any distributor with a direct client relationship has ultimate responsibility to meet the product governance obligations set out in this section. A distributor acting as an intermediary shall: ensure that relevant information about the financial instrument obtained from the manufacturer or person referred to in Article 313-1 (II) is passed to the final distributor in the chain; take the necessary measures to enable the manufacturer or the person referred to in Article 313-1 (II) who requests information on sales of a financial instrument to obtain that information in order to comply with their own financial instrument governance obligations; and apply the financial instrument governance obligations for manufacturers, as relevant, within the framework of the services that it provides. The provisions of this Chapter shall not apply to branches established in other States party to the European Economic Area agreement by investment services providers authorised in France. Investment services providers shall ensure that relevant persons are reminded that they are bound by the obligation of professional confidentiality, subject to the terms and penalties prescribed by law. For the purposes of this Chapter, the term "client" shall designate existing and potential clients. Sub-section 1 - Approval of codes of conduct Where a professional organisation draws up a code of conduct applicable to investment services, the AMF shall verify whether the code's provisions are consistent with this General Regulation. The professional organisation may ask the AMF to approve all or part of the code as professional standards. If, having sought the opinion of the Association Française des Etablissements de Crédit et des Entreprises d'Investissement (AFECEI), the AMF considers that some or all the provisions of such code should be recommended to investment services providers, the AMF shall announce its decision by publishing it on its website. Sub-section 2 - Primacy of the client's interest and market integrity Investment services providers shall act honestly, fairly and professionally, with due skill, care and diligence, in the best interests of clients and the integrity of the market. More specifically, they shall comply with all the rules pertaining to the organisation and operation of trading platforms that they use. Sub-section 3 - Client categories [Removed by Decree of 10 april 2020] Sub-section 1 - Information media A durable medium is any instrument which enables a client to store information addressed personally to that client in a way that affords easy access for future reference for a period of time adequate for the purposes of the information and which allows the unchanged reproduction of the information stored. Sub-section 2 - Marketing communications The AMF may require investment services providers to submit to it their marketing communications for the investment services that they provide and the financial instruments that they offer prior to publication, distribution or broadcast. It may require changes to the presentation or the content to ensure that the information is accurate, clear and not misleading. Article L. 533-12-7 of the Monetary and Financial Code applies to categories of financial contracts with any of the following characteristics: depending on whether a condition specified in the contract is met or not, they give rise upon the contract's expiry either to the payment of a predetermined gain or the partial or total loss of the amount invested; they give rise to the payment of a positive or negative differential between the price of an underlying asset or basket of assets at the time the contract has been entered into and the price at which the position is closed out, and can oblige the client to pay an amount greater than the amount invested at the time the contract has been entered into; their underlying asset is a currency or basket of currencies. For the purposes of 2° of III of Article L. 533-13 of the Monetary and Financial Code, a service may be deemed to have been provided at the client's initiative if the client requests it following any communication containing a promotion or offer of financial instruments made by any means and which is nature a general communication addressed to the public or a broader group or category of clients. A service may not be deemed to have been provided at the client's initiative if the client requests it following a personalised communication addressed to him by the investment services provider or in its name that invites the client, or attempts to invite the client, to take an interest in a given financial instrument or transaction. I.- The investment services provider shall ensure that natural persons acting on its behalf as sales personnel have the minimum qualification as well as a sufficient level of knowledge. Sales personnel shall mean any natural person responsible for providing investment advices or informations on financial instruments, investment or ancillary services, to the clients of the investment services provider on whose behalf he is acting; II. - It verifies that the sales personnel can prove they have the minimum level of knowledge set forth in Point 1° of II of Article 312-5: When an investment services provider ensures that the persons who provide investment advice or information on financial instruments, investment services or ancillary services to clients, on its behalf, possess the necessary knowledge and competence in accordance with Article L. 533-12-6 of the Monetary and Financial Code, it may consider that it has fulfilled its obligations in terms of the verification of the minimum knowledge levels provided for in II of Article 314-9, subject to the regular update of their skills and knowledge. An investment services provider shall ensure that the persons referred to in the first paragraph, when they do not yet possess an appropriate level of knowledge and competence, acquire them within a period of six months full-time equivalent from the date on which they took on their functions. During this period, these persons shall be supervised by one or more member(s) of the staff of the investment services provider who possess the adequate qualifications and experience. Sub-section 1 - Changes to agreements entered into before 3 January 2018 Without prejudice to the provisions of Article 314-26, investment services providers that concluded agreements with clients before 3 January 2018 shall inform such clients before that date of any changes made to comply with client disclosure obligations introduced by the provisions of the Monetary and Financial Code implementing Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and the European regulations completing this Directive and the provisions introduced by the present Book. If no objection has been expressed by the client within a period of two months following this communication, this implies acceptance of said changes. Sub-section 2 - Agreements entered into retail clients Without prejudice to the provisions of Article 58 of the Commission Delegated Regulation 2017/565 of 25 April 2016, agreements concluded between the investment services provider and non-professional clients shall contain specific stipulations concerning the detailed information to these clients about the characteristics and modalities of the investment service provided and on the rights and obligations of the parties. Commission delegated regulation (EU) 2017/575 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards concerning the data to be published by execution venues on the quality of execution of transactions Commission delegated regulation (EU) 2017/576 of 8 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution Investment services providers providing portfolio management services shall define the planned allocation of the orders they give beforehand. As soon as they learn that they orders have been executed, they shall transmit to the account keeper exact instructions for the allocation of the orders executed to the beneficiaries. This allocation shall be final. Sub-section 1 - General provisions relating to inducements Where the investment services provider pays or is paid any fee or commission or provides or is provided with any non-monetary benefit in connection with the provision of an investment service or ancillary service to the client, it shall ensure that all the conditions set out in Article L. 533-12-4 of the Monetary and Financial Code and the requirements set out in Articles 314-14 to 314-17 are met at all times. A fee, commission or non-monetary benefit shall be considered to be designed to enhance the quality of the relevant service to the client if all of the following conditions are met: it is justified by the provision of an additional or higher level service to the relevant client, proportional to the level of inducements received, such as: the provision of non-independent investment advice on and access to a wide range of suitable financial instruments including an appropriate number of instruments from third party product manufacturers having no close links with the service provider; the provision of non-independent investment advice combined with either: an offer to the client, at least on an annual basis, to assess the continuing suitability of the financial instruments in which the client has invested; or another ongoing service that is likely to be of value to the client such as advice about the suggested optimal asset allocation of the client; the provision of access, at a competitive price, to a wide range of financial instruments that are likely to meet the needs of the client, including an appropriate number of instruments from third party manufacturers having no close links with the service provider, together with: either the provision of added-value tools, such as objective information tools helping the relevant client to take investment decisions or enabling the relevant client to monitor, model and adjust the range of financial instruments in which it has invested; or the provision of periodic reports of the performance and costs and charges associated with the financial instruments; it does not directly benefit the recipient service provider, its shareholders or employees without tangible benefit to the relevant client; it is justified by the provision of an ongoing benefit to the relevant client in relation to an ongoing inducement. A fee, commission, or non-monetary benefit shall not be considered acceptable if the provision of relevant services to the client is biased or distorted as a result of the fee, commission or non-monetary benefit. The investment services provider shall fulfil the obligations set out in Article 314-14 as long as it continues to pay or receive the fee, commission or non-monetary benefit. The investment services provider shall hold evidence that any fees, commissions or non-monetary benefits paid or received by it are designed to enhance the quality of the relevant service to the client: by keeping an internal list of all fees, commissions and non-monetary benefits received from a third party in relation to the provision of investment or ancillary services; and by recording: how the fees, commissions and non-monetary benefits paid or received by it, or that it intends to use, enhance the quality of the services provided to the relevant clients; and the steps taken in order to comply with its duty to act honestly, fairly and professionally in accordance with the best interests of the client. As regards any payment or benefit received from or paid or provided to third parties, the investment services provider shall disclose the following information to the client: prior to the provision of the relevant investment or ancillary service, it shall disclose to the client information on the payment or benefit concerned in accordance with the second subparagraph of Article L. 533-12-4 of the Monetary and Financial Code. Minor non-monetary benefits may be described in a generic way. Other non-monetary benefits provided or received in connection with the investment service provided to the client shall be priced and disclosed separately. prior to the provision of an investment or ancillary service to a client, where it has been unable to ascertain the amount of any payment or benefit to be received or paid, it shall disclose to the client the method for calculating that amount. In this case, after providing the service, it shall provide its client with information on the exact amount of the abovementioned payment or benefit received or paid; and at least once a year, as long as ongoing fees, commissions or benefits are received by it in relation to the investment or ancillary services provided to the relevant clients, it shall inform its clients on an individual basis about the actual amount of payments or benefits received, paid or provided. Where the investment services provider implements the obligations mentioned in this article, it shall take into account the provisions on costs and charges set out in point 3° of Article D. 533-15 of the Monetary and Financial Code and in Article 50 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016. Where more firms are involved in a distribution channel, each investment services provider providing an investment or ancillary service shall comply with its disclosure obligations to its own clients. Pursuant to the second subparagraph of Article L. 533-12-4 of the Monetary and Financial Code, the dissemination by the issuer of the prospectus required pursuant to Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 fulfils the obligation to disclose, to professional clients, the information that may be required by Article 314-17 on the investment commission charged by the investment services provider when the latter provides an investment service to an investor client. This article does not apply when the investment services provider provides investment advice to its clients. Sub-section 2 - Inducements in respect of investment advice on an independent basis or portfolio management services for third parties Where the investment services provider provides investment advice on an independent basis or portfolio management services for third parties, it shall return to its client any fees, commissions or any monetary benefits paid or provided by a third party or anyone acting on behalf of a third party in relation to the services provided to that client as soon as reasonably possible after receipt. All fees, commissions or monetary benefits received from third parties in relation to the provision of independent investment advice or portfolio management services for third parties shall be transferred in full to the client. It shall set up and implement a policy to ensure that any fees, commissions or any monetary benefits paid or provided by a third party or anyone acting on behalf of a third party in relation to the provision of independent investment advice or portfolio management services for third parties are allocated and transferred to each individual client. It shall inform clients about the fees, commissions or any monetary benefits transferred to it, such as through the periodic reporting statements provided to the client. Where the investment services provider provides investment advice on an independent basis or portfolio management services for third parties, it shall not accept non-monetary benefits that do not qualify as acceptable minor non-monetary benefits in accordance with Article 314-20. Only the following benefits shall qualify as acceptable minor non-monetary benefits: information or documentation relating to a financial instrument or an investment service, which is generic in nature or personalised to reflect the circumstances of an individual client; written material from a third party: a) that is commissioned and paid for by a corporate issuer or potential issuer to promote a new issuance by the company; or b) where the third party firm is contractually engaged and paid by the issuer to produce such material on an ongoing basis; provided that the material: a) clearly discloses the relationship between the issuer and the third party; and b) is made available at the same time to any investment services provider wishing to receive it or to the general public; participation in conferences, seminars and other training or information events on the benefits and features of a specific financial instrument or an investment service; hospitality of a reasonable de minimis value, such as food and drink during a business meeting or a conference, seminar or other training or information events mentioned under point 3° of this article; and other minor non-monetary benefits which the AMF deems: a) capable of enhancing the quality of service provided to a client; and b) having regard to the total level of benefits provided by one entity or group of entities, to be of a scale and nature that are unlikely to impair compliance with the service provider's duty to act in the best interest of the client. Acceptable minor non-monetary benefits shall be reasonable and proportionate and of such a scale that they are unlikely to influence the service provider's behaviour in any way that is detrimental to the interests of the relevant client. Disclosure of minor non-monetary benefits shall be made prior to the provision of the relevant investment or ancillary services to clients. In accordance with Article 314-17(1), minor non-monetary benefits may be described in a generic way. Sub-section 3 - Provisions concerning inducements in relation to research In this paragraph, “research” means research material or services concerning: one or several financial instruments or other assets; or the issuers or potential issuers of financial instruments; or a specific industry or market; such that it informs views on financial instruments, assets or issuers within that sector or market. That type of material or services: explicitly or implicitly recommends or suggests an investment strategy and provides a substantiated opinion as to the present or future value or price of such instruments or assets; or contains analysis and original insights and reaches conclusions based on new or existing information that could be used to inform an investment strategy and be relevant and capable of adding value to the decisions by the investment services provider on behalf of clients being charged for that research. I.- The provision of research by third parties to investment services providers other than asset management companies that provide portfolio management or other investment or ancillary services to clients shall not be regarded as an inducement if it is received in return for either of the following: Direct payments by the service provider out of its own resources; Payments from a separate research payment account controlled by the investment service provider, provided the following conditions relating to the operation of the account are met: the research payment account is funded by a specific research charge to the client; as part of establishing a research payment account and agreeing the research charge with clients, the investment service provider shall set and regularly assess a research budget as an internal administrative measure; the investment service provider is held responsible for the research payment account; the investment service provider regularly assesses the quality of the research purchased based on robust quality criteria and its ability to contribute to better investment decisions. II.- Where an investment services provider makes use of the research payment account, it shall provide the following information to clients: before the provision of an investment service to clients, information about the budgeted amount for research and the amount of the estimated research charge for each of them; annual information on the total costs that each of them has incurred for third party research. The investment services provider that operates a research payment account shall also be required, upon request by its clients or by the AMF, to provide a document indicating: the providers paid from this account; the total amount they were paid over a defined period; the benefits and services received by it; and how the total amount spent from the account compares to the budget set by the service provider for that period, noting any rebate or carry-over if residual funds remain in the account. For the purposes of Article 314-22 (I)(2)(a), the specific research charge shall: only be based on a research budget set by the investment service provider based on the need for third party research estimated to be necessary in order to provide investment services to clients; and not be linked to the volume or value of transactions executed on behalf of the clients. If research charges are included alongside a transaction commission and cannot be collected separately, the operational arrangement for the collection of client research charges shall enable these research charges to be separately identified and must comply with the conditions set out in Article 314-22 (I)(2) and (II). The total amount of research charges received may not exceed the research budget. The investment services provider shall agree with clients, in the portfolio management agreement or general terms of the service delivery contract: the research charge set out in its estimated budget; and the frequency with which the specific research charge will be charged to the budget over the period. Clients shall be informed clearly and in advance of any increase in the estimated research budget. If there is a surplus in the research payment account at the end of a period, the investment service provider should implement arrangements to rebate those funds to the client or to allocate them to the research budget for the following period. After the client has been informed and given the opportunity to express its disagreement, where applicable, the client agreement referred to in the first subparagraph shall be deemed to be obtained where: the planned research charge budget for a given period does not result in an increase in the total charges paid by the client compared with the previous equivalent period; and the frequency with which the investment service provider plans to charge specific research charges to the client over a given period is equivalent to that planned for the previous period for other charges. For the purposes of applying Article 314-22 (I)(2)(b), the research budget shall be managed solely by the investment service provider. This budget shall be based on a reasonable assessment of the need for third party research. The allocation of the research budget to purchase third party research shall be subject to appropriate controls and oversight by the management body to ensure it is managed and used in the best interests of the investment service provider's clients. Those controls include a clear audit trail of payments made to research providers and may be used to check that the amounts paid were determined with reference to the quality criteria referred to in Article 314-22 (I)(2)(d). The investment services provider shall not use the research budget and research payment account to fund internal research. For the purposes of applying Article 314-22 (I)(2)(c), the investment services provider may delegate the administration of the research payment account to a third party, provided that the arrangement facilitates the purchase of third party research and payments to research providers in the name of the service provider without any undue delay in accordance with the investment services provider's instruction. For the purposes of applying Article 314-22 (I)(2)(d), the investment services provider shall establish a written policy and provide it to its clients. This policy shall also identify situations in which the investment service provider considers that research purchased through the research payment account may benefit clients' portfolios, including, where relevant, by taking into account investment strategies applicable to various types of portfolios, and the approach the investment services provider will take to allocate such costs fairly to the various clients' portfolios. Where the investment services provider provides execution services, it shall identify separate charges for these services that only reflect the cost of executing the transaction. Charges relating to the provision of any other benefit or service by an investment services provider to another investment services provider established in a State party to the European Economic Area agreement shall be separately identified. The supply of benefits or services and charges for those benefits or services shall not be influenced or conditioned by levels of payment for execution services. Sub-section 4 - Portfolio management services' trading costs All fees and commissions paid by clients for transactions in portfolios under management, with the exception of subscription and redemption transactions relating to collective investment schemes or investment funds of third countries, shall be trading costs. They include: Intermediation costs, taxes and duties included, charged directly or indirectly by third parties that provide: Order reception and transmission services and order execution services on behalf of third parties referred to in Article L. 321-1 of the Monetary and Financial Code; Services referred to in Article L. 321-2 (4) of the Monetary and Financial Code charged under the conditions set out in Article 314-24 and order execution services specified in an AMF Instruction; If applicable, a turnover commission. I. - Investment services providers making offers of financial securities or minibons referred to in Article L. 223-6 of the Monetary and Financial Code via a website on the terms set out in Article 325-48 must, for each project and prior to any subscription, provide the client with the information supplied by the issuer pursuant to Article 217-1 unless a prospectus has been drafted and approved by the AMF. In the latter case, the prospectus is sent to the client and paragraphs II and III above do not apply. II. This information shall be completed by information on: the procedures for collecting subscription applications and transmitting them to the issuer, and the rules applied in the event of oversubscription; detail of the fees charged to the investor and the possibility of obtaining, on request, a description of the services provided to the issuer of the securities to which subscription is being considered, and the related fees; the risks inherent to the project and, in particular, the risk of total or partial loss of the capital, illiquidity risk and the risk of an absence of valuation. If the issuer is not the company carrying out the project, the investment services providers must provide the client, via their website and prior to any subscription, with the information referred to in Article 217-1 pertaining to the company carrying out the project and, where applicable, to those companies intervening between the company carrying out the project and that making the offer. Information must be provided on any contractual agreements between the abovementioned companies, whenever such agreements exist. Investment services providers are responsible for checking the consistency, clarity and balance of this information. To make this information easily accessible, all these items must be written in non-technical language. III. – All advertisements must contain prominent and easily-accessible reference to the risks inherent to the proposed investments and, in particular, the risk of total or partial loss of capital and illiquidity risk. IV. – The investment services provider shall ensure that the articles of the company carrying out the project presented to investors comply with the laws and regulations on companies making offers that are not subject to publication of a prospectus and are made via a website. This provision is applicable to those companies intervening between the company carrying out the project and that making the offer. V. – The provisions of point 3° of Article 325-51, of the final subparagraph of Article 325-52 and of the second to last subparagraph of Article 325-57 shall apply to investment services providers offering minibons referred to in Article L. 223-6 of the Monetary and Financial Code via a website, under the conditions set out in Article 325-48. Commission delegated regulation (EU) 2017/567 of 18 May 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions Commission delegated regulation (EU) 2017/582 of 29 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards specifying the obligation to clear derivatives traded on regulated markets and timing of acceptance for clearing Commission delegated regulation (EU) 2017/591 of 1 December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the application of position limits to commodity derivatives Commission implementing regulation (EU) 2017/1093 of 20 June 2017 laying down implementing technical standards with regard to the format of position reports by investment firms and market operators Commission implementing regulation (EU) 2017/953 of 6 June 2017 laying down implementing technical standards with regard to the format and the timing of position reports by investment firms and market operators of trading venues pursuant to Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments. Commission delegated regulation (EU) 2017/2417 of 17 November 2017 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on the trading obligation for certain derivatives. Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC. Sub-section 1 - Rules to prevent undue circulation of inside information Investment services providers shall establish and maintain effective and adequate procedures to control the circulation and use of inside information, as defined in Article 7 of Regulation (EU) n° 596/2014 of the European Parliament and of the Council of 16 April 2014, with the exception of paragraph 1.c of that same Article, taking into account the activities conducted (same Regulation) by the group to which the investment services provider belongs and the organisation adopted by that group. These procedures, called "information barriers", shall provide for: Identification of business segments, divisions, departments or any other entities likely to possess inside information; Organisation, in particular physical organisation, so as to separate entities within which the relevant persons referred to in Paragraph 1 of Article 2 of Delegated Regulation (EU) n° 2017/565 are likely to possess inside information; Prohibition of disclosure of inside information by the persons possessing it to other persons, except as provided for in Article 10 of Regulation (EU) n° 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse and after informing the compliance officer; The conditions in which the investment service provider may authorise a relevant person assigned to a given entity to provide assistance to another entity, whenever one of the two entities is likely to possess inside information. The compliance officer shall be informed whenever the relevant person assists the entity possessing inside information; The manner in which the relevant person benefiting from the authorisation provided for in 4° is informed of the temporary consequences thereof on the performance of his regular duties. The compliance officer shall be informed when this person returns to his regular duties. Sub-section 2 - Watch list To ensure compliance with the abstention requirement set forth in Articles 8, 10 and 14 of Regulation (EU) no. 596/2014 of the European Parliament and of the Council of 16 April 2014, investment services providers shall establish and maintain an appropriate procedure for monitoring the issuers and financial instruments on which they have inside information. This monitoring shall be proportionate to the risks identified and will concern, where applicable: transactions in financial instruments by the investment services provider for its own account; personal transactions, as defined in Article 29 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016, made by or on behalf of the relevant persons mentioned in the same Regulation; investment research as defined in Article 36.1 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016. To this end, the investment services provider shall draw up a watch list of the issuers on which it has inside information. The relevant entities shall inform the compliance officer at once when they believe they possess inside information. In such case, the issuer shall be put on the watch list, under the supervision of the compliance officer. The relevant entities shall inform the compliance officer when they believe that information they had previously reported pursuant to the sixth subparagraph has ceased to be inside information. The contents of the watch list are confidential. Dissemination of items on the watch list is restricted to the persons designated by name in the procedures referred to in the first subparagraph of 315-1. The investment services provider shall exercise supervision in accordance with the procedures set forth in Article 315-2. It shall take appropriate measures if it detects an anomaly. The investment services provider shall keep a record on a durable medium of the measures it has taken in the event of an anomaly or, if it takes no measures, of the reasons for so doing. Sub-section 3 - Restricted list I. - Investment services providers shall establish and maintain an appropriate procedure for monitoring compliance with any restrictions that apply to: personal transactions, as defined in Article 28 of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016, made by or on behalf of the relevant persons referred to in Paragraph 1 of Article 29 of the same Regulation; II. - To this end, the investment services provider shall establish a restricted list. This list includes those issuers in which the investment services provider must restrict its activities, or the activities of relevant persons, because of: legal or regulatory provisions to which the investment services provider is subject other than those resulting from the abstention requirements set forth in Articles 8, 10 and 14 of Regulation (EU) no. 596/2014 of the European Parliament and of the Council of 16 April 2014; the application of undertakings given on the occasion of a financial transaction. When an investment services provider deems it necessary to prohibit or restrict the performance of an investment service, an investment activity or an ancillary service in respect of certain issuers or financial instruments, those issuers and/or financial instruments shall also be included on the restricted list. Investment services providers shall determine, based on the restricted list, which entities are subject to the restrictions referred to in Article 315-4 and how those restrictions shall apply. They shall inform the relevant persons affected by the restrictions of the list and the nature of the restrictions. Sub-section 4 - Listing of a company's securities on a regulated market in financial instruments In allotting securities, the lead manager, in cooperation with the company concerned, ensures that the various categories of investors, other than those connected with the issuer (e.g. suppliers, clients, shareholders, senior managers, employees or third parties whom such persons are authorised to represent), are treated fairly. When several allotment procedures intended specifically for individual investors are applied concurrently, the lead manager shall ensure that the allotment percentages resulting therefrom are substantially equivalent. The lead manager shall make its best efforts to satisfy demand for the securities from individual investors to a meaningful extent. This objective is deemed to have been met when there is a procedure, centralised by the market operator and characterised by an allotment proportional to applications submitted, under which at least 10% of the overall offering amount is put on the market and made accessible to individual investors. The lead manager shall endeavour to avoid an obvious imbalance, to the detriment of individual investors, between the allotment for such investors and the allotment for institutional investors. Thus, when a placing procedure intended specifically for institutional investors coexists with one or more procedures intended specifically for individual investors, the lead manager shall endeavour to provide for a transfer mechanism to avoid an imbalance of the kind mentioned above. Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities Commission Delegated Regulation (EU) 2017/587 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards on transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and on transaction execution obligations in respect of certain shares on a trading venue or by a systematic internaliser The AMF may authorise an investment services provider to defer the publication of transactions in the financial instruments referred to in paragraph 1 of Article 21 of Regulation (EU) No 600/2014 of 15 May 2014 in the cases described in paragraph 4 of this same Article. Investment services providers shall have organisational structures and procedures that enable them to comply with the vigilance and disclosure requirements provided for in Title VI of Book V of the Monetary and Financial Code relating to the fight against money laundering and terrorist financing. When it makes offers of financial securities via a website on the terms set out in Article 325-48, the investment services provider may provide a subscription application handling and monitoring service that includes the registration of financial securities in a securities account. This service shall be formalised in an agreement between the investment services provider and the mandating issuer setting out in particular the obligations of the investment services provider and the fees charged. For this purpose, it shall collect notably the personal data of subscribers and transmit it to the issuer for registration in the records of the latter. The investment services provider shall implement a procedure setting out: 1° The terms for handling and monitoring subscription applications, notably in the event of oversubscription. 2°The procedure for registering financial securities in a securities account. This procedure shall provide for time stamping of the subscription applications on receipt. The investment services provider shall act with diligence and professionalism when processing subscription applications and registering financial securities in a securities account. It shall keep a record of the service provided on a durable medium. If the offer is cancelled, it shall inform the client promptly. Commission Delegated Regulation (EU) 2016/908 of 26 February 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council laying down regulatory technical standards on the criteria, the procedure and the requirements for establishing an accepted market practice and the requirements for maintaining it, terminating it or modifying the conditions for its acceptance To benefit from the exemption provided for by Article 13 of Regulation (EU) no.596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse, any investment services provider using an accepted market practice shall comply with the requirements set out in the AMF decision that established said accepted market practice in application of the above-mentioned Regulation. Sub-section 1 - Orders with instructions for deferred settlement and delivery The provisions of Articles 315-12 to 315-22 shall apply to authorised investment services providers receiving orders for deferred settlement and delivery as well as to custody account keepers. Where the market rules provide for the possibility referred to in the first paragraph of Article 516-1, an investment services provider who receives an order for deferred settlement or delivery shall not accept it unless the investor remits a margin deposit, either in the provider's books or in the books of the custody account keeper if the provider does not perform that function. An investment services provider who does not keep his client's account cannot consent to transmit or execute an order for deferred settlement and delivery unless it is able, under an agreement with the client's custody account keeper, to ascertain that the necessary margin has been duly deposited with the custody account keeper before it transmits or executes that order. The investment services provider who keeps the client's account shall be subject to the provisions of this section. The investment services provider shall be subject to the rules governing the posting and composition of clients' mandatory margin deposits. Margin is calculated as a percentage of the position and according to the type of assets pursuant to the following indications: cash (euros and other currencies in circulation in the European Union), Treasury bills, units or shares of “short-term money market” or “money market” UCITS: 20%; debt instruments admitted for trading on a regulated market of a State that is party to the Agreement on the European Economic Area, negotiable debt securities and other debt instruments of States party to the Agreement on the European Economic Area, units or shares of UCITS classified as “bonds and other debt securities in euros”, units or shares of UCITS classified as “international bonds and other debt securities”: 25%; equity instruments admitted for trading on a regulated market of a State that is party to the Agreement on the European Economic Area, units or shares of UCITS classified as “French equities”, units or shares of UCITS classified as “eurozone equities”, units or shares of UCITS classified as “equities of European Union countries”, units or shares of UCITS classified as “international equities”: 40%. Should a client fail, within the required time period, to remit or top up the margin deposit or to fulfil the commitments arising from the order executed on his behalf, the investment services provider shall liquidate some or all of the client's commitments or positions. The AMF can, where necessary, set more stringent margin deposit rules for a given financial instrument or market, either temporarily or permanently. Where a margin deposit consists of financial instruments, the investment services provider can legally refuse any such instrument that: it considers he would be unable to realise at any time or on his own initiative; it deems will not provide adequate collateral, having regard to the type of position to be collateralised. In any event, long positions in a given financial instrument cannot be collateralised with the same financial instrument. Cheques cannot be accepted as margin until they have been cashed. An investment services provider must be able to inform his client, upon request, of the value of the margin deposited under the three categories set forth in article 315-13 and, pursuant to the same article, of the position that may be taken or the increase in an existing position that may be realised. The AMF can increase the minimum margin rates provided for in Article 315-13 for one or more designated financial instruments, as specified in that article. The new rates cannot come into force for at least two trading days after they have been published. Initial margin deposits are readjusted, if need be, in view of the daily marking to market of the position and the assets accepted as collateral therefor, so that the deposits comply at all times with the minimum regulatory requirement. The investment services provider shall order the client, by any and all means, to top up or restore its collateral within one trading day. If the collateral is not topped up or restored in due time, the investment services provider shall take the necessary measures so that the client's position is once again collateralised. Unless the provider and the client have agreed on a different procedure, the investment services provider shall begin by reducing the position before realising some or all of the collateral. Absent a contractual agreement, an investment services provider who wishes to increase the collateral on a client's position by higher rates than those provided for in article 315-13 shall warn the client of the new rates by registered letter with return receipt. That letter shall be sent at least eight calendar days before the effective date of the increase. Where an investment services provider reduces a client's position or realises some or all of its collateral, pursuant to the third paragraph of Article 315-19, it shall send the corresponding trade confirmations and account statements to the client by registered letter with return receipt. Notwithstanding the first paragraph of Article 315-12, a member of a regulated market who does not hold the account of a client is not required to ascertain that margin has been deposited if the order is sent to it by an investment services provider acting as an order receiver-transmitter. Sub-section 2 - Derivatives markets An investment services provider who receives an order for execution on a regulated market in derivative financial instruments shall not accept such order unless the client remits a margin deposit, either in the provider's books or in the books of the custody account keeper if the provider does not perform that function. By way of derogation from the first paragraph, where the client is a professional client or an eligible counterparty within the meaning of Articles D. 533-11 and D. 533-13 of the Monetary and Financial Code, the investment services provider may grant it a period of time in which to remit the margin. Such period may not exceed the period granted by the clearing house to the clearing member with whom the positions are recorded. The margin referred to in the first paragraph shall be equal to or greater than that required by the market rules, if called from market members, or that required by the clearing house rules, if called from clearing house members. Since the aforementioned margin levels are minimum requirements, the investment services provider may, upon receiving the orders and at any time, call additional margin from the client. If, in light of market conditions, the margin posted by the client falls below the amount required under the third paragraph, additional margin shall be deposited in the same conditions and time limits as those specified in the second and third paragraphs. Should a client fail to post margin or remit additional margin within the above time limits, the investment services provider shall liquidate some or all of the client's commitments or positions. Commission Delegated Regulation (EU) 2017/585 of 14 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the data standards and formats for financial instrument reference data and technical measures in relation to arrangements to be made by the European Securities and Markets Authority and competent authorities A systematic internaliser within the meaning of Article L. 533-32 of the Monetary and Financial Code shall inform the AMF when it acts as a systematic internaliser for one of the categories of financial instruments mentioned in paragraph 1 of Articles 14 and 18 of Regulation (EU) No. 600/2014 of 15 May 2014 and when it ceases to act as a systematic internaliser for this category. A systematic internaliser may, in accordance with paragraph 2 of Article 18 of Regulation (EU) No 600/2014, be waived from pre-trade disclosure requirements in the cases described in paragraph 1 of Article 9 of said Regulation. The AMF may authorise systematic internalisers to defer publication of transactions in the financial instruments referred to in Article 21, paragraph 1 of Regulation (EU) No 600/2014 of 15 May 2014 in the cases described in paragraph 4 of said Article. For the application of this Title: The term "asset management company" shall mean a French asset management company; The term "management company" shall mean a company established in another Member State of the European Union; The term "manager" shall mean a manager established in a third country. I. - This Title is applicable: To asset management companies managing AIFs whose assets exceed the thresholds set out in Article R. 532-12-1 of the Monetary and Financial Code; To asset management companies managing the "Other AIFs" referred to in Article L. 214-24, III, 1 of the Monetary and Financial Code; To asset management companies or legal entities managing AIFs whose assets are below the thresholds set out in Article R. 532-12-1 of the Monetary and Financial Code or the "Other AIFs" referred to in Article L. 214-24, III, 2 and 3 of the Monetary and Financial Code or, in the case referred to in the last paragraph of the same Article L. 214-24, III, when these asset management companies or legal entities have chosen to submit these AIFs or "Other AIFs" to the present title. II. - Unless otherwise provided, asset management companies authorised under Directive 2009/65/EC of the European Parliament and Council of 13 July 2009 and authorised under Directive 2011/61/EU of the European Parliament and Council of 8 June 2011 must apply Titles Ib and Ia of the present Book cumulatively. III. - An asset management company may apply for authorisation to provide investment services comprising the reception and transmission of orders on behalf of a third party, portfolio management or investment advice referred to in 1, 4 and 5 of Article L. 321-1 of the Monetary and Financial Code. IV. - When an asset management company is authorised to provide one or more of the investment services referred to in III or when it markets units or shares of AIFs or UCITS in France in accordance with Article 421-26 and Article 411-129, to perform these activities it shall comply with the provisions of this Title as well as the provisions applicable to investment services providers contained in Title I. V. - When an asset management company markets financial instruments in France in accordance with Article L. 533-24-1 of the Monetary and Financial Code, it shall comply with section 2 of Chapter III of Title I. VI. For the purposes of applying the present title, references to Member States of the European Union and to the European Union must be understood to include States parties to the Agreement on the European Economic Area. Commission Implementing Regulation (EU) No 447/2013 of 15 May 2013 establishing the procedure for AIFMs which choose to opt in under Directive 2011/61/EU of the European Parliament and of the Council Sub-section 1 - Authorisation The authorisation of asset management companies referred to in Article L. 532-9 of the Monetary and Financial Code requires submission to the AMF of an application specifying the scope of the authorisation, together with a file complying with the model provided for in Article R. 532-10 of the said Code. The application file must contain the following information: Information on the persons who effectively manage the activities of the asset management company; Information on the identity of the shareholders or members, either direct or indirect, of the asset management company who have qualifying holdings, and the amounts of such holdings; A programme of operations for each of the services that the asset management company intends to provide, specifying the conditions in which it expects to provide those services and indicating the type of transactions envisaged and its organisational structure. This programme of operations is completed, as appropriate, by any additional information corresponding to the assets used by the asset management company; Information about remuneration policies and practices; Information on the terms it has defined for delegating or sub-delegating its asset management company functions to third parties; Information about each AIF it manages or intends to manage; The rules or instruments of incorporation of each AIF it intends to manage; Information on the arrangements made for the appointment of the depositary for each AIF it intends to manage; All or any addition information provided for in the third paragraph of Article L. 214-24-19 of the Monetary and Financial Code for each AIF it manages or intends to manage. If the asset management company is already authorised by the AMF under Directive 2009/65/ CE of the European Parliament and Council of 13 July 2009, it is not required to provide the AMF again with the information or documents it already supplied to it in its authorisation application under the said directive, provided that this information and these documents are up to date. The AMF shall issue an acknowledgement of receipt when it receives this file. In deciding whether to grant authorisation to an asset management company, the AMF shall review the items in the file referred to in Article 316-3, along with the items set out in Chapter II of this Title. The AMF may require the applicant to produce any additional information it needs to make its decision. It may restrict the scope of the authorisation, notably relating to the investment strategies of the AIFs the applicant shall be authorised to manage. The AMF rules on the authorisation application within a period of three months as of submission of the full file. It may extend this period by up to an additional three months if it deems necessary on account of the specific circumstances of the case at hand and after informing the applicant to this effect. For the purposes of the present article, an application is deemed to be complete when the applicant's file contains at least the information referred to in points 1 to 4 and 6 of Article 316-3. The applicant may commence its AIF management activity as soon as it receives its authorisation, but no earlier than one month after submitting all the missing information referred to in points 5 and 7 to 9 of Article 316-3. The procedure and the terms and conditions of authorisation are set out in an AMF instruction. The AMF informs the European Authority on a quarterly basis of the authorisations it has granted under the terms of the present Chapter. Any changes to the information contained in the authorisation file of the asset management company shall require, as applicable, a declaration, a notification or an application for prior approval to be made to the AMF. On receiving the declaration, notification or application for prior approval from the asset management company, the AMF shall issue a receipt. Pursuant to Article L. 532-9-1, II of the Monetary and Financial Code, when the asset management company submits an application for prior approval of a material change to the information contained in its authorisation file, the AMF shall have one month to inform it of its refusal or of any restrictions placed upon its application. The AMF may, if the particular circumstances of the case at hand so justify, inform the asset management company of an extension of this deadline by a period of as much as one month. The changes are implemented after the one-month assessment period as extended, if appropriate. Sub-section 2 - Withdrawal of authorisation and deregistration Except in cases where the company requests withdrawal, the AMF, whenever it envisages withdrawing an asset management company's authorisation pursuant to Article L. 532-10 of the Monetary and Financial Code, shall so inform the company, specifying the reasons for which such decision is envisaged. The company shall have one month from receipt of such notification to submit any observations it may have. When the asset management company requests the AMF to withdraw its authorisation, the company must comply with 1 to 3 and the last paragraph of Article L. 532-10 of the Monetary and Financial Code. When the AMF decides of its own accord to withdraw an authorisation, the company concerned shall be notified of the AMF's decision by registered letter with acknowledgement of receipt. The AMF shall inform the public of the withdrawal by inserting notices in newspapers or other publications of its choosing. This decision shall specify the timetable and method for implementing the withdrawal. During this period: a) The company shall be put under the supervision of an administrator appointed by the AMF on the basis of his or her skills. The administrator shall be bound by professional secrecy rules. The administrator appointment decision shall specify the terms of their monthly compensation, allowing, in particular, for the nature and importance of the work and the position of the appointed administrator. If he manages another company, said company may not acquire the clientele directly or indirectly; b) The administrator shall choose another asset management company to manage the collective investments. For employee investment undertakings, this choice shall be subject to ratification by the supervisory board of each fund. If the administrator does not find an asset management company, he shall invite the custodians to enter into proceedings for liquidation of the collective investments; c) The company may make only such transactions as are strictly necessary to protect the interests of the unitholders or shareholders of the managed collective investments and its clients; d) The company shall inform the custodians and unitholders or shareholders of the managed collective investments of the withdrawal of authorisation, as well as the custody account-keepers of the individual portfolios under discretionary management and its clients; e) The company shall ask its clients in writing to request transfer of their accounts to another investment service provider, or to request liquidation of their portfolios, or to manage their portfolios themselves; f) The company shall update its website notably by removing all references to its capacity of asset management company; g) On the day the withdrawal of authorisation comes into effect, the company shall change its company name and its corporate object. The AMF informs the European Securities and Markets Authority on a quarterly basis of the authorisations it has withdrawn under the terms of the present article. When the AMF pronounces a deregistration pursuant to Article L. 532-12 of the Monetary and Financial Code, the AMF shall notify the company of its decision with the conditions stipulated in Article 316-7. The AMF shall inform the public by inserting notices in newspapers or other publications of its choosing. Sub-section 3 - Resignations When it is considering demanding the resignation of a company from its capacity as the asset management company of an AIF pursuant to Article L. 621-13-4 of the Monetary and Financial Code, the AMF informs the company to this effect, specifying the reasons for which such decision is envisaged. The company shall have one month from receipt of such notification to submit any observations it may have. When it decides to demand the resignation of a company from its capacity as the asset management company of an AIF, the AMF shall inform the company of its decision by registered letter with acknowledgement of receipt. The AMF shall inform the public of its decision by inserting notices in newspapers or other publications of its choosing. The decision shall specify the terms and implementation timeframe for the resignation. a) The company shall be put under the supervision of an administrator appointed by the AMF on the basis of his or her skills. The administrator shall be bound by professional secrecy rules. The administrator appointment decision shall specify the terms of their monthly compensation, allowing, in particular, for the nature and importance of the work and the position of the appointed administrator. If he manages another company, said company may not take over management of the relevant AIF directly or indirectly; b) The administrator shall choose another asset management company to manage the relevant AIF. If the administrator does not find an asset management company, he shall invite the custodian to enter into proceedings for liquidation of the relevant AIF; c) The company may make only such transactions as are strictly necessary to protect the interests of the unitholders or shareholders of the relevant AIF; d) The company shall inform the custodian and the unitholders or shareholders of the relevant AIF of its resignation. The units or shares in the AIF in question must no longer be marketed in France or, as applicable, in the other Member States of the European Union. Where necessary, the AMF informs the competent authorities of the host Member States of the asset management company of its decision immediately. An asset management company seeking to create and manage an AIF or provide investment services in another State of the European Union, under the freedom to provide services or under the right of establishment, shall notify the AMF of its plans in accordance with Articles R. 532-25-1 et R. 532-30 of the Monetary and Financial Code. Commission Implementing Regulation (EU) No 448/2013 of 15 May 2013 establishing a procedure for determining the Member State of reference of a non-EU AIFM pursuant to Directive 2011/61/EU of the European Parliament and of the Council The date of entry into force of the present Section is set in accordance with the provisions of the European Commission delegated act provided for in Paragraph 6 of Article 67 of Directive 2011/61/EU of the European Parliament and Council of 8 June 2011. Without prejudice to Article L. 532-9 of the Monetary and Financial Code, no authorisation shall be granted unless the following additional conditions are fulfilled: The manager appoints France as its reference Member States in accordance with the criteria set out in Article R. 532-31 of the same Code and the appointment is backed up by the disclosure of its marketing strategy; The manager has appointed a legal representative established in France; The legal representative is, with the manager, the contact point of the manager for holders of units or shares in the AIFs in question, for the European Securities and Markets Authority and for the AMF and the competent authorities concerning the activities for which the manager is authorised in the European Union and shall be equipped to perform its compliance function by virtue of the legislative and regulatory provisions applicable to asset management companies; There are appropriate cooperation arrangements in place between France, the competent authorities of the Member State of reference of the European Union AIFs concerned and the supervisory authorities of the third country where the manager is established in order to ensure an efficient exchange of information that allows the AMF and the competent authorities to carry out the duties incumbent upon them; The third country where the manager is established is not listed as a Non-Cooperative Country and Territory by FATF; The third country where the manager is established has signed an agreement with France, which fully complies with the standards laid down in Article 26 of the OECD Model Tax Convention on Income and on Capital and ensures an effective exchange of information in tax matters, including any multilateral tax agreements; The effective exercise by the AMF of its supervisory functions is neither prevented by the laws, regulations or administrative provisions of the third country governing the manager, nor by limitations in the supervisory and investigatory powers of that third country's supervisory authorities. The authorisation of the AIF manager shall be granted in accordance with Article L. 532-36 of the Monetary and Financial Code, subject to the following criteria: The information referred to in Article L. 532-9 of the same code is supplemented by: A justification by the manager of its assessment regarding the Member State of reference in accordance with the criteria set out in Article R. 532-31 of the same code with information on the marketing strategy; A list of the legislative and regulatory provisions applicable to asset management companies of AIFs for which compliance by the manager is impossible, as compliance by the manager with those provisions is incompatible with compliance with a mandatory provision in the law to which the manager established in a third country or the third-country AIF marketed in the Union is subject; Written evidence based on the regulatory technical standards developed by ESMA that the relevant third-country law in question provides for a rule equivalent to the provisions for which compliance is impossible, which has the same regulatory purpose and offers the same level of protection to the investors of the relevant AIFs and that the manager complies with that equivalent rule. Such written evidence shall be supported by a legal opinion on the existence of the relevant incompatible mandatory provision in the law of the third country and including a description of the regulatory purpose and the nature of the investor protection pursued by it; The name of the legal representative of the manager and the place where it is established; The information referred to in Article 316-3, Points 1 to 6 may be limited to the EU AIFs the manager intends to manage and to those AIFs it manages and intends to market in the European Union with a passport; The second paragraph of Article L. 532-9, II of the Monetary and Financial Code is without prejudice to Article L. 532- 31 of the same code; Point 1 of Article L. 532-9, II of the Monetary and Financial Code is not applicable; The fifth paragraph of Article 316-4 shall be understood as including a reference to the "information referred to in Article L. 532-37 of the Monetary and Financial Code". Articles 12 to 15 of the Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision The asset management company shall have its registered office in France. It may be incorporated in any form, subject to a review of the compatibility of its instruments of incorporation with the laws and regulations applicable to it, and provided that its accounts are subject to a statutory audit. I. - The share capital of asset management companies shall be equal to a minimum of EUR 125,000 and must be fully paid in cash at least to this minimum amount. II. - When authorisation is granted and in subsequent financial years, the asset management company must be able to prove at any time that its level of own funds is at least equal to the higher of the two amounts referred to in Points 1 and 2 below: EUR 125,000 plus an amount equal to 0.02 % of the amount by which the assets under management by the asset management company exceeds EUR 250 million. The total own funds requirement shall not exceed EUR 10 million. The assets included in the calculation of the additional own funds requirement referred to in the third paragraph are: French or foreign AIFs in corporate form that have globally delegated management of their portfolio to the asset management company; French or foreign AIFs in fund form managed by the asset management company, including portfolios for which it has delegated management but excluding portfolios that it manages on a delegated basis. Up to 50% of the additional own funds requirement may be met by a guarantee given by a credit institution or insurance undertaking having its registered office in a State that is a party to the European Economic Area agreement, or in another State, provided the guarantor is subject to prudential rules considered by the AMF to be equivalent to those applicable to credit institutions and insurance undertakings having their registered offices in States that are parties to the European Economic Area agreement. One-quarter of general operating expenses for the previous financial year calculated in accordance with Articles 34 ter to 34 quinter of Commission Regulation (EU) No 241/2014 of 7 January 2014. III. - The own funds requirement at the time of authorisation shall be calculated on the basis of forecast data. For subsequent years, the amount of general operating expenses and the total value of portfolio assets used to determine the own funds requirement shall be calculated on the basis of the most recent of the following asset management company documents: financial statements for the previous financial year, interim statement of financial position certified by the statutory auditor or the data sheet referred to in Article 318-37. IV. - To cover any potential professional liability risks resulting from AIF management activities, the asset management company must: Either have additional own funds of an amount sufficient to cover potential liability risks arising from professional negligence; Or hold a professional indemnity insurance against liability arising from professional negligence which is appropriate to the risks covered. V. - When the asset management company is also authorised by the AMF by the terms of Directive 2009/65/EC of the European Parliament and Council of 13 July 2009, it is not subject to points I, II and III the present Article. I. The asset management company's own funds, including any additional own funds, must be invested in liquid assets or assets that can easily be converted into cash in the short term and that do not include speculative positions. II. However, if own funds exceed 130 % at least of the regulatory own funds mentioned in Article 317-2, the excess portion of this amount may be invested in assets that do not meet the requirements of I, provided that these assets do not create a material risk for the company's regulatory own funds. The asset management company shall disclose the identities of legal entities or individuals who are direct or indirect shareholders with qualifying holdings as well as the amounts of their holdings. The AMF shall assess the quality of the company's shareholders having regard to the need for sound and prudent management and proper performance of its own supervisory responsibilities. It shall make the same assessment of partners and members in an economic interest grouping. The asset management company shall be effectively directed by at least two persons of sufficiently good repute and sufficient experience for their duties, so as to ensure sound and prudent management. The directors must, among other things, be sufficiently experienced as regards the investment strategies pursued by the AIFs managed by the asset management company. At least one of these two persons must be a company officer with the power to represent the company in its dealings with third parties. The other person may be the chairman of the board of directors or a person specifically empowered by the company's governing bodies or instruments of incorporation to direct the company and determine its policies. The persons effectively managing the asset management company as defined in Article 317-5 undertake to inform the AMF promptly of any modification of their situation as declared at the time of their appointment. The asset management company shall have a programme of operations in accordance with Chapter III. The programme of operations also contains information on the remuneration policies and practices implemented pursuant to Article L. 533-22-2 of the Monetary and Financial Code, and information concerning the AIFs the asset management company intends to manage: Information about the investment strategies, including the types of underlying funds if the AIF is a fund of funds, and the manager's policy as regards the use of leverage, and the risk profiles and other characteristics of the AIFs it manages or intends to manage, including information about the Member States or third countries in which such AIFs are established or are expected to be established; Information on where the master AIF is established if the AIF is a feeder AIF; The rules or instruments of incorporation of each AIF the asset management company intends to manage; Information on the arrangements made for the appointment of the depositary for each AIF in question; For each AIF the asset management company manages or intends to manage, any additional information disclosed to investors pursuant to the third paragraph of Article L. 214-24-19 of the Monetary and Financial Code The asset management company may also hold equity interests in companies set up for purposes that represent an extension of its own activities. These holdings must be compatible with the provisions the asset management company is required to implement to detect and prevent or manage any conflicts of interest likely to arise from these holdings. The AMF shall be notified of any transaction that enables a person acting alone or in concert with other persons, within the meaning of Article L. 233-10 of the Commercial Code, to acquire, increase or decrease or cease owning, directly or indirectly, a qualifying holding in an asset management company. The notice must be given to the AMF by the person or persons concerned before the transaction is executed, if one of the following conditions is met: The capital or voting rights held by the person(s) exceed or fall below one-tenth, one-fifth, one-third or one-half of the capital or voting rights; The asset management company becomes or stops being a subsidiary of the person(s) concerned; The person or persons gain or lose significant influence over management of the management company as a result of the transaction. For the purposes of this Chapter: A “qualifying holding” means, pursuant to sub-paragraph h of Article 4(1) of Directive 2011/61/EU of 8 June 2011, “a direct or indirect holding in a management company which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of the management company in which that holding subsists”; Voting rights are calculated in accordance with the provisions of Article L. 233-4, points I and IV of Article L. 233-7 and Article L. 233-9 of the Commercial Code; The capital holding is calculated by adding up, as applicable, the direct holding and any indirect holdings in the capital of the asset management company. Indirect holdings are calculated by multiplying together the fractions held in the capital of each intermediate entity and in the capital of the asset management company; The fraction of capital or voting rights held by investment firms or credit institutions as a result of underwriting or guaranteed placement of financial instruments, within the meaning of 6-1 or 6-2 of Article D. 321-1 of the Monetary and Financial Code, shall not be counted, as long as these rights are not exercised or used in any other way to influence the issuer's management and provided that they are sold within one year of acquisition; In the case of an indirect holding, any person likely to acquire, sell or lose a qualifying holding must notify the AMF of this. However, without prejudice to the obligations of the direct holder, the final holder may make notifications for and on behalf of the entities under its control, provided it includes the relevant information on these entities. Transactions to acquire or increase qualifying holdings are subject to prior authorisation by the AMF under the following conditions: within two trading days of receipt of the notice and all the documents required, the AMF shall provide the applicant with written acknowledgement of receipt. The AMF shall have up to sixty trading days, starting from the date of the written acknowledgement of receipt of the notice, in which to assess the transaction. The written acknowledgement of receipt shall specify the expiry date of the assessment period. During the assessment period and by the fiftieth trading day thereof at the latest, the AMF may request further information to complete the assessment. This request shall be made in writing and shall specify additional necessary information. Within two trading days of receipt of the further information, the AMF shall send the applicant a written acknowledgement of receipt. The assessment period shall be suspended from the date of the AMF's request for further information until the receipt of the applicant's response to this request. The suspension shall not last more than twenty trading days. The AMF may make further requests for more information or clarifications, but these requests shall not suspend the assessment period. The AMF may extend the suspension mentioned in the preceding paragraph to thirty trading days, if the applicant: a) is established outside the European Union or is governed by non-European Union regulations; b) or is a person who is not subject to monitoring under the terms of European Directives 2013/36/EU, 2009/65/EC, 2009/138/EC or 2014/65/EU. if the AMF decides to object to a planned acquisition after the assessment, it shall give written notice of its decision to the applicant within two trading days and before the end of the assessment period. The AMF shall give the grounds for its decision. The portfolio asset management company shall also be notified. At the request of the applicant, the AMF shall publish the grounds for its decision on the website mentioned in Article R. 532-15-2 of the Monetary and Financial Code. if the AMF has not made a written objection to the planned acquisition by the end of the assessment period, the acquisition shall be deemed to be approved. the AMF may set a deadline for completing the planned acquisition and may extend this deadline. if the AMF receives several notifications under the terms of Article L. 532-9-1 of the Monetary and Financial Code concerning the same asset management company, it shall examine them jointly in such a way as to ensure equal treatment of the applicants. Notwithstanding the preceding provisions, the AMF shall be notified only of transactions that occur between companies directly or indirectly owned and controlled by the same company and that change the structure of ownership among the existing shareholders holding, prior to the transaction, a qualifying participating interest in the portfolio asset management company, unless such transactions result in the transfer of control or ownership of some or all of the above-mentioned rights to one or more persons that are not subject to the laws of a State party to the European Economic Area agreement. When the number or distribution of voting rights is restricted in relation to the number or distribution of the relevant shares or units under the provisions of legislation or the instruments of incorporation, the percentages stipulated in this Chapter and in Article 317-11 shall be calculated and implemented in terms of shares or units respectively. Transactions involving the sale or decrease qualifying holdings in an asset management company mentioned in Article 317-10 shall entail a re-examination of the authorisation in view of the need to ensure sound and prudent management. The AMF may ask asset management companies for the identity of partners or shareholders who report holdings of less than one twentieth, but more than 0.5%, or the relevant figure set by the instruments of incorporation for the purposes of Article L. 233-7 of the Commercial Code. The asset management company shall use, at all times, adequate and appropriate human and technical resources that are necessary for the proper management of AIFs. Given the nature of the AIFs it manages, it shall have sound administrative and accounting procedures, control and safeguard arrangements for electronic data processing and adequate internal control mechanisms including, in particular, rules for personal transactions by its employees or for the holding or management of investments in order to invest on its own account and ensuring, at least, that each transaction involving the AIFs may be reconstructed according to its origin, the parties to it, its nature, and the time and place at which it was effected and that the assets of the AIFs managed by the AIFM are invested in accordance with the AIF rules or instruments of incorporation and the legal provisions in force. The annual financial statements of the asset management company shall be certified by a statutory auditor. Within six months of the end of the financial year, asset management companies shall file copies of their balance sheet, income statement and the notes to the financial statements, along with their annual management reports and notes, the statutory auditors' general and special reports with the AMF. If applicable, the companies shall also produce consolidated financial statements. Articles 61 and 62 of the Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision Asset management companies shall apply the compliance policy provided for in Article 61 of Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 as well as the provisions relating to the responsibilities of the management body referred to in Article 60 of the same Regulation, to the professional obligations referred to in II of Article L. 621-15 of the Monetary and Financial Code that do not fall under the scope of application of the Articles of that Regulation. The compliance officer referred to in Article 61, 3, b of Commission Delegated Regulation (EU) n° 231/2013 of 19 December 2012 shall hold a professional licence issued on the terms defined in Section 8 of this Chapter. In application of Article L. 621-8-4 of the Monetary and Financial Code, the effective managers within the meaning of Article L. 532-9, II, 4 of said Code shall immediately inform the AMF of any incidents that could lead to a loss or gain for the asset management company, a cost linked to its civil or criminal liability, an administrative sanction or reputational damage and resulting from non-compliance with Articles 57 to 59 of Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012, of an amount that exceeds 5% of its regulatory capital. Under the same conditions, they shall inform the AMF of any event preventing the asset management company from meeting the requirements of its authorisation. They shall provide the AMF with an incident report indicating the nature of the incident, the measures implemented after it happened and the initiatives taken to prevent similar incidents from taking place in the future. I.- The asset management company shall ensure that natural persons acting on its behalf have the minimum qualification as well as a sufficient level of knowledge. a) Asset manager within the meaning of Article 318-8; b) Compliance and internal control officer within the meaning of Article 318-21. III. - The asset management company shall not carry out the verification provided for in II with regard to persons employed at 1st July 2010. Persons having passed one of the examinations referred to in Article 38-9, II, 3° shall be deemed to have the minimum knowledge required to perform their duties. IV. - To conduct the verification referred to in II, the asset management company shall have six months from the date on which the employee starts to perform one of the above functions. However, when the employee has been taken on under a work/study contract, as provided in Articles L. 6222-1 and L. 6325-1 of the Labour Code, the asset management company may choose not to perform any such verification. If it decides to hire the employee when his or her training period finishes, the asset management company shall ensure that he or she has the minimum qualification as well as a sufficient level of knowledge, as referred to in I, at the latest by the end of the contract training period. The asset management company shall ensure that any employee whose minimum knowledge has not yet been verified is appropriately supervised. An asset manager is any person authorised to take investment decisions within the framework of the management of one or several AIFs. I - Portfolio asset management companies may entrust to an external organisation which can provide evidence of its ability to organise examinations, the verification of the professional knowledge of the physical persons under their authority or acting on their behalf who carry out one of the functions referred to in Article 318-7 (II); the Financial Skills Certification Board mentioned in Article 312-5 shall also issue opinions at the request of the AMF on the certification of organisations that can prove they have the capacity to organise examinations. determines the content of the minimum knowledge to be acquired by natural persons acting under the authority or on behalf of an asset management company and performing one of the functions referred to Article 318-7 (II). It shall publish that content: defines the content of the modules completing the minimum knowledge mentioned in 1°. It publishes the content of these modules; determines and verifies the arrangements for the examinations and the complementary modules that validate acquisition of the knowledge; certifies organisations within four months of the filing of applications. This deadline shall be extended as necessary until requests for further information are met. The organisation shall provide the AMF with a report on the anniversary of the date when it was certified, and then every three years; the AMF shall charge an application fee when applications for certification and reports are filed. The asset management company shall establish and maintain operational an effective and transparent procedure for reasonable and prompt handling of complaints received from all holders of units or shares in AIFs, when no investment service is provided to them upon subscription. Holders of units or shares may file complaints free of charge with the asset management company. The asset management company shall respond to the complaint within a maximum of two months as of the date of receipt of the said complaint, except in duly justified special circumstances. They shall implement a system enabling fair and consistent handling of complaints from the holders of units or shares. This system shall be allocated the necessary resources and expertise. It shall record each complaint and the measures taken to handle it. It shall also implement a complaint monitoring system enabling it, among other things, to identify problems and implement appropriate corrective measures. Information on the complaint handling procedure shall be made available free of charge to the holders of units or shares. The complaint handling procedure shall be proportionate to the size and structure of the asset management company. The asset management company shall establish appropriate procedures and arrangements to ensure that it deals properly with complaints from AIF unit or shareholders and that there are no restrictions on these persons exercising their rights if they reside in another European Union Member State. These measures shall allow AIF unit or shareholders to send a complaint in the official language or one of the official languages of the Member State in which the AIF is marketed and to receive a response in the same language. The asset management company shall also establish appropriate procedures and arrangements to supply information, at the request of the public. These provisions shall apply if no investment service is provided upon subscription. Article 63 of the Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision This Section is applicable to management of French AIFs by asset management companies except, for branches established in other European Union Member States, for AIFs they manage in that Member State. It is also applicable to branches established in France by management companies or managers. I. - The asset management company shall take all reasonable steps to identify conflicts of interest that arise in the course of managing AIFs between: The asset management company, including its managers, employees or any person directly or indirectly linked to the asset management company by control, and the AIF managed by the asset management company or the unit or shareholders in that AIF; The AIF or the unit or shareholders in that AIF, and another AIF or the unit or shareholders in that other AIF; The AIF or the unit or shareholders in that AIF, and another client of the asset management company; The AIF or the unit or shareholders in that AIF, and a UCITS managed by the asset management company or the unit or shareholders in that UCITS; or Two clients of the asset management company. The asset management company shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to identify, prevent, manage and monitor conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their unit or shareholders. The asset management company shall segregate, within its own operating environment, tasks and responsibilities which may be regarded as incompatible with each other or which may potentially generate systematic conflicts of interest. It shall assess whether their operating conditions may involve any other material conflicts of interest and disclose them to the unit or shareholders of the AIFs. II. - Where organisational arrangements made by an asset management company to identify, prevent, manage and monitor conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of unit or shareholders will be prevented, the asset management company shall clearly disclose the general nature or sources of conflicts of interest to such holders before undertaking business on their behalf, and develop appropriate policies and procedures. III. - Where the asset management company, on behalf of an AIF, uses the services of a prime broker, the terms shall be set out in a written contract. In particular any possibility of transfer and reuse of AIF assets shall be provided for in that contract and shall comply with the AIF rules or instruments of incorporation. The contract shall provide that the depositary be informed of the contract. The asset management company shall exercise due skill, care and diligence in the selection and appointment of prime brokers with whom a contract is to be concluded. When collective investment scheme or investment funds managed by the asset management company or a related company are acquired or subscribed on behalf of an AIF, the investor information document of that AIF must make provision for such a possibility. Paragraph 1 - General provisions The compliance and internal control officer must hold a professional licence issued by the AMF, pursuant to Article 318-29. The persons referred to in Article 318-56 shall fulfill the function of compliance and internal control officer. A natural person may perform the function of compliance and internal control officer, on a probationary or temporary basis, without holding the required professional licence, for a maximum period of six months, that can be renewable once. The function of compliance and internal control officer may only be performed on a probationary or temporary basis with the prior consent of the AMF. Issuance of a professional license shall require the applicant to compile an application for authorisation, which shall be submitted to the AMF. The application for authorisation shall be kept on file by the AMF for ten years after the licensee has ceased to perform the functions that gave rise to the issuance of the professional licence. The person shall be deemed to have permanently ceased to perform the activity that gave rise to the issuance of the license when the interruption exceeds twelve months, except in exceptional cases as assesses by the AMF. When a person definitively ceases to perform the function for which a professional licence was issued, the licence shall be withdrawn. This withdrawal is performed by the AMF. The asset management company on behalf of which the licensee is acting informs the AMF promptly when a person definitively ceases the activity as referred to in the previous paragraph. Whenever an asset management company takes disciplinary measures against a person holding a professional licence because of a breach of their professional obligations, it shall notify the AMF to this effect within one month. It is kept informed of the appointment of the compliance and internal control officer. The information in the register of professional licences shall be kept on file for ten years after the professional licence has been withdrawn. Paragraph 2 - Compliance and internal control officer professional licence issuance The AMF shall issue compliance and internal control officer professional licenses to the persons performing such functions. For this purpose, the AMF shall organise a professional examination under the terms referred to in Articles 318-33 to 318-35. However, where asset management companies appoint one of their effective managers within the meaning of Article L. 532-9, II, 4° of the Monetary and Financial Code to the function of compliance and internal officer, that person shall hold the relevant professional license. He or she shall not be required to take the examination provided for in the first paragraph. That the relevant natural person is fit and proper, that he is familiar with the professional requirements and capable of performing the functions of compliance and internal control officer. That pursuant to Article 318-7, II, the asset management company has conducted an internal verification or an examination as provided for in Article 318-9, II, 3 to ensure that the person in question has the minimum knowledge referred to in Article 318-9, II, 1. That the asset management company complies with Article 318-4. The AMF may waive the examination requirement for a person who has performed comparable functions with another asset management company having equivalent business activities and organisational structures, provided that person has already passed the examination and that the asset management company planning to appoint him or her has already presented a candidate who passed the examination. If an asset management company requires compliance and internal control officer professional licenses to be issued to several persons, the AMF shall ensure that the number of license holders is proportionate to the nature and risks of the asset management company's business activities, size and organisational structure. Asset management companies shall provide precise written definitions of the attributions of each professional license holder. The examination shall consist of an interview of the professional license applicant by a jury. The applicants shall be presented by the asset management companies on whose behalf they are to perform their functions. The AMF shall hold the examinations at least twice a year. It shall decide who sits on the jury, set the examination dates and determine the amount of examination fees. This information shall be made known to asset management companies. The AMF shall collect the examination fees from the asset management companies presenting applicants. A serving compliance officer, chair; A person holding an operational function in an asset management company; A member of the AMF staff. If an applicant considers that a member of the jury has a conflict of interest with regard to him, he or she may ask the AMF to be examined by another jury. If the jury deems that the conditions referred to in Article 318-30 have been met, it shall propose that the AMF issue a professional license. However, if the jury considers that the applicant has the necessary qualities to perform the function of compliance and internal control officer, but that the asset management company does not allow him proper independence or does not provide him with adequate resources, the jury may propose that issuance of a professional license be subject to the condition that the asset management company remedies the situation and notifies the AMF of the measures taken to this effect. If outsourcing of the compliance and internal control officer function is being considered, the jury may be asked for its opinion. Within four and a half months of the close of the financial year, asset management companies shall send the AMF the information specified on a data sheet. Pursuant to Article L. 621-8-4 of the Monetary and Financial Code, asset management companies shall provide the AMF, at the latest one calendar month after the end of each quarter of the calendar year: information relating to compensations paid by the asset management company to shareholders or unitholders of the AIFs that it manages, including by delegation, and to clients to which the asset management company provides one or more investment or ancillary services. The asset management company shall also inform the AMF if it has not paid any compensation during the period covered; Information relating to the non-compliance, by the asset management company, with investment and asset structure rules laid down by legal and regulatory provisions and the investor disclosure documents for the AIFs that it manages, including by delegation, with the exception of cases of non-compliance with these rules occurring beyond the control of the asset management company and not resulting from the maturity of a financial instrument held by the AIF. This article shall not apply to asset management companies that manage an AIF by delegation when the asset management company, the investment management company or the manager of said AIF is already subject to the disclosure requirements under this Article. Asset management companies shall functionally and hierarchically separate the functions of risk management from the operating units, including from the functions of portfolio management. The functional and hierarchical separation of the functions of risk management, pursuant to Article 318-38, shall be examined in accordance with the principle of proportionality, on the understanding that the asset management company shall, in any event, be able to demonstrate that specific safeguards against conflicts of interest allow for the independent performance of risk management activities and that the risk management process satisfies the requirements of this Article and is consistently effective. The asset management company shall implement adequate risk management systems in order to identify, measure, manage and monitor appropriately all risks relevant to each AIF investment strategy and to which each AIF is or may be exposed. In particular, the asset management company shall not make exclusive or mechanical use of credit ratings issued by credit ratings agencies within the meaning of Article 3, Paragraph 1, point b of Regulation (EC) n° 1060/2009 of the European Parliament and Council of 16 September 2009 on credit ratings agencies, to assess the creditworthiness of AIF assets. The asset management company examines the risk management systems, at appropriate intervals and at least once a year, and adapts them if necessary. Asset management companies shall at least: Implement an appropriate, documented and regularly updated due diligence process when investing on behalf of the AIF, according to the investment strategy, objectives and risk profile of the AIF; Ensure that the risks associated with each investment position of the AIF and their overall effect on the AIF's portfolio can be properly identified, measured, managed and monitored on an ongoing basis, including through the use of appropriate stress testing procedures; Ensure that the risk profile of the AIF shall correspond to the size, portfolio structure and investment strategies and objectives of the AIF as laid down in the AIF rules or instruments of incorporation, prospectus and offering documents. The asset management company shall set a maximum level of leverage which they may employ on behalf of each AIF they manage as well as the extent of the right to reuse collateral or any guarantee that could be granted under the leveraging arrangement, taking into account, inter alia: The type of the AIF; The investment strategy of the AIF; The sources of leverage of the AIF; Any other interlinkage or relevant relationships with other financial services institutions, which could pose systemic risk; The need to limit the exposure to any single counterparty; The extent to which the leverage is collateralised; The asset-liability ratio; The scale, nature and extent of the activity of the asset management company on the markets concerned. Asset management companies shall, for each AIF that they manage which is not an unleveraged closed-ended AIF, employ an appropriate liquidity management system and adopt procedures which enable them to monitor the liquidity risk of the AIF and to ensure that the liquidity profile of the investments of the AIF complies with its underlying obligations. Asset management companies shall regularly conduct stress tests, under normal and exceptional liquidity conditions, which enable them to assess the liquidity risk of the AIFs and monitor the liquidity risk of the AIFs accordingly. Asset management companies shall ensure that, for each AIF that they manage, the investment strategy, liquidity profile and redemption policy are consistent. Asset management companies shall, for each AIF they manage, send the AMF and update at least once a year, information providing a true image of the types of financial contracts, underlying risks, quantitative limits and methods chosen to estimate the risks related to operations on financial contracts. The AMF may check that this information is regular and exhaustive and ask for explanations relating to it. Sub-section 1 - Compliance and internal control systems The compliance and internal control system includes monitoring described in Article 318-50, internal audits and consulting and assistance assignments. Monitoring includes the compliance function referred to in of Article 61, 2, a of Commission Delegated Regulation (EU) n° 231/2013 of 19 December 2012, the control system referred to in Article 57, 6 of the same Regulation and the control system for compliance with the professional obligations referred to in Article L. 621-15, II of the Monetary and Financial Code and the risk control system provided for in Section 11 of this Chapter. First-level control shall be exercised by persons in operational functions. Monitoring shall be conducted through second-level controls to ensure proper execution of first-level controls. Monitoring shall be performed exclusively, subject to the provisions of Article 318-55, by staff appointed solely to that function. Sub-section 2 - Compliance and internal control officers Compliance and internal control officers shall be responsible for the compliance function referred to in Article 61, 2 of Commission Delegated Regulation n° 231/2013 of 19 December 2012, for the monitoring referred to in Article 318-50 and for the internal audits referred to in Article 62 of the same Delegated Regulation. If an asset management company establishes a separate and independent internal audit function, that function shall be performed by an internal audit manager who is not the same person as the compliance and continuing monitoring officer. Asset management companies may give responsibility for monitoring, other than compliance monitoring, and responsibility for compliance monitoring to two different people. When the manager carries out the function of compliance and internal control officer, he or she shall also be responsible for internal audit and monitoring, other than compliance monitoring. The following persons shall hold professional licenses: The officer referred to in Article 318-52; The compliance and monitoring officer referred to in Article 318-53; The officer for monitoring, other than compliance monitoring, referred to in Article 318-54 and the compliance officer referred to in the said Article, if the two functions are separate. Employees of asset management companies or employees of other entities in their group may hold professional licenses if the asset management companies present them for the examination. The AMF shall ensure that the number of professional license holders is proportionate to the nature and the risks of the asset management company's business activities, scale and organisational structure. The internal audit officer referred to in Article 318-53 shall not hold a professional license. Asset management companies shall establish a procedure that enables all their employees and all natural persons acting on their behalf to discuss questions they might have about deficiencies they have noted in the actual implementation of compliance obligations with the compliance and internal control officer. If asset management companies outsource the execution of critical operational tasks and functions or tasks and functions that are important for the provision of a service or the conduct of business, they shall take reasonable measures to prevent an undue exacerbation of operating risk. Outsourcing of critical or important operational tasks or functions must not be done in such a way that it materially impairs the quality of internal control and prevents the AMF from verifying that the asset management company complies with all its obligations. Outsourcing to an extent that makes the asset management company into a letter box entity must be deemed to be in violation of the requirements that the asset management company must comply with to obtain and keep its authorisation. Outsourcing shall consist of any agreement, in any form, between an asset management company and a service provider under which the service provider takes over a process, service or activity that otherwise would have been performed by the asset management company itself. I. An operational task or function shall be regarded as critical or important if a defect or failure in its performance would materially impair the asset management company's capacity for continuing compliance with the conditions and obligations of its authorisation or its professional obligations referred to in II of Article L. 621-15 of the Monetary and Financial Code, or its financial performance, or the continuity of its business. II. - Without prejudice to the status of any other task or function, the following tasks or functions shall not be considered as critical or important: The provision to the asset management company of advisory services, and other services which do not form part of the investment services of the firm, including the provision of legal advice, the training of personnel, billing services and the security of the asset management company's premises and personnel; The purchase of standard services, including market information services and the provision of price feeds. I. - Asset management companies that outsource an operational task or function shall remain fully responsible for complying with all their professional obligations referred to in II of Article L. 621-15 of the Monetary and Financial Code and complying, in particular, with the following conditions: Outsourcing must not result in the delegation by senior management of its responsibility. The relationship and obligations of the asset management company towards its clients must not be altered. The conditions or commitments with which the company must comply in order to be authorised must not be undermined. II. - Asset management companies shall exercise due skill, care and diligence when entering into, managing or terminating an outsourcing contract for critical or important operational tasks or functions. In particular, asset management companies must take the necessary steps to ensure that the following conditions are satisfied: The service provider must have the ability, capacity, and any authorisation required to perform the outsourced tasks or functions reliably and professionally. The service provider must carry out the outsourced services effectively. To this end, the asset management company must establish methods for assessing the standard of performance of the service provider. The service provider must properly supervise the carrying out of the outsourced tasks or functions, and adequately manage the risks stemming from outsourcing. Asset management companies must take appropriate action if it appears that the service provider may not be carrying out the functions effectively and in compliance with the professional obligations referred to in II of Article L. 621-15 of the Monetary and Financial Code applying to them. Asset management companies must retain the necessary expertise to supervise the outsourced tasks or functions effectively and manage the risks stemming from outsourcing and must supervise those tasks and manage those risks. The service provider must disclose to the asset management company any development that may have a material impact on its ability to carry out the outsourced tasks or functions effectively and in compliance with the professional obligations referred to in II of Article L. 621-15 of the Monetary and Financial Code applying to them. The procedures for terminating outsourcing contracts at the initiative of either party must ensure the continuity and the quality of the activities carried out. The service provider must cooperate with the AMF in connection with the outsourced tasks or functions. The asset management company, its auditors and the relevant competent authorities must have effective access to data related to the outsourced tasks or functions, as well as to the business premises of the service provider. The service provider must protect any confidential information relating to the asset management company and its clients. The asset management company and the service provider must establish and maintain an effective contingency plan for disaster recovery and periodic testing of backup facilities, where that is necessary having regard to the nature of the outsourced task or function. III. - The respective rights and obligations of asset management companies and service providers shall be clearly defined in a contract. IV. - Where the asset management company and the service provider are members of the same group, the asset management company may, for the purposes of determining how this Article shall apply, take into account the extent to which it controls the service provider or has the ability to influence its actions. V. - Asset management companies must provide the AMF, at its request, all information necessary to enable it to supervise the compliance of the performance of the outsourced tasks or functions with the requirements of this Book. I. - When an asset management company delegates the management of an AIF, the following conditions shall be met: It shall notify the AMF of the delegation before the delegation arrangements become effective; It must be able to justify its entire delegation structure on objective reasons; The delegate must dispose of sufficient resources to perform the respective tasks and the persons who effectively conduct the business of the delegate must be of sufficiently good repute and sufficiently experienced; Where the delegation concerns asset management or risk management, it may be conferred only on a person authorised for the purposes of asset management and subject to supervision within the meaning of and as set forth under Article 78 of the Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 or, if those conditions cannot be met subject to prior approval by the AMF; Where the delegation concerns asset management or risk management of an AIF that is open to professional investors and is conferred upon a third country undertaking, under the conditions specified in point 4°, cooperation between the AMF and the supervisory authority of the undertaking must be ensured; The delegation must not prevent the effectiveness of supervision of the asset management company, and, in particular, must not prevent the asset management company from acting, or the AIF from being managed, in the best interests of its unit or shareholders; The asset management company must be able to demonstrate that the delegate is qualified and capable of undertaking the functions in question, that it was selected with all due care and that the asset management company is in a position to monitor effectively at any time the delegated activity, to give at any time further instructions to the delegate and to withdraw the delegation with immediate effect when this is in the interest of the unit or shareholders of the AIF. The asset management company shall review the services provided by each delegate on an ongoing basis. II. - No delegation of portfolio management or risk management shall be conferred upon: The depositary or a delegate of the depositary; Any other entity whose interests may conflict with those of the asset management company or the unit or shareholders of the AIF, unless such entity has functionally and hierarchically separated the performance of its portfolio management or risk management tasks from its other potentially conflicting tasks, and the potential conflicts of interest are properly identified, managed, monitored and disclosed to the unit and shareholders of the AIF. III. - The liability of the asset management company towards the AIF and its unit or shareholders shall not be affected by the fact that it has delegated functions to a third party, or by any further sub-delegation. The asset management company shall not delegate its functions to the extent that it becomes a letter-box entity. IV. - The delegate may sub-delegate any of the functions delegated to it, provided that the following conditions are met: The delegating asset management company consented prior to the sub-delegation; The delegating asset management company notified the AMF before the sub-delegation arrangements become effective; The conditions set out in Paragraph I are met, on the understanding that all references to the "delegate" are read as references to the "sub-delegate". V. - No sub-delegation of portfolio management or risk management shall be conferred upon entities referred to in Paragraph II. The relevant delegate shall review the services provided by each sub-delegate on an ongoing basis. VI. - Where the sub-delegate further delegates any of the functions delegated to it, the conditions set out in Paragraph 4 shall apply mutatis mutandis. This Chapter shall apply to management of AIFs by asset management companies, except, for branches established in other European Union Member States, for the AIFs they manage in that State. Pursuant to Article L. 532-21-3 of the Monetary and Financial Code, this Chapter shall also apply to management of French AIFs by branches established in France by management companies. Pursuant to Article L. 532-30 of the Monetary and Financial Code, this Chapter shall also apply to management of AIFs by branches established in France by managers. Asset management companies shall ensure that the relevant persons are reminded that they are bound by the obligation of professional confidentiality, subject to the terms and penalties prescribed by law. For the application of this Chapter, the term "client" shall designate existing and potential clients, including, where relevant, AIFs or their unit holders or shareholders. Where a professional organisation draws up a code of conduct applicable to AIF management, the AMF shall verify whether the code's provisions are consistent with this General Regulation. Sub-section 2 - Primacy of the AIF and its unit holders or shareholders' interest and market integrity The asset management company shall: Act honestly, with due skill, care and diligence and fairly in conducting their activities; Act in the best interests of the AIFs or the unit and shareholders of the AIFs they manage and the integrity of the market; Have and employ effectively the resources and procedures that are necessary for the proper performance of their business activities; Take all reasonable steps to avoid conflicts of interest and, when they cannot be avoided, to identify, manage and monitor and, where applicable, disclose, those conflicts of interest in order to prevent them from adversely affecting the interests of the AIFs and their unit and shareholders and to ensure that the AIFs they manage are fairly treated; Comply with all regulatory requirements applicable to the conduct of their business activities so as to promote the best interests of the AIFs or the unit and shareholders of the AIFs they manage and the integrity of the market; Treat all AIF unit or shareholders fairly. No unit or shareholder in an AIF shall obtain preferential treatment, unless such preferential treatment is disclosed in the relevant AIF's rules or instruments of incorporation. Asset management companies that market units or shares in AIFs shall comply with the provisions relating to the assessment of the suitability and appropriateness of the service to be provided set out in Section 4 of Chapter IV of Title I of this Book. Articles 24 and 107 of the Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision Sub-section 1 - Remuneration policy within the framework of AIF management I. - When establishing and applying the total remuneration policies, inclusive of salaries and discretionary pension benefits, for those categories of staff referred to in Article L. 533-22-2 of the Monetary and Financial Code, asset management companies shall comply with the following principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities: The remuneration policy is consistent with and promotes sound and effective risk management and does not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the AIFs they manage; The remuneration policy is in line with the business strategy, objectives, values and interests of the asset management company and the AIFs it manages or the unit and shareholders in such AIFs, and includes measures to avoid conflicts of interest; The management body of the asset management company, in its supervisory function, adopts and periodically reviews the general principles of the remuneration policy and is responsible for its implementation; The implementation of remuneration policy is, at least annually, subject to central and independent internal review for compliance with policies and procedures for remuneration adopted by the management body in its supervisory function; Staff engaged in control functions are compensated in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control; The remuneration of the senior officers in the risk management and compliance functions is directly overseen by the remuneration committee; Where remuneration is performance related, the total amount of remuneration is based on a combination of the assessment of the performance of the individual and of the business unit or AIF concerned and of the overall results of the asset management company. When assessing individual performance, financial as well as non-financial criteria are taken into account; Assessment of performance is set in a multi-year framework appropriate to the life-cycle of the AIFs managed by the asset management company, in order to ensure that it is based on longer term performance and that the actual payment of performance-based components of remuneration is spread over a period which takes account of the redemption policy of the AIFs it manages and their investment risks; Guaranteed variable remuneration is exceptional, occurs only in the context of hiring new staff and is limited to the first year; Fixed and variable components of total remuneration are appropriately balanced and the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy, on variable remuneration components, including the possibility to pay no variable remuneration; Payments related to the early termination of a contract reflect performance achieved over time and are designed in a way that does not reward failure; The measurement of performance, when used to calculate individual or collective variable remuneration components, includes a comprehensive adjustment mechanism to integrate all relevant types of current and future risks; Subject to the legal structure of the AIF and its rules or instruments of incorporation, a substantial portion, and in any event at least 50% of any variable remuneration consists of units or shares of the AIF concerned, or equivalent ownership interests, or share-linked instruments or equivalent non-cash instruments, unless the management of AIFs accounts for less than 50% of the total portfolio managed by the asset management company, in which case the minimum of 50% does not apply. The instruments referred to in this paragraph shall be subject to an appropriate retention policy designed to align incentives with the interests of the asset management company and the AIFs it manages and the unit or shareholders of such AIFs; Payment of a substantial portion, and in any event at least 40%, of the variable remuneration component, is deferred over a period which is appropriate in view of the life cycle and redemption policy of the AIF concerned. This portion is fairly proportionate to the nature of the risks of the AIF in question. The period referred to in the previous paragraph shall be at least three to five years unless the life cycle of the AIF concerned is shorter. The remuneration payable under deferral arrangements vests no faster than on a pro-rata basis. In the case of a variable remuneration component of a particularly high amount, at least 60% of the amount is deferred; The variable remuneration, including the deferred portion, is paid or vests only if it is sustainable according to the financial situation of the asset management company as a whole, and justified according to the performance of the business unit, the AIF and the individual concerned. The total variable remuneration shall generally be considerably reduced where subdued or negative financial performance of the asset management company or of the AIF concerned occurs, taking into account both current compensation and reductions in payouts of amounts previously earned, including through malus or clawback arrangements; The pension policy is in line with the business strategy, objectives, values and long-t

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professional_accounting

Corporate Finance & Accounting Financial Ratios Jason Fernando Jason Fernando is a professional investor and writer who enjoys tackling and communicating complex business and financial problems. Julius Mansa Reviewed by Julius Mansa Julius Mansa is a CFO consultant, finance and accounting professor, investor, and U.S. Department of State Fulbright research awardee in the field of financial technology. He educates business students on topics in accounting and corporate finance. Outside of academia, Julius is a CFO consultant and financial business partner for companies that need strategic and senior-level advisory services that help grow their companies and become more profitable. Skylar Clarine Fact checked by Skylar Clarine Skylar Clarine is a fact-checker and expert in personal finance with a range of experience including veterinary technology and film studies. Introduction to Company Valuation Valuation Analysis 6 Basic Financial Ratios 5 Must-Have Metrics for Value Investors Price-to-Earnings Ratio (P/E Ratio) Price-To-Book Ratio (P/B Ratio) Price/Earnings-to-Growth (PEG Ratio) Fundamental Analysis Basics Intrinsic Value of a Stock Intrinsic Value vs. Current Market Value Equity Valuation: The Comparables Approach 4 Basic Elements of Stock Value How to Become Your Own Stock Analyst Due Diligence in 10 Easy Steps Determining the Value of a Preferred Stock Fundamental Analysis Tools and Methods Stock Valuation Methods Bottom-Up Investing What Book Value Means to Investors Liquidation Value Discounted Cash Flow (DCF) Enterprise Value (EV) How to Use Enterprise Value to Compare Companies How to Analyze Corporate Profit Margins Decoding DuPont Analysis Valuing Non-Public Companies How to Value Private Companies Valuing Startup Ventures What Is Return on Equity? Calculating ROE What Does ROE Tell You? ROE and Stock Performance Using ROE to Identify Problems Limitations of ROE ROE vs. ROIC Example of ROE How to Calculate ROE With Excel ROE and DuPont Analysis ROE FAQs What Is Return on Equity (ROE)? Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a gauge of a corporation's profitability and how efficient it is in generating profits. Return on equity (ROE) is the measure of a company's net income divided by its shareholders' equity. ROE is a gauge of a corporation's profitability and how efficiently it generates those profits. An ROE is considered satisfactory based on industry standards, though a ratio near the long-term average of the S&P 500 of around 14% is typically considered acceptable. Calculating Return on Equity (ROE) ROE is expressed as a percentage and can be calculated for any company if net income and equity are both positive numbers. Net income is calculated before dividends paid to common shareholders and after dividends to preferred shareholders and interest to lenders. Return on Equity = Net Income Average Shareholders’ Equity \begin{aligned} &\text{Return on Equity} = \dfrac{\text{Net Income}}{\text{Average Shareholders' Equity}}\\ \end{aligned} ​Return on Equity=Average Shareholders’ EquityNet Income​​ Net income is the amount of income, net expenses, and taxes that a company generates for a given period. Average shareholders' equity is calculated by adding equity at the beginning of the period. The beginning and end of the period should coincide with the period during which the net income is earned. Net income over the last full fiscal year, or trailing 12 months, is found on the income statement—a sum of financial activity over that period. Shareholders' equity comes from the balance sheet—a running balance of a company’s entire history of changes in assets and liabilities. It is considered best practice to calculate ROE based on average equity over a period because of the mismatch between the income statement and the balance sheet. What Does Return on Equity Tell You? Whether an ROE is deemed good or bad will depend on what is normal among a stock’s peers. For example, utilities have many assets and debt on the balance sheet compared to a relatively small amount of net income. A normal ROE in the utility sector could be 10% or less. A technology or retail firm with smaller balance sheet accounts relative to net income may have normal ROE levels of 18% or more. A good rule of thumb is to target an ROE that is equal to or just above the average for the company's sector—those in the same business. For example, assume a company, TechCo, has maintained a steady ROE of 18% over the past few years compared to the average of its peers, which was 15%. An investor could conclude that TechCo’s management is above average at using the company’s assets to create profits. Relatively high or low ROE ratios will vary significantly from one industry group or sector to another. Still, a common shortcut for investors is to consider a return on equity near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor. Return on Equity and Stock Performance Sustainable growth rates and dividend growth rates can be estimated using ROE, assuming that the ratio is roughly in line or just above its peer group average. Although there may be some challenges, ROE can be a good starting place for developing future estimates of a stock’s growth rate and the growth rate of its dividends. These two calculations are functions of each other and can be used to make an easier comparison between similar companies. To estimate a company’s future growth rate, multiply the ROE by the company’s retention ratio. The retention ratio is the percentage of net income that is retained or reinvested by the company to fund future growth. ROE and a Sustainable Growth Rate Assume that there are two companies with identical ROEs and net income but different retention ratios. Company A has an ROE of 15% and returns 30% of its net income to shareholders in a dividend, which means Company A retains 70% of its net income. Business B also has an ROE of 15% but returns only 10% of its net income to shareholders for a retention ratio of 90%. For Company A, the growth rate is 10.5%, or ROE times the retention ratio, which is 15% times 70%. Business B's growth rate is 13.5%, or 15% times 90%. This analysis is referred to as the sustainable growth rate model. Investors can use this model to make estimates about the future and to identify stocks that may be risky because they are running ahead of their sustainable growth ability. A stock that is growing at a slower rate than its sustainable rate could be undervalued, or the market may be discounting risky signs from the company. In either case, a growth rate that is far above or below the sustainable rate warrants additional investigation. Estimating the Dividend Growth Rate This comparison seems to make Business B more attractive than Company A, but it ignores the advantages of a higher dividend rate. We can modify the calculation to estimate the stock’s dividend growth rate, which may be more important to income investors. The dividend growth rate can be estimated by multiplying ROE by the payout ratio. The payout ratio is the percentage of net income that is returned to common shareholders through dividends. This formula gives us a sustainable dividend growth rate, which favors Company A. Continuing with our previous example, Company A's dividend growth rate is 4.5%, or ROE times the payout ratio, which is 15% times 30%. Business B's dividend growth rate is 1.5%, or 15% times 10%. A stock that is increasing its dividend far above or below the sustainable dividend growth rate may indicate risks that should be investigated. Using Return on Equity to Identify Problems It's reasonable to wonder why an average or slightly above-average ROE is preferable rather than an ROE that is double, triple, or even higher than the average of its peer group. Aren’t stocks with a very high ROE a better value? Sometimes an extremely high ROE is a good thing if net income is extremely large compared to equity because a company’s performance is so strong. However, an extremely high ROE is often due to a small equity account compared to net income, which indicates risk. Inconsistent Profits The first potential issue with a high ROE could be inconsistent profits. Imagine that a company, LossCo, has been unprofitable for several years. Each year’s losses are recorded on the balance sheet in the equity portion as a “retained loss.” These losses are a negative value and reduce shareholders' equity. Now, assume that LossCo has had a windfall in the most recent year and has returned to profitability. The denominator in the ROE calculation is now very small after many years of losses, which makes its ROE misleadingly high. Excess Debt A second issue that could cause a high ROE is excess debt. If a company has been borrowing aggressively, it can increase ROE because equity is equal to assets minus debt. The more debt a company has, the lower equity can fall. A common scenario is when a company borrows large amounts of debt to buy back its own stock. This can inflate earnings per share (EPS), but it does not affect actual performance or growth rates. Negative Net income Finally, negative net income and negative shareholders' equity can create an artificially high ROE. However, if a company has a net loss or negative shareholders’ equity, ROE should not be calculated. If shareholders’ equity is negative, the most common issue is excessive debt or inconsistent profitability. However, there are exceptions to that rule for companies that are profitable and have been using cash flow to buy back their own shares. For many companies, this is an alternative to paying dividends, and it can eventually reduce equity (buybacks are subtracted from equity) enough to turn the calculation negative. In all cases, negative or extremely high ROE levels should be considered a warning sign worth investigating. In rare cases, a negative ROE ratio could be due to a cash flow-supported share buyback program and excellent management, but this is the less likely outcome. In any case, a company with a negative ROE cannot be evaluated against other stocks with positive ROE ratios. Limitations of Return on Equity A high ROE might not always be positive. An outsize ROE can be indicative of a number of issues—such as inconsistent profits or excessive debt. Also, a negative ROE due to the company having a net loss or negative shareholders’ equity cannot be used to analyze the company, nor can it be used to compare against companies with a positive ROE. Return on Equity vs. Return on Invested Capital Though ROE looks at how much profit a company can generate relative to shareholders’ equity, return on invested capital (ROIC) takes that calculation a couple of steps further. The purpose of ROIC is to figure out the amount of money after dividends a company makes based on all its sources of capital, which includes shareholders' equity and debt. ROE looks at how well a company uses shareholders' equity while ROIC is meant to determine how well a company uses all its available capital to make money. Example of Return on Equity For example, imagine a company with an annual income of $1,800,000 and average shareholders' equity of $12,000,000. This company’s ROE would be as follows: R O E = ( $ 1 , 800 , 000 $ 12 , 000 , 000 ) = 15 % ROE=\left(\frac{\$1,800,000}{\$12,000,000}\right )=15\% ROE=($12,000,000$1,800,000​)=15% Consider Apple Inc. (AAPL)—for the fiscal year ending Sept. 29, 2018, the company generated $59.5 billion in net income. At the end of the fiscal year, its shareholders’ equity was $107.1 billion versus $134 billion at the beginning. Apple’s return on equity, therefore, is 49.4%, or $59.5 billion / [($107.1 billion + $134 billion) / 2]. Compared to its peers, Apple had a very strong ROE: Amazon.com, Inc. (AMZN) had an ROE of 28.3% in 2018. Microsoft Corp. (MSFT) had an ROE of 19.4% in 2018. Google—trading as Alphabet Inc. (GOOGL)—had an ROE of 18.6% for 2018. How to Calculate ROE Using Excel The formula for calculating a company's ROE is its net income divided by shareholders' equity. Here's how to use Microsoft Excel to set up the calculation for ROE: In Excel, get started by right-clicking on column A. Next, move the cursor down and left-click on column width. Then, change the column width value to 30 default units and click OK. Repeat this procedure for columns B and C. Next, enter the name of a company into cell B1 and the name of another company into cell C1. Then, enter "Net Income" into cell A2, "Shareholders' Equity" into cell A3, and "Return on Equity" into cell A4. Enter the formula for "Return on Equity" =B2/B3 into cell B4 and enter the formula =C2/C3 into cell C4. When that is complete, enter the corresponding values for "Net Income" and "Shareholders' Equity" into cells B2, B3, C2, and C3. Though ROE can easily be computed by dividing net income by shareholders' equity, a technique called DuPont decomposition can break down the ROE calculation into additional steps. Created by the American chemicals corporation DuPont in the 1920s, this analysis reveals which factors are contributing the most (or the least) to a firm's ROE. There are two versions of DuPont analysis. The first involves three steps: ROE = NPM × Asset Turnover × Equity Multiplier where: NPM = Net profit margin, the measure of operating efficiency Asset Turnover = Measure of asset use efficiency Equity Multiplier = Measure of financial leverage \begin{aligned} &\text{ROE} = \text{NPM} \times \text{Asset Turnover} \times \text{Equity Multiplier} \\ &\textbf{where:} \\ &\text{NPM} = \text{Net profit margin, the measure of operating} \\ &\text{efficiency} \\ &\text{Asset Turnover} = \text{Measure of asset use efficiency} \\ &\text{Equity Multiplier} = \text{Measure of financial leverage} \\ \end{aligned} ​ROE=NPM×Asset Turnover×Equity Multiplierwhere:NPM=Net profit margin, the measure of operatingefficiencyAsset Turnover=Measure of asset use efficiencyEquity Multiplier=Measure of financial leverage​ ​Alternatively, the five-step version is as follows: ROE = EBT S × S A × A E × ( 1 − TR ) where: EBT = Earnings before tax S = Sales A = Assets E = Equity TR = Tax rate \begin{aligned} &\text{ROE} = \frac{ \text{EBT} }{ \text{S} } \times \frac{ \text{S} }{ \text{A} } \times \frac{ \text{A} }{ \text{E} } \times ( 1 - \text{TR} ) \\ &\textbf{where:} \\ &\text{EBT} = \text{Earnings before tax} \\ &\text{S} = \text{Sales} \\ &\text{A} = \text{Assets} \\ &\text{E} = \text{Equity} \\ &\text{TR} = \text{Tax rate} \\ \end{aligned} ​ROE=SEBT​×AS​×EA​×(1−TR)where:EBT=Earnings before taxS=SalesA=AssetsE=EquityTR=Tax rate​ Both the three- and five-step equations provide a deeper understanding of a company's ROE by examining what is changing in a company rather than looking at one simple ratio. As always with financial statement ratios, they should be examined against the company's history and its competitors' histories. For example, when looking at two peer companies, one may have a lower ROE. With the five-step equation, you can see if this is lower because creditors perceive the company as riskier and charge it higher interest, the company is poorly managed and has leverage that is too low, or the company has higher costs that decrease its operating profit margin. Identifying sources like these leads to a better knowledge of the company and how it should be valued. What Is a Good ROE? As with most other performance metrics, what counts as a “good” ROE will depend on the company’s industry and competitors. Though the long-term ROE for S&P 500 companies has averaged around 18.6%, specific industries can be significantly higher or lower. All else being equal, an industry will likely have a lower average ROE if it is highly competitive and requires substantial assets in order to generate revenues. On the other hand, industries with relatively few players and where only limited assets are needed to generate revenues may show a higher average ROE. How Do You Calculate ROE? To calculate ROE, analysts simply divide the company’s net income by its average shareholders’ equity. Because shareholders’ equity is equal to assets minus liabilities, ROE is essentially a measure of the return generated on the net assets of the company. Since the equity figure can fluctuate during the accounting period in question, an average shareholders’ equity is used. What Is the Difference Between Return on Assets (ROA) and ROE? ROA and ROE are similar in that they are both trying to gauge how efficiently the company generates its profits. However, whereas ROE compares net income to the net assets of the company, ROA compares net income to the company’s assets alone, without deducting its liabilities. In both cases, companies in industries in which operations require significant assets will likely show a lower average return. Apple. "Form 10-K, Apple Inc.," Pages 24 and 43. Accessed Nov. 29, 2021. Amazon. "2018 Annual Report," Pages 25 and 47. Accessed Nov. 29, 2021. Microsoft. "Annual Report 2018." Accessed Nov. 29, 2021. Alphabet. "Form 10-K, Alphabet Inc.," Page 26. Accessed Nov. 29, 2021. Federal Deposit Insurance Corporation. "Equity/Assets and ROE of S&P 500 Companies," Page 2. Accessed Nov. 29, 2021. How to Value a Company Guide Understanding Business Valuations How the Valuation Process Works How to Interpret Financial Statements What Is a Balance Sheet? 6 Basic Financial Ratios and What They Reveal Price-to-Earnings (P/E) Ratio What the Price-to-Book (P/B) Ratio Tells You? Why the Price/Earnings-to-Growth Ratio Matters What Is Fundamental Analysis? Relative Valuation Model What Is the Intrinsic Value of a Stock? Intrinsic Value vs. Current Market Value: What's the Difference? The 4 Basic Elements of Stock Value How to Choose the Best Stock Valuation Method Bottom-Up Investing Definition How Liquidation Value Measures a Company's Worth What Is Market Capitalization? Enterprise Value – EV Understanding Corporate Profit Margins How Return on Equity (ROE) Works Equity Definition Equity typically refers to shareholders' equity, which represents the residual value to shareholders after debts and liabilities have been settled. How to Use the DuPont Analysis to Assess a Company's ROE The DuPont analysis is a framework for analyzing fundamental performance popularized by the DuPont Corporation. In finance, a return is the profit or loss derived from investing or saving. What Is a Dividend Payout Ratio? The dividend payout ratio is the measure of dividends paid out to shareholders relative to the company's net income. Understanding Return on Capital Employed (ROCE) Return on Capital Employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. Financial Statement Analysis Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes. How Do You Calculate Return on Equity (ROE) in Excel? What Is the Average Return on Equity (ROE) of Banks? ROE vs ROCE: The Difference What are some of the advantages and disadvantages of DuPont Analysis? Return on Equity (ROE) vs. Return on Capital (ROC): What's the Difference?

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professional_accounting

(-) Published (18) In progress (1) Planned (6) Premier and Cabinet (12) (-) Performance audit (16) Financial reporting (3) Internal controls and governance (10) Management and administration (17) Search filters applied: local government, transport, treasury AND special review, performance audit AND 2020, 2018, 2012 AND published . Actions for Procurement management in Local Government Procurement management in Local Government The Auditor‑General for New South Wales, Margaret Crawford, released a report today examining procurement management in Local Government. The audit assessed the effectiveness of procurement management practices in six councils. All six councils had procurement management policies that were consistent with legislative requirements, but the audit found compliance gaps in some councils. The audit also identified opportunities for councils to address risks Actions for The effectiveness of the financial arrangements and management practices in four integrity agencies The effectiveness of the financial arrangements and management practices in four integrity agencies The Auditor-General for New South Wales, Margaret Crawford, released a report today examining the effectiveness of the financial arrangements and management practices of four integrity agencies: the Independent Commission Against Corruption, the NSW Electoral Commission, the NSW Ombudsman, and the Law Enforcement Conduct Commission. The audit also included NSW Treasury and the Department of Premier and Cabinet (DPC) because both departments are involved Actions for Support for regional town water infrastructure Support for regional town water infrastructure The Auditor-General for New South Wales, Margaret Crawford, released a report today examining whether the Department of Planning, Industry and Environment has effectively supported the planning for, and funding of, town water infrastructure in regional NSW. The audit found that the department has not effectively supported or overseen town water infrastructure planning since at least 2014. It does not have a clear regulatory approach and lacks internal p Actions for Credit card management in Local Government Credit card management in Local Government In 2018–19, all councils responding to an Audit Office survey (representing over 90 per cent of the sector) indicated they issued credit cards to staff members to make work-related purchases. As there are no sector-wide requirements or policies for credit card use and management in Local Government, councils have developed their credit card management frameworks to suit their own needs. The quality of credit card policies and procedures may therefore var Actions for Governance and internal controls over local infrastructure contributions Governance and internal controls over local infrastructure contributions The Auditor-General for New South Wales, Margaret Crawford, released a report today on how well four councils managed their local infrastructure contributions during the 2017-18 and 2018-19 financial years. Local infrastructure contributions, also known as developer contributions, are collected from developers to pay for local infrastructure such as drainage, local roads, open space and community facilities. Controls over local infrastructure contribut Actions for CBD South East Sydney Light Rail: follow-up performance audit CBD South East Sydney Light Rail: follow-up performance audit This is a follow-up to the Auditor-General's November 2016 report on the CBD South East Sydney Light Rail project. This follow-up report assessed whether Transport for NSW has updated and consolidated information about project costs and benefits. The audit found that Transport for NSW has not consistently and accurately updated project costs, limiting the transparency of reporting to the public. The Auditor-General reports that the total cost of the pr Actions for Train station crowding Train station crowding Sydney Trains patronage has increased by close to 34 per cent over the last five years, and Transport for NSW (TfNSW) expects the growth in patronage to continue over the next 30 years. As patronage increases there are more passengers entering and exiting stations, moving within stations to change services, and waiting on platforms. As a result, some Sydney metropolitan train stations are becoming increasingly crowded. There are three main causes of sta Actions for Destination NSW's support for major events Destination NSW's support for major events This report focuses on whether Destination NSW (DNSW) can demonstrate that its support for major events achieves value for money. The audit found that DNSW’s processes for assessing and evaluating the major events it funds are mostly effective, but its public reporting does not provide enough transparency. DNSW provides clear information to event organisers seeking funding and has a comprehensive methodology for conducting detailed event assessments. H Actions for Newcastle Urban Transformation and Transport Program Newcastle Urban Transformation and Transport Program The urban renewal projects on former railway land in the Newcastle city centre are well targeted to support the objectives of the Newcastle Urban Transformation and Transport Program (the Program), according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. The planned uses of the former railway land achieve a balance between the economic and social objectives of the Program at a reasonable cost to the government. Actions for Mobile speed cameras Mobile speed cameras Key aspects of the state’s mobile speed camera program need to be improved to maximise road safety benefits, according to a report released today by the Auditor-General for New South Wales, Margaret Crawford. Mobile speed cameras are deployed in a limited number of locations with a small number of these being used frequently. This, along with decisions to limit the hours that mobile speed cameras operate, and to use multiple warning signs, have reduced

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