Discussion McCollum, Muchmore, and Menendez

July 18, 2005
Participants:Tony Menendez (TM), Mark McCollum Charles Muchmore Beverly Babb

(BB)

Part I

At 5:53 minutes:
How are ya?

Male: Hi.

At 6:23 minutes:

   
 

Yup. Ourta I ..forms

Well I heard the reclass portion a week ago from Chris [Ing] but  found out about the other thing
yesterday, but nothing, nothing too detailed about it.



 

- . 
x. 

 Well, it?s just, just you know, .. It?s all a clean up of prior years

 2003 when I got here and it just wasn?t . . you ah, we just had no focus on that area and
then they were just sort of winging that they had gone through the
merger with Dresser and a lot of issues coming from that, that time and, ab, they, evidently in
the fourth quarter of 02, went through a massive reconciliation of their book - tax

ah booked $150 million in deferred taxes in the fourth quarter of 02 just to get i :5
. square.

. Imean it?s . . .1 ?on file in

TM: . Uh huh.

MM: Okay, which, which evidently offset a couple, a hundred million dollars or so of accrual to return 
adjustments which  which we?re now ?nding may not have been correct either. Um, So just trying 

wrestle it to the groundthink we have a signi?cant de?ciency in taxes. 
Well, at least that.
a, .
 Huh? It?s not at least that. I said at least

 
 

CMi"%lirom the numbers I?m hearing its pretty large 


 

CM:

CM:

CM

CM:

CM:

CM:

CM:

CM:

.not material. I think there?s a question about . .Well

Yeah they?re large, but, yeah, its not..
ke it material weakness, I mean ah,,

again, you know, just the fact that we booked an entry doesn?t ma
you look forward on that and I don?t 

As long as somebody can do a damn good write up on it, and why it couldn?t happen today.

Well, I think 

?Cause they?re going to have to document that pretty 

Um huh.

They control over the true up process didn?t work. I have only heard some bits and pieces

Well, I don?t know, it?s confusing as hell to me, I don?t know what happened in the fourth quarter
of 02; but you know, I go back and I, I do the calculations on the deferred taxes on the asbestos stuff and
you know, and I get pretty close to the numbers and so, and ah is what I understand is the entry that
we made an error on the return, took a deduction for Harbison-Walker asbestos that?s what
I understood. I need to clarify that, you know, cause David in a circular conversation may be
telling people different things. But that?s what I was, I was told. And, ah, we need to ?nd exact entries
but that then in the accrual to return treated it as a ?owthrough Which is where the 

There?s not a timing difference it?s . 

Well, you can?t deduct asbestos until you pay it.
Sure

Ah, it was deducted in 01. The 01 retin?n done in 02

The balance sheet and right?

It?s a L. They let it ?ow through So, now we found on audit IRS is coming and says you
can?t deduct that in 01 and so it?s audit adjustment.

themfutum taxes issues, for future tax deductibility.

Yeah, it?s a tax adjustment. 1 mean, effectively it is a reserve adjustment. It will be deductible. .,
That?s what I ?ve..Well, that?s what I?ve heard is that they actually picked 

Something went through the income statement, that took a current bene?t for, that?s what Davrd

is saying, is that when they go back and look at what the accrual to return, they took _a current
bene?t for that deduction in 02 as a result of the accrual to return. And you gotta get it back out.

at

 

 

 

MZM:

CM:

CM:

CM:

CM:

CM:



CM:

CM:

CM:

CM:

And $6.3 is not a signi?cant de?ciency. $10 million dollars is the threshold there.

We had booked and deferred taxes on asbestos, and we got everything cleaned up in that reconciliation
process and then we let it ?ow through.

The return also,

The return.

Because we double hooked it.

So it went through the income statement and now it?s got to come back out of retained earnings.
Effectively double dipped it

Yeah, we double dipped it

?Cause I?d actually heard that also what we didn?t do was defer taxes on the change in the balance for
the year but we just picked with over the reserve that moved from on

legal entity. . .to another

I hadn?t heard that. That?s news to me

Everybody can tell you. . . . . 

Okay.

On the uh, UK taxes .. That?s probably a signi?cant de?ciency also.

I?ve not heard that. That?s not what Dennis [Whalon] told me last night at 8:00-
Well that?s what was on the conference call I just had 

Well I disagree vehemently. That?s not signi?cant de?ciency.

It cost $6.3 million to like Monopump because the Monopump people did not follow the Dresser po icy
but the Halliburton policy.

Okay.

Okay? So it?s not.

 

Okay so through it in there with the other problems.

 

 

CM:

CM:

CM:

. CM:

CM:

CM:

CM:

That could be, it may be that the total aggregate of the taxes looking at prior years. Could be. But I?m
not going to treat it as a separate signi?cant de?ciency. I think that?s inappropriate. The issue around
taxes. And here?s how I articulate a signi?cant de?ciency.

Okay

And this is what I believe that our controls today in terms of our accrual accounting, the reconciliation
processes that we go through, the reviews of the contingencies and reserves and all that are solid. OK
and I think that there are some additional things that we need do on top of them  I think that they are

solid.

The problem is that most of those controls we started implementing in late 03 and 04. So in the
tax area, all of this stuff that comes out of the fact that we don?t, we?re still yet to catch up on all
our statutorial reports, until all those are ?led and caught up we don?t know, that?s what?s
smoking out all these adjustments. Right? Every single other adjustment on taxes came out of
the fact that we were catching up on our returns, and getting we just ?led. .. The UK we

?led the statutory returns from 99 through 04

You need to understand the whole process. Most of 99 through 2002 all came out from of the agreed
adjustments with the Inland Revenue that you have to put back in the amended the return.

Okay, so that?s news to me somebody?s not giving me the full story.
That?s our problem though. That?s just bits and pieces

No

So that part, I don?t think there is anything wrong with.

No, there?s not

But Monopumps is only late by one quarter

Oh god. Hang me. Because that?s 

Well, ?om a true up standpoint because of late ?ling. If it had been ?led on time but we actually
missed the deadline for ?ling the taxes, ah, for the, you have to ?lean initial retum and you can ?le

amended returns for the next 20 years.

I think that?s being anal. . .

The real problem was we should have caught it in 2003 when it was booked wrong by Memo. But,
you know, once again, everybody saying. . .what would happen today.

that?s the problem. You know This tax area, all of this stuff is all pre 03 stuff.

 

 

CM: The question is how do we not know that there?s not something in the 03 .

MM: We don?t that?s 

CM: The 03 group relief hasn?t been ?nalized.

MM: That?s why we, that?s what creates the signi?cant de?ciency

CM: _And the other issues were not 

MNI: While I don?t think there?s a $40 million plus, you know, issue out there. But we did the accounts,

CM: Yes.

MM: But I think there could be a 10 million out there that we don?t know and until we get everything caught
up and these returns and the tax accounts we don?t know?

CM: On the other side of this is that if we?ve got any of the other acquisitions we?ve got to be more diligent
in getting them onto our processes and monitoring them. Because actually it was an entry that was
booked by Mono wrong originally because they went Dresser like 

MM: Well, listen, we need to have a dialog before we  I don?t want this UK thing, Ithink it?s all part of a
larger de?ciency than honestly you 

CM: 1 do too. . .I think when you aggregate 

MM: The problem is you get the documentation, I can?t go ?x the UK process in and of itself particularly
around Mono adjustment that not, you we just putting it off

TM: Wouldn?t you aggregate them all to a line item, like a tax line item . ..

CM: Monopump, we need to check that. . .My understanding of the adjustment now, is the adjustment
actually related to a gain or 1055s on the sale 0f Mono. Ah, basically that?s what it was related to
taxes. Because it has to do with tax losses. Or some that were moved from Mono to another oth
legal enti  ou know.

At @1630 minutes:
You know this, this, this tax return issue is related to Harbison~Walker and Dresser. . ..

CM:  Uh huh.

MM: What David had told me was that it was the Harbison?Walker asbestos . .

CM: Harbison?Walker had been sold years before that.

 

 

MM: Well, I?m saying it?s something there. Maybe it was that payment. Would you ever have made a
payment 

CM: Yes that?s what it w. . .Well, it had to do with our contingent liability associated with Harbison-Walker.
MM: Right

CM: That was, that was the start of the downfall on asbestos.

MM: All right, . . . let me Get with David and try to..and maybe Brent and try to pin this down. . .um. ..

CM: I have a write up on the table and I?ll show it to you.

At @17:20 minutes:
MM: Right. . .Hey urn Beverly is Chris here? Do you hear anybody? Have you seen him?

BB: No, I haven?t. Do you want me to try to walk down?

Yeah, . .Have him come by. Let me clarify an issue with him.

BB: OK

MM: Have you talked was Chris [lng} on the call?

(Pause)

CM: Our basis for to try to understand the Mono thing. Of course, the tax people all approach it that we
tmed up as soon as we had the amended return. And what I?m trying to ?gure out is why we had such a
large true up, is there a problem for further back, and the more questions you ask the, ?Well yeah
actually, Mono was booked wrong? and we found it when we did the true up. That?s a little bit. ..

CM: The problem is that everybody is approaching it from their piece and trying to Show why they?re not the
guilty party. Instead of saying this is a total company, why did we have the adjustment? Is it true 
we had just had lots of little things but one big thing for 6.3 million stuck out. The more we ask about
it. .?Well yeah this is.? they booked group relief the way Dresser used to do it and not according to

Halliburton who just didn?t catch it.

  
  
 
 
 

Ah I?ll come back to you after my meeting

  

Okay.

 

 

At minutes:

MM: So anyway. . . .

 

TM:

TM:

with a. . .with your conversations JR and and. ..and

I know you?ve been busy. I?ve been keeping 
that a, you know,

others. In my note to you the other day, you and I need to talk more often. I think
well, number one I think there?s just too much going .the a. . ..

The challenging thing is really that I?m always on the run. You know.

schedule a meeting, unless it?s meeting that?s just like this, would be dif?cult.

If you got to wait to by to
hey?ll come and they?re kind of

Guys like Charlie and Debra and Chris, you know what they do is 
always sort of talking with Beverly about where I am.

Right. . .Umhum

They stick their head in. You have to, I guess. One of the things I need you to do is pursue me.

Okay.

just going to be hard. My, my windows of

Okay? Not..Don?t..ah..ah..Because it?s just going to 
ou head in

time, they are all going to be ?ne, but they may be small. You know, you just got to get 
there..

Yeah. . .Everytime I come down here and see if you?re always. . .and so maybe. or something

Or just send me a note, say, ?Mark, I need to get on your calendar.? And or talk to Beverly. And
Beverly. You know, if it?s really dif?cult or challenging, she?s knows and just tell her, need to get on
Mark?s calendar? and she will put you on. She?s. she?s very good aboixt that, and she disciplines my
schedule. She knows. It?s a challenge, but ah..but ah it.can be overcome. And..and.a. . .and I, you
know, I don?t know what?s regular, these guys, I see the, you know, I see the rest of the team every

other day.

Umhum,

Okay? So, that?s why when I say I feel like I haven?t seen you in a month, that?s, you know, that?s in
reference to the amount of conversation I?m having with everybody else.

Okay.
And a. . .So, so we need to talk..ah

But I do know, I mean, based on everything that..that I?ve heard and seen and obviously getting this

stu? cleaned up on Fiberspar. I know that there were some conversations about that, um butI think

that it..it ah ultimately will resolve itself on mechanics in looking at the initial kind there, you know
Sounded like the UK issue that you

that have been resolved,  and then the revenue recognition issue.
and I talked about quite a while ago is still around. And..ah..JR copied me on the memo that I think

you had..you had written in that regard, and..ah, and some of the other communications.

MM: Um..So, you know, I don?t know what else is on your..on your list other than, you know, some of the
things that..that I?ve seen in here. Um. . .One of the things that I wanted to make sure that we talked
about and I?m not..I?m not..I?m not. . .this is not in relation to any of the particular issues.

TM: Okay.

MM: This is more sort of how..how we work kind of..kind of deal. . .Um..This organization, you know,
different culture, big organization, you know, it?s a..a probably, a..jus..you know, probably different
than any organization that you have had experience with you know some type. . .with primarily
dealt with small companies. Small companies don?t have communication issues. And they generally
have a lack of politics around communications, because they just, they don?t..that doesn?t..ah..fester in
that kind of an environment. Ah, you know. I came ?om a company that was, you know, signi?cantly
smaller than 3, 3 or 4 billion dollar organization. . .You know..The headquarter staff was maybe 8
people, you know, it communication was fairly rapid, you know, and a still was a
lot of politics, you know, and ah.. you had to generally 

(Static noise.)

At @24:03 minutes:

MM:  how to communicate so that you got..so that you were effective in the organization. Well, you know
Hallibmton is, you know, signi?cantly larger than that and with that, that size comes an expanded, you
know, ah, degree of communication issues involved. Just like it?s a communication problem getting to
me, it?s a communication issue getting with other folks too. Um And a, it?sjus? one of those things that
you have to learn to manage. Now, the, as I say this, the world?s worst communication tool to have ever

been invented is e?mail.

TM: Umhuh.
MIVI: Okay? It?s..it?s bad for a couple different reasons. One it?s bad because it?s impersonal. Okay. You

can?t have a conversation. You can?t, you know, it?s not conversational. Instant messaging doesn?t,
doesn?t ?x that problem either. It?s, it?s, it?s ah, It?s impersonal,,you know, it kind of ?res things out. It

sets, ah, unreasonable and maybe inappropriate expectations about response times.

TM: Umhum.

MM: You know because. . 

- (conversation with woman indicating Chris Ing is on the phone)

    

At 25:20 minutes

   

Okay..YeS, put him through. . .Okay.

 
 
 

on phone w/Chris [Ing]:

 
 

Hey, Chris I?ve had better mornings. But that?s okay. Alright, that?s all right. Followed your area
code. . .[Laughs] Ah yeah, found it and I?m gonna pass my pain on to you 

I had a conversation with Charles just a bit ago and he was going through . .. evidently ah conversation
wise, my on UK..ah..Group Relief entries, that they sort of broke that down into its component pieces or
whatever. They arrived at the conclusion that there is elements of that that do involve prior period
adjustments, on particularly one piece that relates to Monopumps. I don?t know how familiar you are
with all the details, ah, of the UK Group Relief entries that were booked, but I need you to get behind
just going to come out because with the  contributors toward us having signi?cant

de?ciencies in this area.

Well, what he has basically relayed to me this morning was that there was a piece of it Well,
?rst, let?s start with this. This was a different fact pattern than what Ihad that, you know, this 99
through 02, you know, we were doing all this group relief stuff, you know, this kind of rolling. And in
fact what we were doing was we were ?ling amended retmns because the ah, Inland Revenue had
already smoked out problems in the prior year returns that we were required to make amendments to, re-
adjust the group relief. Okay? So it wasn?t all, you know, sort of current periods stuff there was some

clean up stuff that was happening like. Okay. ..

Alright, second, the second issue is that there is evidently a 6 million dollar component piece of that
related to Monopumps that evidently just was a ?at out error in terms of how it was recorded.

Ah. . .Because, ah, they evidently hooked it under a methodology that was used by Dresser and ah, not
by Halliburton at the time and. . .[beep] losses. Now,  necessarily conclude we follow that but that?s,
ah, you know, like to understand that some more. Okay?

They did it last night.
Alright.
Well, Brendt?s the guy, I just want the facts. You know, in other words, it?s written down

or something. I want the facts instead of us sort of going around in circles and what this thing is related
to. Okay?

Second, and this is the..falls in the same bucket. And 

(pause)
At 29:00 minutes: 

MM: Now, I think it just was kind of done behind your back. I mean, the question where it comes down
to was the UK following policy? Alright? In other words, we had policies around Halliburton was
supposedly to be done. Were they following policy in terms of making sure that what we had on our tax
returns was..is re?ected appropriately and timely in the ?nancial statement as  Okay? Ultimately, that
is the objective rightwere identi?ed this as a particular element of a de?ciency. I
want to be able to articulate what that deficiency is. If the de?ciency. . .Yeah, I don?t know that Charles
articulated it well or and ah . We need to know what .. I need to get some more facts.

The second issue relates to our already, the, the 43 million adjustment. Ah..When we had a
conversation on the a tax contingency with David, David, I thought, and this is what my notes re?ect
said that it was really two pieces. The most signi?cant pieces about 30 million or so was related to
asbestos and Harbison-Walker. Okay? Now, and then the second piece was retiree bene?ts for Dresser

employees.

(Noise)

When I talked to Chris this morning, Chris said no, they told me it was related to ?xed assets from
Harbison?Walker. You know, I have been pursuing a lot of logic about, you know, the, the accounting
for this, you know, assuming it was asbestos I need to know exactly what the pieces relate to. What
notes, we?ve got to go back, what were the entries that were ?awed in 

 

    
  
 
 
 
 

 

So can you? .. Alright

Well, I?m gonna ma,..yeah. . Often times Brenda has a tendency to be differential to David,  even if
David?s going in circles. So, I?d like to. . .and make sure that we do have this exactly nailed down. 

Okay?
Alright.

Okay. Alright. Okay that?s what I have. I appreciate it.

Okay thanks. off the

MM: I apologize.

TM: It?s Okay . . . . . 
.
At @31:40 minutes:

MM: Um, you know what I was saying. You know [noise] The real problem. . .wait. Okay? That?s,
that?s. . .Not everybody believes that or it?s critical. It?s just my own experience, you know, in working,
you know, 25-26 years in the market place, that ah, you lmow, that people, people misconstrue what?s in

emails.

   

TM: Umhum.

     
 
 
  

    

     

The second issue it a ?eatre with: emails is when: you get stuff out there, you knew, it
never goes away. So once something?s done in e-mail, you know, it?s dif?cult to, particularly if you
are having a dialog, and this is going to be always true in your area. Okay? Talking about technical

issues, in trying to explore various facts and that there?s and that there?s a..a..an honest disagreement

between reasonable peOple, that when rules are not clear,

Umhum.

10

    
   
    
      
   
   
    
    
    
   
 
 
 

  

Okay? That a trail created through an email string, gets in trouble. Okay? We have our own
experience here at Halliburton. I?ve seen happened obv' usly inside, ah, other ?rms and things like
that. Because pe0p..things will be pulled out of context if ever seinething ever sentething, yen
knew, gets cut there. Se, fer you, partieniariy, you know, guess What Pinui?ne asking, you have
to heineretiihiy circumspect aha-tit the use (if emaii tn eemmunieate, uh,  eve rheti . Ra" .
. new ?In: a- .. . rgamzatron,1t?sa uge
organization, communication is dif?cult, but what I?m telling you in your particular role the issues that
you have te warts on, yen..yen ean?t, yen?re geing to have to- piek up the phone, you?re going tn
have tn pick up the phene and me and get peopie en the tine and diseuss  And, yes knew,
and keep tight notes. Uni. Anti li..i..i?ni in that same heat ten. 1? mean, li?ve sat there this merning
aimest twice, and  started te type an ems-ii, and  i said, yes: knew what, ?eause It said was
wanted te ask a question. I said, you knew, 1i ean?t..I can?t put this an emaii. i mean, 1E
[Staci te pick up. the phene, caii Chris whatever, and have a dieing about it, because nntii we
r-lehed a tetai eeneiusien ..  K-r -   t. thing li get in emaii is just damaging.

  

   
  

l- ?vwvo

 

   

TM: Hear me out. The fact of this revenue recognition. I did recognize that fact. So, you know, up to a fe
months ago, I drafted the situations up and so forth in e?mail and then I handed them copies and I just
said, ?Hey, when you get a chance. You know. Here?s something we need to address and get on the
same page.? And ah we walked off with the comments..and the two memos. And I tn'ed for..l tried a
couple of meetings revenue recognition discussion, and it got postponed every tinie. I mean. And it..it.
You know, ultimately, it took two months later to get the meeting on the schedule. It one of those
things, it?s 1ike..Um..So, maybe I had to take more..a more diligent effort, but, I mean, that was what I
am trying to do, you know, approach it that way. And again, trying to get in front of Chris; trying to
talk to Chris about it. He never had time to talk about it. . .Ah..you know. Ah..

2,
'<r3

MM: Well, you know, ah, you know in my view this is where the communication with me comes in. If you
came to me and said Mark, I?m trying to get to Chris. I?ve..I?ve called several times, and he?s not
returnng my phone calls. And so I would have ?x that. I have the power to ?x that. Okay? That?s my
job. You?ll see that. Run interference in that regard, okay? Where, where you have to work diligently
is to create the relationships and ah, and the problem with, you know, the issue you get into is if you
don?t do communication well in a political organization as it is, okay? What happens is you sour your
relationships and it?s twice as hard to build a-good relationship with people. You know. What happens is'
it?s human nature. People feel like, they, they, they don?t, they can?t trust you. Okay?

TM: Umhum.

MM: Um, you know, ah. . .In this particular situation, you know, along revenue recognition, this is why I
?agged this issue for you a while back. There was a lot of work done. You know. Some, some people 
who, fairly smart pe0ple, okay? They didn?t, they didn?t just fall off the turnip truck. You know,
They?re smart people, engaged in an honest dialog about this, engaged KPMG and their, and their
national of?ce, and reached a different conclusion. Okay? Now you have to sort of step back from this.
Okay? You knowappropriate and responsible thing to do. To. . .that, all that. Talk to the
people involved, look at all the papers and get down on the table, and recognize that somebody reached
a different conclusion. Now, could their facts have been incomplete? Yes, absolutely. And ah..Cou1d,
could national of?ce been smoking dope? Yes they could. I?ve seen them do it before. I, I
have come to a different conclusion than the national of?ce, in fact, with the SEC, and took something

11

 

it happens.
it?s just that, .

 
   
 

to the that they gave me a different opinion on and guess what, they were wrong.
ecognize that. And so, it?s not like, you know everybody is trying to be subversi
 I know, when we have documentation reach that, it?s just that we have to go through that honest
rocess, and it?s warped. It requires a lot of communication andSo, the issue that develop-ed here, and E?m just going to- Eary it out an the table, a-k 
that your memo is out, quite frankiy it?s a goo-ti memo, okay?   and I had. a 9
conversations ahcut it, and ah we think. that your conclusion is appropriate, aka . Based on what
-  vv-I. es 0. - gquestloninourmind,
which was the looming question has on mind, okay? Wait a second, all these people, okaythis research before, reached a different conclusion, including with KPMG, why did they
reach that conclusion? You know, I have to reconcile the two. Because ultimately, if I have to book
an adjustment, I have to answer to the Audit Committee of the Board of Directors why we
reached a different conclusion, okay; Potentially, if this is material. It may not be material, but if
it?s there I have to go through that process. I can?t leave it out.

.411 1@39:00 minutes:

The fact that the memo went out, okay, and yet those discussions and that review, appear to be
incomplete causes those who were involved with that discussion at the time  Chris and, and

others, to ah feel like they can?t trust you.



TM: What I was trying to . . . I was working on was basically one issue, a current contract. I wasn?t calling
into question anything that they had done.

MM: I understand.

TM: I was just trying to deal with this one thing, hey going forward, you know, I?m going to teach people,
hey, if we, when you have possession of stuff, we need have to the documentation in place and go
through the criteria. That?s what I was trying to. . ..I mean, I wasn?t stepping and, I mean,
they were replying Hey, we?ve been doing it for a while at corporate. But I was really just trying to deal
with this one issue, and not really calling into question what the other guys did.

you, you have to do it.

 
   
  

TM: Umhum..

MM: Because they reviewed the same exact issue you are looking at and reached a different conc'lus n.
That?s what I?m telling you. Okay, so you have to call them into question. But you have to do tin a
way, that?s not, you know. And I?m not saying because ultimately they may not have reached

wrong conclusion, it?s just that politically you had to be politically sensitive thatorder for you to be successful in this organization, you have to recognize that it?s a political reality
and deal with it.

 

12

TM:

TM:

TM:

TM:

TM:

TM:

TM:

TM:

Umhum..

Okay? And you have to be able to deal with it. And so, you know, the answer is not avoidance.

Umhum..

Okay? The answer is reconciliation. Reconcile it. Look at what they did and reconcile it. Okay. And
it could be that they reached the wrong conclusion, but you have to give everybody an opportunity to be

involved in that dialog.

Well, I?ve talked mean, I?ve talked to Chris.  I mean, his basic premise was you

know. . .Who did you ask and they would say I talked to Chris. Yes I did and incorporate his
comments. Ah, No I didn?t because his basic premise is not consistent with the position that, Hey, I
mean his basic premise. Hey, the guy with the PO says it?s FOB our warehouse and title passes and you

don?t have to adjust to Bill and 

But where did he get that thought? Did he ?nd that in literature? Did he review it? Did he say? Or did
he just go, I just really pulled that out of my butt?

Let me tell you. Let me tell you. That?s the way he way inteipreted but it comes down to
that.

Have you talked to Evelyn?

I haven?t talked to Evelyn. And as far as.. that is, well, no, I haven?t. To tell the truth, I?m not sure with
her new role if she may 

She was still a part of that. You know She was a part of that. She?s not a scary person.

No, I know that.

She wants to talk about it. Quite frankly, I think she?s a signi?cantly, in my view, a signi?cantly better
technician than Chris is. Okay? She?s..She is a very, very, good technician and knows FIN 46 and, you
knowthe other things that you?re, and the recognition revenue rules and stuff pretty

well.

Umhum.

You know, so some of these categories that you?re involved with. You gotta. . .You need to go step
back. Because that was her role during this period of time when ultimately there was. There was
a lot of documentation and  that was pulled together. I don?t know whether you haVe gone through all

the documentation. Did you gone through all of it?

I didn?t go through all of it. mean the basic premise was, hey, as long. as the PO indicates FOB our
warehouse, then delivery 8 occurred. And my, my, my position is basically delivery doesn?t



 

TM:

can?t argue that delivery has occurred.

  

And then,  and then. . .so we can?t argue that delivery has occurred and then, so you can?t ar
delivery has occurred, so in order to recognize revenue you use the 7 criteria for B111 and Hold

Right.

That?s a  that?s a fundamental difference between the position that we are taking and at the same time

you know as I was taught. . .and even, and 

Tony, let?s..let?s.. I don?t want to talk about issue,

was

  
 

 

inn; not questioning your

  

conclusion; Okay? At all I?m questioning the process with which you
a you ave go ..got to be able to do, if you?re gonna be successful
.  

   

at it. Ok . ?7 
here, is you got to get the eole involved. Okay? And I Even wen - -
compe - n. you ave the - .. kay? You need to be able to

recognize that if somebody reached a different conclusion out there, you need to be able to reconcile

with them to make sure everybody is together. Okay? Um..Because, if you don?t the organization is
going to close up to you and not..not work with you, and then you?re..you know, then what?s the
point? Right? I hope. ..Am I making any sense on that?\ 

.

cl 



 

No, Yeah, you are.

 I mean. I think that, that, that, that in this particular situation, if I had been playing this issue, what I
would have done is well, this is what I?m trying to get through, get with Chris and Evelyn and you know
make sure you have gone through all their papers and, and, and understood if there was anything laid
out, what basis that they reached for their conclusion. If none was laid out, I?d sit down in the room and
I?d say, Okay I?m reviewing this issue, I have this particular question. My readings of the rules is
this, okay, I see you reached a different conclusion here, what is the basis of your conclusion? Okay,
what is the basis? Don?t look for the answer. What is the basis for the different conclusion that you
reached on this particular issue. Help me understand because I feel like that this is the answer, and it?s
pretty clear in the literature, and we?ve done some other things and, and. . ..

If they all then say, you know, we don?t have a basis, we just thought this was it, say, okay, well if you
don?t mind, we are going to be re?addressing this, okay, and I?m going to go out and get, you knOW,
other guidance you know. We?re going to check with, with, with outsiders or whatever else and we are
going to double check this issue and see [Noise]

14

TM:

TM:

TM:

It?s always appropriate. Did you involve KPMG or other outside experts in your. . .in this? You know.
What, what was your guidance did you pull? And, and go through that process with them and then
communicate and say, okay, based on, you know, if there was a lack of evidence there, okay which in
my. ..particularly this may be. But say I?m going to be reaching a different conclusion. I want
you to know that. Okay? That, that, that I?m going to be reaching a different conclusion. Okay? And
then work from there. Give them the opportunity to defend themselves.

You know, the people I?ve been trying to go to  or whatever, I mean, for example getting the memo to
JR early  and trying to get meetings with him. That was a dif?cult process. I even brought Charlie in
to it to help pave, to met with Chris and certainly got involved to help bridge the communication gap
that might exist with Chris; Um, but we set several meetings that never occurredthe quarter, I went into Charlie?s of?ce and said Charlie, I know we?ve had this on the calendar we
haven?t really dealt with it. You know. I don?t know what the number is or you want me to contact the
UK to ?nd out what the number is before the quarter So we can just at least give comfort that we
are going to deal as time permits next quarter. Uh..he said Yeah you?re going to call Gabriel Salls the
next moming, they indicate its several million dollars or 3 and a half million dollars. And I was trying
to follow with them, hey, well, we sold. . .we haven?t reached this conclusion as a company on this, but
my position is still pretty much what I communicated to you on our conference call. But the company

hadn?t reached a conclusion and I?ve been trying to meet with them on that afternoon and I ?nally did.

Okay? Um. . .But as soon as I got off the phone, 5 minutes later the UK ?red off an email over here
saying that I disagreed with their conclusion it a 3 1/2 million dollar adjustment. They Were concerned

about their controls and so forth.

So, So that kind of  accelerated the process a bit. Um, so then I met with JR, who said, Hey, we?re
going to run this down, but next to. . .you know, probably 6 million dollars  which I did, said hey
Chris we need to get on the phone with IR. We need to discuss this topic when you have time. Well, he

didn?t respond. The next day IR stepped up the meeting and said hey we?re having this meeting with
I called Chris and said, Hey Chris I

Chris and everyone involved. Um. So the night before that meeting,
just wanted to give you a heads up. We are, going to talk about this topic already set the
meeting up, I want to try tell you some of the conclusions and, and what things he might be looking for..
Can we talk about it? Well, he got. . .he was really concerned about it and  the conversations got a
little excited. And, and you know, I said Chris, I was very con?dent about this and I didn?t want him

to be broadsided with this. -

Well, the thing is the fact that you called late and after you had the meeting with IR set.

Well, here?s the problem within the day. I mean, the day I set the meeting, and I actually, Look, I
hadn?t talked to Chris, I mean, I thought I would we would meet in like two weeks.

Well, Now, see now - Hold on I?m gonna replay.. I with JR as long as  and JR
had indicated to me that in the early period when he was deferring, he thought what he was asking you
to do was the same thing that I was asking you to do which was to go and fully Vet the issue as Opposed
to prepare to report. His fundamental question was the same question that I posed to you earlier was
when you have a different processing conclusion out there make sure you fully understand how we
arrived, ?how?, the operative word is how, how we arrived at the earlier conclusion.

15

TM:

TM:

KW

Well, I did that. I . I mean. Yes, I didn?t review all of the contracts and agreements. But
ultimately yes, I read eir memos. I had discussions with Chris. I mean originally, he was trying to. . .I
mean I ith Chris. I think I feel like I fully vetted out what their conclusions are. But I
was, I was fully aware in my mind that it wasn?t, it was at odds with what I was thinking. Because I
really didn?t know to what extent, Chris, eSpecially after In conversation with IR, to what extent, Chris
was really going to be able to expand out on this position, Womg to come down
to the. . .You know and 

  

All I said politically. do you see that?

I was trying to do that to try and set up a meeting with them, and then JR accelerated the time schedule,
so I had to give him a phone call, which probably wasn?t the best

Well, another issue in the process, and ah, you know, besides the communication, want to talk about this
just now, but when dealing with the, with issues, okay, ah, your quarter end, okay, from your
prospective needs to be a month earlier than a quarter-end for everybody else. Okay, in other words, if
you wait until the ?rst week of July, or, or, you know which may be even the early part of next week,
can you come the way, I have this list of issues, you?re too late. We close
the books on the third day after the end of the month. Okay, and once We close those books and
everything after that point becomes a major, major problem and an issue. We?re all running too hard.
It?s already so hard enough to get the books closed here in the time frame that we have to allow, that
you can?t allow the end of the quarter to pass with open issues. Okay. You just can?t.

One of the ways that Paul and I and, and and ab. . .hold of that and in fact IR and I do this with JN as
well, we have a running list of issues. Here are the things that we?re are, are, are ?ushing down there
and who?s accountable, and the time frame, and we make sure. That last month, I spent most of the

month of June, communicating our issues list. k)

Now, did 1.. .when you and I communicated a long t' c. ago before we knew that you were chasing this
one particular issue in Wnumber one, the doll. magnitude of what we were talking about wasn?t
on my radar screen; 3 million buc - - - - a a i, billion dollars lus is inconseuential really, other than we - broa er issue I that on hadn?t ent

ch time on that one articular roblem. 11 you ow, we?re. .we re, a, I sort 0

. . -. gm lean - . a so 1 ?g to get dealt sort of in the normal course, and I

was surp 'sed when JR told me that we were still pursuin the issue a month later, maybe more than a
month la r, at the end of the quarter, and I think that, you a ow, part of the idea is that your team does
have an 01 going dialog with me, hey I have this issue, I?m being successful in getting any. . .or
getting peple?s attention to it, you know, you know, you need 0 get my help managing the issue to
ground, 0 y, on a timely basis. And however we can manage tht, you know, but we, we need to start,

'you know, this particular quarter, we should have met that wee a?er Memorial Day.

And you sai .1 Okay, here are the things that concern me going into end of the period, and get a

schedule the and get date certain on when we are going to close on the issues. This one, this one, this

one, this one, so that they all can have been dealt with at booked at be ore

 

 16 

 The reason people get excited, okay, besides the political aspect of it for Chris, the guys in the UK is

TM:

TM:

this, you know, their comm .. .your communication with them that the day before your meeting with JR,
they had already closed the books.

Well, I don?t need that. I mean. I just told them this is an issue that, you know, this is going to
take some time. 

In, in, in this world, Man it?s we?re movin fast. You know, ou ot issue, issues have a, that
3 3 

We?ve got a. . .it?s a challenging to take that on to ah to deal with.

And I wanted it to move fast. I mean mean, my basic position hasn?t changed in 2 1/2 - 3
months. Since I?ve, I?ve covered it. It never  nothing has changed. I mean I?ve 
talked to Charlie, tried to give JR all those memos from a month ago, emphasized that I was very
we?ve had discussions and you indicated it wasn?t material, so that?s Why I kind of left it up
to JR to, you know, to work with him to see what he thinks. You 

END OF CD

17

Discussion- Mark McCollum (Part II)
July 18, 2005
Participants: Tony Menendez, Mark McCollum

TM

TM

{if-what apiprc-pria, You like. Um. Ah. You know,1 

 immiullal uoes 

6/9/2006 12:36:06 PM

wit/177i

If any thing. . . Otherwise we can just a - forward on this

Well, how  If we deal wit quickly and move on. Um.. you know.  think  is reaity
eencerned abeut  Enz' fet famitiar  the issue  if the  Fundamentals Training was
?Ifwe Yew [Um  r? . 95%. . 'e . 
ineerrectty, we regained, terminates address ihewihigsqf?p};
 I - re can. at nurseives back Within the, within: the?iin??s
you ow,1 -v .. 
I don?t want to hear what you are working on, what I?m trying to do is to give
you some sense of prioritization. Okay? Fiberspar was a big issue, okay, and that needed to be pinned
down quickly, and you know, and communicated. $3 million dollars on revenue rec., if that, if that was
the only issue we had, it?s not a big issue and that needed to be handled quickly and then move on to

other things. Because, you know, we?ve got a lot of things we are chasing. You know.

Uh huh.

So, it, it, it. . .that, that, but that doesn?t mean I don?t want to hear about it. So, lets kinda recap here a
minute. We need to communicate more, alright, so I can help you prioritize your list, and also if you got
sticking points in your communication, alright, then [noise]  What I?m asking you to do is, you?ve
got to be politically sensitive. Okay? And I am not, when I say that I am not, asking you to compromise
your ethics and I?m not asking you to compromise the position that you feel strongly about. Okay?
What I?m asking you to do is to be sensitive to other people?s feelings. Okay? This organization, we get
a lot of peOple who are experienced, and smart and sharp people. Okay? You ham to give people that,
if you don?t, you are not in the right organization. Okay? I think there are a lot of smart people here
who are very technically competent, and technically competent people, hopefully you?ve experienCed in
your career thus far, you know, can reach different conclusions based on the rules. Okay? And so it is
important to be sensitive to their feelings, to understand and fully to vet that if somebody else reached a
different conclusion, understand why' they did, and to communicative sensitively if you are going to
reach a different conclusion, think about what are the rami?cations of my decision on other people, not
just the organization, but other people who may have reached a different conclusion.

Um. .you know. On the memo for IR, and, and you gave drafts to JR, okay, ab and. . ., and I understand
that. Okay. JR is, you know, he?s swamped. You know. You know. IR comes in at six o?clock every
morning, and does leave here until 8 o?clock at night and works at least one day a weekend. Okay?

So. . .You know, be sensitive, you know, he?s got a lot on his plate and help him get prioritized. You
know. Hey, I?ve got this memo - If you don?t get comments back from him, ?x it, you know, hey, IR, 1
gave you that, you know, do I ne. . .do you have any comments or thoughts and then respond to it
because I want you to go back and double back with people. Do it. I think that?s an importantto show
good faith and then, and then also if you have feel the need the pressure that I?ve got to get this opinion
out, go back in and say IR 1 need to get this released to others. Are you okay with me doing that? And



A I :30 minutes:

I

1.

-.
.FU

stats?amassetsaggees with yaas  assesses  assesses  Okay? {tsetse}, 1

Chris, yeti: lmew, Hill same thing, same issues, Utkay, He?s a guy, shay, but ultimately, he?s

W89 

then, and then allow him to step in. Now the combination of you co - I 'cating with me, and you
communicating with him, because I can help him set his priorities too. the doesn?t answer to me.
Alright but if he?s not looking at it and you say well I had him look at it an he?s not responding I can

go JR you really need to do it.

  
   
     
  
 

PageZ -

I can also help communicate that if he?s got an issue of the fact of you.

Alright with that communication loop, you know, could have avoided, you know, feeling just like
he got his toes stepped on, because IR for the political issue with him is that it, you ow, you feel that
he should look at things before it goes to me, and then it goes to KPMG. Alrightknow so, is that easy? No, that?s what I?m tellin; ou itthat  yea,  370:, '3 v?   . answer is I?m inst getng te sert assesses; shay,
what  happen te- yett here is that the process Witt ran ever you. Because, because the
retattenships  he damaged, peeple  not trast, yen Imew, and ae?ekty yeaw?t find yearselif
irrelevant heeaase   werk amend yen. Gkay?? That?s not what you want, that?s not what I

   

and and; it?s ant heaase their, and it?s ant hes ise'ariy

 

..

beasts?

want you to understand that, the isSu - is not disagrement, the issue is around how the process for which
free - .. -. usion. "2 ve?yn feels lake, yea - on raveu' ea 
er and she teets threatened heeaa she est-std he embarrassed in treat ef  hess which is Cris.
Ultimatety ifhe has to: make an adj a - r, eta-URI end . - 4 - ?4
5s, s; a 21,, ave tn deal with i, hut she deserves, persenalty the right 7e be heard, how did:
she, why  she, reach a stifferth eenehtsten. Gkay?

the gay whe was respensihle for timing a thereagh Eels at? his hem-ewerk and, and if, it", if yen
reaehed a different eenetusien, yea knew it eealdt reiteet en;  Understand that, that he has the
right to be heard about the and ask those questions.

 

 

 is interested. Yea know. He just wants ta get it right, but he wants tn die it. . en knew he?s
he?s sensuve . eenseieas, that the is his, net  at, at he ?ees agi ueandalsoJRissensitivetothe

issue that if Evelyn and Chris  to re?ect on it, then it?s not right.

So, I?m just, I?m..I?m laying this out as an example, and of course, you know, for me, ah, my biggest
concern is that I?m watching all this going, happening third hand, okay, and people are calling me with
the political issues. Okay, the technical, I had, you know, I had no awareness, because we never really
talked in a while about it, I mean, I sort of do, but what I get is the dumb, all the political issues, so I
spent in the last week on this particular issue, I spent 4 hours with people calling me and ragging about

 WM  0j?<

the pr ess. Okay, that?s just something, that?s, that?s ultimately the that everybody is going . ..

yea I, you know, and I?ve seen a couple occasions 

NOISE 



9m not dating it to- tntenttenatty linrt them at eatt them a :estien and that?s what hart them
were it?s not that they shentdn?t me, li mean, t?s net that i don?t think that E?rn
dining anything wrang. E?tn trying to tie the right thing and: nteve forward. 

I wanted to try to make sure that in the

But see, and, and I understand that, and that?s why, you know, 
although that we didn?t, did  that,

midst of all that communication that happened on Friday afte oon,
that, that  trust

 

Trust is a multi dimensional thing. Okay? Um. it has nethng tn the  trusting yen? 
@ka 7?  has ?2 Erin te- ate- with  a an patitieati n: ?n   .- ..
e. iess way. I am a ?rm'believer organizationay, an probably just, just, I?m talking about
organizational management here, okay. As individuals, okay, as a person of integrity, the way that I
have to establish myself in any organization I work with, with any individual, is I have to earn their
trust. I have to earn their trust by number one, always, you know, being true to my principles, in terms
of, you know, standing up and saying I?m going to do the right thing, and all that. I mean. They know
where I stand, personally, ethically, whatever else.

At @9:40 minutes:  

MM But the other element a that is that they know that when I, I act, when I do things whenI make
decisions, I?m goin; 0 do it in a way that is courteous, that?s sel?ess, or not operating ?om self
motivation or sel a ggrandizement, okay, but that I?m going to put the best interests of others in front of
my own best in rests. Okay? And that?s a very subtle thing, okay? But it?s an important thing as a

leader of an anization to the people that work here, you have to understand that, you know, I?m not
here, it?s no all about Mark McCollum. It?s about the organization, it?s about them, I want everyone to
be success 1. I want these individuals to be successful. I am natural. Okay.

. .

 
  

.1 I get nothing ant ef tilts/I mean, it?s limean, It?s net at set?sh

What etc they think It This is, this ts net gee-d fer nae in any way, shape at: term Ernean tt
deesn?t  mean, The whete tssne think

 

l\ 755.75%, to LU a arrive, you know, fully in their head. Okay? But

one of the things that I perceive when they are complaining is that they are feeling a bit, sort of, two
things, one is that, um, possibly, possibly that you, um, you feel that they aren?t technically
competent. Okay. I?m telling you what they feel.

TM: Okay.

MZM

?Page4- 

Okay. You need to understand, okay, that you, that a person?s feelings are valid, Okay, that doesn?t
mean they are right, but they are valid. Okay? If a person feels that waybelieve
that they feel that you don?t, um, that you don?t believe they are technically competent, that
possibly, possibly, you believe that what they would try to do, if they got involved in the issue, is
manipulate the ultimate answer to be able to..an incorrect accounting conclusion for their own

self..which is in the form of lack of trust on your part. In other words, that you had a, you know

what I?m saying, that they feel you had a conclusion and you, you, you know it?s right and so,
therefore, if you give any audience to them about sort of this, that you?re gonna, that they?re \fk
gonna to just to talk you out of that, and that that?s, um, manipulation. Manipulation. (If,

can  

At @12:45 minutes:
MZM And a, and a, that a? ore, you don?t trust them. You dOn?t trust their motives. May they
were trying to  ?0 an answer that wasn?t appropriate. That they were'short cutting 

  

- You know, ah, they are probably

whatever els a and that, and that, and, and, and again, that?s a, um..that reaction on thir part.
Okay? ..  it know, but I?m, I?m, I?m more talking about Evelyn than Chris at this pint, that
reactio on their part, I think a natural defense mechanism, that?s why I articulate that I I that why I
say  el that way because that defense mechanism Okay..You know. I

 
   

- hey?re, they?re now sort of defensive because they feel I get to protect myseif, because this dining
is going to  . l? have had no audience, no chance to defend myself. No- whatever. nd, and,
and you know, like I saia . the reached the wrong canelnsion 
wan ow why, I want to know why because u, we don?t
know, because it is important for me for the control
if we follow reach the wrong conclusion again, I also want to
environment, I also in part want to make sure that when we do have technical issues,

particular process in including incorporation of experts, and even, even more importantly the
incorporation of KPMG.

It helps me to understand just how far I can take that in trust. In other words, if, look, if the national

of?ce of KPMG is not gonna give me consistently good answers, I ain?t going to go to them. Why
even go there. So, so, so the question about why did we reached that different conclusion I think is
there may be  by the deal that they uncovered that may not have been open to you. Okay? Or the law
or GAAP, or something like that that we just didn?t look at. And I, you know, and I am'always, you
know. . .I just know that the rules are too complex any more for anyone, one person to be an island of
technical competency. You can?t be there. So, so, it, it?s so my interest in getting that information isn?t,
you know, and I think that?s why I?m trying to encourage you as what would, understanding why they

reached a different conclusion is important for a number of aspects.

Not doing that, I?m still sitting here today with an incomplete answer. ?Cause the anSWer isn?t all about a
what the technical answer is, I have to look at internal controls, I have to look at process, I have to
look at people, I need, I need all those answers from you. And until those answers are fully vetted, I?m,

I?m paralyzed in this. So, so. .

and I?m saying when on the phone we?re not talking about your

?t had a art..a chance to articulate those things. Feelings that you are

feelings, because that, they haven
you don?t trust them?

It?s all about the answer, and therefore, um..um..they feel that mayb

 Page 5 -

AT 16:00 minutes:

TM

TM

MM

I I admit, I have not engaged Evelyn in these issues. I didn?t know if that was really something
that she wanted to be involved with or should be involved with in her new role. Chris has been
involved. And we?ve discussed the issues with him. Now if he?s not communicating with 
you I maybe that?s my fault for not going directly to EVelyn. But it?s not as 

Well, but I think that I said you should talk to Evelyn. And I think that JR said, it?s JR communicating
to me, that you should talk to Evelyntell you you should talk to Evelyn, then you

need to talk to Evelyn.

Yeah, well this is now. I mean, that?s over the past couple months I didn
needed to be involved in these things. And..l mean

?t know to what extent she

When in doubt, come and ask. Okay? If there is ever a doubt, and that?s what I say, you need to, that?s,
that?s part of this communication we want to avoid that in the future. From part, okay?

Talking. .you know, talk about the feelings of those people who are from part. I think the thing
that, that he?s concerned about more is that, um, you know, as your operating in a support role for him.

He?s looking for you to support him on the technical side. While he, he..I know, because we?ve had
this discussion, he ?rmly believes that you are technically competent. Okay? That you have, you
have a sense of the rules. Okay? What he feels and is concerned about are two aspects. One is that,
um, ah, you don?t follow instruction well. Okay, in other words, that is if he asked you to do something,
that the follow through doesn?t happen. And [noise] Fiberspar, and everything..and there were some
things that he asked you to do that I. . .And I don?t know the technical details. But, but, but he felt a
little of that and I think he feels more on this, this other issue that, he, he perceiVed that he asked you to
follow through and go find out this why question. And that there wasn?t a form of communication back

to him that level of follow through and he also fells like that he, he, ah asked you to sort of make sure

that he was signed off before it went further and, and, and that didn?t happen. So he feels like that you,

uh, you know, [noise]

At 18:00 minutes:

MJVI

MM

.. that you are going to do the things you want to do and not, not take instruction ?om him and

that, that scares him. Because, you know, his View, view 

Look I?ve . . .You know, I?ve got a massive organization, I?ve got to manage here, and managing the
managing the size of this organization is

people, the personalities. You know. The hardest thing abou

getting everybody to work together . . . and that what happens in the Lone Ranger scenario is
somebody?s out there doing their thing, okay, and stepping on people?s toes, or, or not following

instruction they could become destructive not by reaching the wrong conclusions, but destructive in

terms of building working relationships With people. Okay, in that.

TM

- Page 6 -

So, he?s nervous right now. He?s nervous that, okay, is Tony going to be a team player here in terms of
working together with people and doing this the way that, you know, helping them  guidances or is
he just going his own And therefore,

Let me. 

And then the last thing which is, and the last thing that, is that, uh, JR feels that, ah, and I?m going
to be honest here, I feel this a little bit too, okay? Recognizing that in a technical area, you know, there
are black and whites, but not every single thing is black and white. Okay. Reasonable people come to
different conclusions and apply the concepts for the conceptual framework. Okay. And that he?s, he is
concerned that in your thought processing, in arriving at conclusions, you are looking in on something
potentially like a bulldog and you are not fully vetting it, okay, with reasoned technical peOple make
sure that that, that conclusion is well grounded in considering all aspects of the con, conceptual
framework and the rules. Okay, now, that?s not with regard to this revenue recognition issue. Okay? I
mean he sensed that a little bit in the, ah, Fiberspar issue, that, you know, arrived at the conclusion and
everybody locked in on this was how it was done. But then in the end, while we still got the right
number answer, I think, the number didn?t change much, how we got there technically changed a little
bit in terms of how you allocate losses. And ah, in terms of the rules, ah, I can?t remember what 
but, that, so there is a concern there that, ah, maybe, maybe not for a particular this is..

Chris told me it hurts them to leam to listen to others in arriving at technical conclusions. That?s an
important, an important aspect of being a good technician is the ability to listen, not just reading, not
just understanding, but listening to people and getting all the facts, not only about the situation you are
addressing, but about also  understanding the rules, how they are applied in practice. Okay? And ah,
and, and what, what?s the full interpretation of this.

AT @22:15 minutes:

TM

TM

TM

What do you mean? Can I take a few minutes on Fiberspar?

Because, you know, I have to say, you know, well, we spent a lot of time making sure we got the

accounting right. Obviously, we didn?t roll forward the account balance, and again that?s probably

something the accountants should be doing. But we didn?t roll the balance. Effectively the
conclusions reached have not changed. But I want to, I want to emphasize that inside?this 
I tried to talk to JR about it; he brought Charlie in, and I?m not kidding; I went there to talk about
Fiberspar and those two guys basically kind of attacked me from a million different positions. And it, It
wasn?t a team. I mean, I was just sort of left trying to defend the position and they were challenging me
on every single from ?why use EITF 98-13 and 99-10? That those don?t even apply. That?s not
even applicable?. I mean, I was appalled at that meeting. When at the end of the day EITF 98-13 and
99-10 are applicable and you know, that, basically, they weren?t working with me as a team player.

I mean, I was willing to discuss the issue and certainly explore different things but, I mean, they
kinda, they tried to do is shut that door on me when they, you know, they challenged every, every
aspect like I wasn?t even on the team. All. . .If my reaction after that point changed, well, 1t?s that

If I wasn?t, you know,

TM

NIM

TM

Page7 -

I mean IR tried to reach conclusions that weren?t correct in that initial meeting. And he tried to explore
different things. And even after that, tried to prove that we met all the others, the other 
Which I didn?t have a problem with, but I, at the same time I didn?t think it would get us to any different
answer. And so, I would listen and that was ?ne. I mean. Um. But, I mean no one was working with
me, on this. I mean. Here I was the bad guy. Iwas the ?Fibersparfault, that?s

really how I felt.

When did this meeting happen?

This meeting happened, let?s see, about a month ago. Maybe even a couple months ago. We set up a
meeting just to talk about Fiberspar [noise] and JR showed up with a stack of papers this big. Charlie
was there. And I was, I was kind like, why was Charlie here? But both of them were basically attacking
me . . . You can talk to Charlie because I got back with him afterwards, because I was like, you know,

this was a little uncomfortable. 

At @2430 minutes:

TM

TM

TM

He even he admitted. He goes, you know this isn?t really my role or responsibility but JR asked me to
get involved, and, ah, and so forth. But, yeah this happened a couple months ago.

And, ah, well I guess that, I mean, they were ?at out telling me that the memo was wrong, that the
conclusions were all wrong. Because I had simpli?ed it when I would discuss it with them, talked about
this ?modi?ed equity method? the SEC was explaining. Because it, it was a little complex because the
EITF addresses the modi?ed equity method through those two And so, we were following the
literature in the memo which made it a little more long and cumbersome and wordy to get through but
ultimately that was the application of the modi?ed equity method that I was able to verbally
communicate to Charlie and JR.

This was after you had issued the Fiberspar Memo?

This was after. Right. This was after.

That was the issue. That was the issue. If you want to know why JR was going after you, it was because
you did not talk to JR before you went through with that memo. The memo Went out, you didn?t have
any conversation with anybody, and it puts pCOple on the defensive. Okay?

If the memo goes out and all the sudden, in the just, like a large organization communicates upward
very rapidly, all of a sudden, all the way up to Cris Gaut, and others, you know, that, you know, we?re
taking a hit. And they are wailing on JR. You know. where in the hell were you? How .come you
haven?t communicated this?? Okay? So, so that release of that memo, broadly, which I think KPMG

may have been on the list as well?
Yes.

Okay.

TM

TM

TM

TM

- Page8 -

That was a mistake, I mean, that was, that was  and I totally admit that.
Tony. Tony, listen to what I?m telling you. Okay. What you did was you clipped JR. Okay? You need
to step back for a second. Instead of saying gee wiz, he was off base. And you know

He was pissed. And you know what, if I had been in his shoes I would have been too. Okay? You see
what I?m saying. I?m just asking you to, you need to listen and be a little circumspect here. Okay. I 
I?ll talk to IR too and, you know, I do regularly. Okay? He?s not, he?s not a golden boy. Okay? You
know. He has a man, he has mannerism around him that can be off putting as well, but, okay, you have
got to recognize and this is particularly hard for the new guy. Okay? Communicate, communicate,
communicate, over communicate. You have to. You have to. I talked to Cris Gaut all about this
Fiberspar issue 10 times, 10 times before he ever saw anything in writing. I mean, I never put it. You
know..I said, ?Cris I think we have an issue that is brewing its on this one issue [noise]? and I come

back a little bit later.

?Cris, we?re still looking at this issue.? Okay? Even though I basically knew wherewe would come
out. ?We?re looking atthis issue and exploring different things. But what do you I talked to
him about 10 different times before I ?nally came in and said, ?You know what Cris? We?re gorng to

have to take a hit.?

Okay, now I do that, because that gives Cris the opportunity to get his questions Out, make sure that I

am doing everything and exploring the issue with him and then it gives him the opportunity to
communicate up. -

.. ..You know. You, Charlie and I, we had us a conference call. We talked about the [Fiberspar] issue. I
need to talk to IR. I went in to talk had a very good conversation with him. And he dismissed me.
He did not want to know anything about it. He said, don?t want to know. Get it all documented,
written up and then get it to me?. I mean, he had basically dismissed me.

We didn?t have a dialog. I mean what did he want me to do? He was like we?ll just put is all back in the
memo and we spent about a week trying to do that. And then made the mistake of trying to  this
memo out because all memos prior to me, they already had a process and, and I incorrectly relied
upon probably James as to what?s the process with being included on drafts, and he thought
that they were [included] or indicated that they were. Obviously, you know, that it wasn?t
appr0priate, until it went out. Okay.
And I regret that happening. But ah. . .But yeah, there are a lot of con?icting, ah, communication

'ous aspects. One, I did a memo fully

problems. But, you know, it?s' not as if I hadn?t try to explore varr
vetting it out. One, I tried to have a conversation. And the second thing was, I could work on my, when I
deal with it like you said, spend more time and validate a little more. But it?s not as if I hadn?t tried any

of these things.

At 29:30 minutes:

MIVI Okay. Well, again, ahight. Have good communication

with me. Periodic. You know. Let me know

your frustrations. Okay? If you are trying, give me an opportunity to, to, to coach you, okay, on how to

TM

  

4N9

3?62; leg?720?? 1,046 

draft the next comm cation issue. An think that the issue with IR. You know. I he wants a draft,

take a draft, just type it,_ and go here?s, ere it is, you know. Take it, take it, take a 10 at it. Get to him.

You know. That?s. . .I don?t know en you typically by to arrive at door step, you know, but, but

a, you know, find the time to get 0 his calendar and deal with itlone, or whatever. (Y

Um. Talk to him about the quest? ns. You know. Before you arrive at an answer, say, you know 

what, I?m looking at this line cause it looks like a question. Do you know an I about it? Yeah, 

get him involved before ydu rt, you know.. 3 


vs

One of the things that puts ?ie?ople on the defensive is to come to them after you had . - - - a - - .

a a hit. You know. Ju..Just . - 0 3 We the
ompany?s job is to  money. Okay? it?s net to write off investments. Alright. That?s a a
value added- exereise. ght. So when you come million dollar hit. Well, you
know. That gets peop excited round here. ?Cause we just destroyed 10 million dollars of shareh 1der

value. Right? Okay? 1

Not, not constitute a right answer .et. You?ve got to do it. Don?t expect people to like it, Oka . 
people are - n- - - - - ieopie are goEmmi  6
a . to it I wouid ?re them. You know. We shouidnz9t just roll: over and take mean, it?s just, you: knew. You, You?re new to the arganization and if I thought this was
a, you knaw, un?xahie problem, we?d be having a: different conversation, but I don?t. Okaybut I?m just trying to let you lmow, it?s a different environment than probably you are used to

dealing With- mt PUbliC accountng a - - - I all business. Oka . Communicati 
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A 
Um. It?s user ?iendly, easy a wr- wi . There?ve been some issues here that I think that, you know, I
mean, I, I didn?t jump on 3 ea but you know, ?cause I kept thinking well, this is all been. . .what

 

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'enue ee thin' oure? a. -

not too late. You 
ant .3, you ow, this is what I?ve heard, and I?d like to get your

Pull out a the documentati - give her a chance to re-review it, you know, with Evelyn?s account' g,
you kn same with you kno i- On the memos, you know, get with JR. I thinkin the nd,
we a want to get the right a: swer. And ah And that?s not the issue here. The issue is just really . out
ho we go about getting re and working 'th Chris. 

ast thing, ?cause I ?m in to have to run, .. .cle the, um, um, the technical meeting that you ad a
few weeks ago and I A that there may be one on alendar coming up fairly soon is there a A I. 
update?

Well it?s 03 doing mostly GAAP upd e. I have a conference call 

0 (6b

7/

MIVI

-Page10?

That?s a different meeting. It?s quarterly

MIVI Quarterly meetings are a great venue. And a I want to be very candid here. Okay, That?s, that?s, that?s
what it. .  I was a bit disappointed in the last one that we had.

AT @34:00 minutes:

MIVI Um. . .The topics, I think were the correct t0pics to cover. But I think two things people sort of, you 

MM

MIVI

TM

TM

know, obviously in our culture of excellence process is one of the things that is very important is raising
the level of technical competency across the ball(?) organization. It is a . . it?s one of the 3 legs of the
stool, okay, to have a technically competent. It is very important, to me, to Cris, to the Board that our

technical competency raises. Um, in light of that, you know, we communicate out to CVerybody that it?s
important that you are technically competent.

Every single individual in the organization, you understand how do you do your job and you understand
the rules. Okay? And we committed to provide the tools to do that. Okay? When you looked at the
room, you know, you have standing room only in that room, and I think that speaks volumes about the
hunger and desire for people to improve their technical competency. They want to know. Alright.

In the meeting there were a couple things that happened though that kind of, that?s  kicked our goal
in the shin. Okay? One, and the one that I think was to me the most glaring was the..on several
occasions you and Susan and a you know,. the statement that you guys don?t want to properly
care about this. You know. You don?t care about this or it?s not important to you. Well, and I think

- that was a topic that you know, you?re trying to cover some very complex things in very short period of

time. And I don?t think it was intended, you know, probably never recognized it, but what I. . .what
those around me picked up was, well, we?re not, you know, it?s not important for them to understand
this. It is important that you understand it. Okay? Now, can they understand in the context of a 2-3, 3
hour meeting all the nuances of those rules?

No. Absolutely not. But the important message to convey is that this is important. The core 
organization. All these rules are important, and what we want to try to do is give you enough

resources to recognize when a certain situation applies and when you see it, here?s who to call. Okay, 'In-
other words, instead of saying that it?s not important, convey the fact that it is important, and here?s,
here?s the situation that applies, call, call me. This is what we are here for is to help support you in this
area and we?re going to provide guidance for it. But you never convey, Well, it?s just, you know, you all
don?t care about this, or to treat it area implicitly like well, you know, you, you, you see the sublte

differences.
1 can see that. I was 

message 

Yeah, since I- was might have thrown in the towel, but, I mean, you ?d never know. . .but. . ..

TM

IVIM

?Pagell-

It was, it wasthink during some of the nuance discussion that you were
getting in there. And you. I think you sort of started out saying this was probably too complicated for

you all.

It?s not what you had to say. . .

5 minutes.

I don?t think that?s what you meant to say, but that?s what you did. So it?s, so it?s important that when
you go in understanding that the underlying objectives of the meeting are to convey technical
competency is important, we?re glad that you guys are making it a priority, you know, a good show and,
and, and that, that you guys as speakers are prepared, fully prepared, to put stuff in context. I tried a
couple times to prod you to, I think, give us an example of where this would be. Okay? In other words, I

was trying to say, in other words, the question addressed is when will we recognize this is an issue so
we will know when to call. And you didn?t bite on it.

You basically, ?cause I don?t, I don?t, I don?t think that you were prepared to answer that question.

And a, and so what I?m hoping for and asking you to do the next time around is that you prepare for it,
be prepared to answer that question. How is it applied in the context of what does Halliburton. Give us
an example where this would be there so we can recognize and that you will always give that message,
you know. If you?ve seen a situation, here?s where you can go ?nd the rules, here?s who to call. Okay?

If you, if you have questions.

At 39:00 minutes:

MIVI

TM

The second, the second thing is, in the same context, is in your charts, we all had handouts, okay? But
in the handouts, okay, what they effectiver were, were, um, bullets that, that prodded you and the rest
of the guys to know what to say. Okay, but they weren?t effective leave behind materials. They were
done in the context of helping you get through, through the presentation, but not, not effective in terms
of giving someone something to walk away with, put on their desk and say, gee you know, this might be
something. . . who do I call? You know. What?s the rule on this? .Do you follow this. -

Uh huh.

So, what I would like for you to do the next time around is that on the, on the materials, you need to do
a better job of getting those, sort of, again, toward, toward that objective. I don?t how the pro?ts came
together. Um. I thought that your presenters were pretty effective, Susan was okay, you know, She was
getting better, and I thought that Charlie was. . ..[noise]

But one of the things I would encourage you to do..You got a. . .it?s a great venue, you know, everybody
there, you know, all the leadership there. You want to put your best foot forward. That is your time to
shine for the organization. You want, you want to build credibility to the organization, that?s
when you, that?s your venue. Okay? So, I wouldn?t approach that sort of meeting casually. Let me know

if that makes sense

TM

TM

TM

TM

TM

Page 12 

You know what I?m saying. In other words, James ,you know, you pulled this together
everyone will give you ..

There?s some of that..In fact I wanted to postpone this once  for you. we spent a lot of time in FIN 46

with two different paths and I hope it?s more along the lines with what you are saying.
No, well, I?ve heard, heard great reviews on the FIN 46 training.

This is what I?m 

It?s kind a, kind of interesting because, I?ve heard that, I go..W, w, you know. based on everything I
heard about the FIN 46 training, this doesn?t, this doesn?t look like it because I felt like the FIN 46
training has been like that process it probably wouldn?t have gotten the same rating.

Well, I?ll tell you, I mean, I, I had my differences, we need to postpone this, because you didn?t mention
it in the staff meeting. [Noise] You know. You were kind indicating that you really wanted to slide this
back. . .. And I said look I got a lot of crews in this and Dave said, ?We?ll make this do GAAP
Fundamentals.? And I just felt that I didn?thave enough time to really get involved with it. So let?s
move it. And those two were adamant. No, we have to move this meeting there and 

I didn?t want to move the meeting it?s very important.

Right, I said, you know, you guys are adamant about doing it then we?ll go forward with it. But that
maybe really that we could push it back two weeks when I could spend more time, but. ..

Well, that?s you know. We need, we need to look forward. Moving that day to the next one. I mean,
get a timeline together, if you?re gonna, if you?re going to farm it out to Susan and James, get them,
you know, you;ve got to have the materials in place, if you are going to have other speakers involved,
have them, make sure that their, you know, presentations are consistent, that there?s expectations about

how people will deliver. Go through the presentations, you know.

Put on that hat, okay. If I?m sitting here and I don?t know doodley about this process, is this, does 
leave behind material help me out? Would this be an asset to takeaway? Could I decide to invest the

money in.
We 

And then ah, and then, you know, I?d, I?d make Susan, you know, go through the presentation. . . ..

I wanted to do that. . .I did

You know, And, and, and spend some time on your own. Spend some time on your own. Think about
that application. The application of it is very important. And if look, and if you can ?t get there on a
particular week, then don?t cover it. You know. It?s better to call off. But I agree With guys that

keeping the dates is an important thing.

TM

TM

-Page 13 -

I mean that, I think that crunch because we already spent a lot of time with this one and also the KBR
thing I was spending time trying to prepare for and this 

That?s probably true.

So, there were 3 presentations in a matter of a few weeks that we?re trying to prepare for. And right
now I?m working on that revenue one and, uh, I think that is really signi?cant. But, you know, I?ll leave
this with you and this like I said, this also includes the solutions for all the .. .. for everybody.

So, Let?s, let?s recap.  Obviously. You and I communicate more. Okay? I mean. This. You got to get
here. Okay? Make it happen. Alright. I?ll try to do my best to, to, you know, stimulate know.

We need to be talking together, even if its 15 minutes every week, keep your and that
includes, you know, the frustration point, you know, and, and, and communicate to me, when you?ve
got a question, hey, something crossed my mind that I think you ought to look into, or somebody sent
me a note on an issue that looks interesting to me and we?re going to have to do something, well, talk
about this, so that we can prioritize and I can also coach you on how work the organization. Okay?

AT 44:40 minutes:

MIVI

Um. WhatI need for you to do. Okay? Is is to listen, okay? Listen to my coaching and follow
through on it. Okay. This is important. .Might affect you personally. Same for JR, you know, give
him an opportunity, you ought to be having this sort of periodic update with JR. Just a couple minutes.
The best time you catch him is in the morning. Early. He?s in early. Get him before he gets out of
control of the day, and just say by the way, I?ve got a couple questions. And ask him questions. Pose

.. .. Ask him what?s on his list. Is there something that I can do to help you? What?s on your list that I
can help support you? Do you have an issue that, that you?d like me to pursue? The revenue
recognition I think is on his list. Okay? So I would go in without having your mind made up and talk to
him and say okay, you know, what would you like for me to do in terms of pursuing this ..

Talk about the revenue rec training thing. But, but, but listen, okay? And, and, and then follow through
on this too. And also I think it was in regard to this particular issue on revenue rec if not today, go
back to Evelyn and Chris and give them an opportunity to have their day that asking a question of how,
you know, out of this, you know, wha, what, what was the basis? And, and a, and keep asking them the
right questions. Not just, well, this is what we concluded but how did you arrive a that conclusion. And
how the process, you know. And then, and then collectively, let them, you know.

but I think you are going to end up ?nding that just, you know, fearful, [noise]. . .problems, you
know..this is what I thought. Okay? And a I?ve always had this sort of na, nagging feeling that, that th
KPMG guys were with me, okay? That, that could be the conclusion. That?s gonna speak volumes on
terms of how we approach them. And last, I?m not going to send them draft memos if they are not

going to help us get the right conclusions. Alright?

- Page 14 -

  
 
    

    

 

 

But [noise] have that, have that process and, and do some things to sort of repair that.

TM Hey, I have known Evelyn a long time. At least more than . . .years. downward without my
real..I could. . ., but I..never was intentional

MM It never is. It never is.  You know, I don?t think. . . .Sometimes we all have them. I have my own
personal blind spots and nothing, you know. Evelyn, obviously,

MM You know, she recruited you, you know, so it?s important for her that you at least respect that. And, I
think, you know, personally, she did that, she could, but a, you know ?nd it a personal issue on this
thing but I think also, she doesn?t want you to not be successful. She?s a, she?s a, She Is worried that
your lack of communication with her on this Your It?s obviously easier for you to communicate than
the organization. You know,  

MM Gets it magni?ed when it?s dealing with others across the .. Okay?


TM Okay.  *0 
MM 1 hone 19.9. thaweah .  You false thisints). c99$id?n?ti??3 5555'? . "31159-5: 77 
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f?biielust-ohs' vo'ulafre f?a'?hihgi'an'd are. ..ang great jolts huge kudo?tn'm  

Sense . . w? ..

And again, you all are in a political environment and you have got to  to be successful.   

TM That?s what  because  important  So Evelyn, should I, I can call her?

MIVI Okay.

MIVI I know that if you call her she?ll be ready. She may vent a little bit. Okay? Just like JR did on the
Fiberspar? IR has a way of venting without explaining it exactly. I called him on 1t.

TM You did that?
(Laughing)

MM Andl was actually, you know..And so she may vent. .. .. Okay. Understand that. You know.

TM Well where?d she  about me?

MM She may not say directly. She just basically helps people. . ..expect it. . ..Okay? And a.

Walking



 
   

 

 

?Je?ve get to repair whatever (lama.
:ey used.


0? 

-Page15-

MIVI  this times we had an Esstte he the  Coast  Bill - Holid-  eteer

MNI Chris went out there 23nd: surveyed; everybody eEsec Knowing Where material flowed they were
doing something Etke ?t was the UK hut they had this special situation and however they did: it,
they did: remit: the eenetusiem and on that we3 We don?t have te werry about lit-?t Hotel. and?
then when they put that  fendamenatets ?aming tegethet?S they put that ?owchart tegether,
and went are-end the world and communicated that and then what we?re tails:ng about are people
have altered their contracts "udidn?t match up? But it was in an operational, at the time I don?t think
it was an issue hopefully, maybe peOple are just  and I?ve seen and particularly in the Um, you

know, Most of the people do, they just don?t have 

TM Right.
MZM But ah. So I don?t think we?re going to ?nd it too hard but we got to .run it down.

Door? Footsteps.

End of CD

Revenue Recognition (Bill?and-Hold) Meeting

August 1, 2005
Participants: JR Sult, Mark McCollum, Evelyn Angelle, Chris Hill, Tony Menendez Bryce Tawney

Background discussion not decipherable

Note: Discussion prior to 10:00 min. not particularly relevant.
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At @10:00 minutes: 
JS Alright, let?s go ahead and get 1 - . Chris on the phone.

 
  
 

EA Hey Chn'

 
  
  

.What wanteei ta- d?ie wa? start discuss?m, mama an; revenue E?eeagni?m? Preammimamt?y
1 maybe tel-day, talk. more abw? b??=and how; Emu]: hmught up revenue recognition in the general
V, CC (EntemaE Centre-Es Committee} a an area: 17. 333% think that we as animus-W31 are very
mscept?b?Ee to revenue reca-gnifien ?g E16539  and its  area mail? war-Lid ?ke HE, for us ta spend
mere time  and uk?ma?ee?y get (-3 guidance em to the ?e?d and [216%ng them with what are at
timess are pretty dif?cult Ewes), I
IE ta?ked. with Mark Last week Andi Pve, E?ve got to. put, what geen so far, revenue
itizon into: 3 different categm?ies of what 13 men En athers??ne ?g reaEEy reEated? &m?1exs,

  

 

1\

 is clearly hitl

think it?s soh?nethimr that we need to reeogntae, that a,

We

?and= aid? and that?s what  reality want ta talk about today, Ah, the seeohd is
and the third is realty a subset of the second is, direct sales, Ah, 
arrangements; it is  my

Page 3 -

element arranements,
think  is a good ptae where, ah, we see the multiplies element
pereeptiah new, after a ear, is a- teol used lay some at the PSLs, quite frankly, ta  some their
targets at the end at? a qarter or at the end of the year, and. Um, Not in any sent at devious way,
any discussions oeeur where people
say, ?Well, if you blow I -r pian, why den? a inst erahh up the direct sales? and 
creates lots of issues there   -. wculd hse - . - . 
 - a: about and: Chris- and Evelyn, and Mark kinda turns to- you
guys, talk about what we  wiginaily for the hill=and=hold As, as yau probably khew, Teny was
asked hy the guys in the UK, canaptetien  in the UK, to leak at a new eentraet, um, that they
had put in place fer a customer: Um, they think that they were following the guidahee
that was provided to them,  with regard to revenue recognition, ahd it, it, it really  raised a
numher at questiohs that we just didn?t have the answer to and  Tony doesn?t have the
bene?t of the background of everything  orgal?zation went through to address hill=and=held;
at]: of the discussions you?ve had   And so, want to- kihd of   meeting, as net
ta solve ahything, hut to kind- ef hey a franiewerh or a haehgrouhd, I think that?s an
exeehent paint Evetyn, background and then, two, hinda decide what. the steps are going Edward,
Um, And with that, maybe I?ll, I?ll kinda let everybody else set the stage.

.. . . 


Can you hear us okay Chris?

Yeah, ah. Yeah, I?m ?ne.

Um, I want to say something in just a second; but I?ll kinda tell you what started our whole bill?and-

hold type of issue and then that was Do you know Steve Macecheck 

Oh Yeahbuddies before I left and he, we stayed in touch quite a bit, and um  he
was telling me that a lot of the oil?eld service clients at They didn?t have any big named ones but
they had a lot, um, and a lot of them were SEC and they were getting, um, questions from the SEC
comment process and actually had to do some rcstatcments I think that they, I think  He kinda beat
around the bush for a while, but um I forget who it was, but they had seen it quite a bit. .  And um,

immediately I started asking in my mind, after talking with Steve and everyone said we don?t have bill-

and-hold; it?s not an issue, and we relied on that for a while but we actually didn?t put that as an issue
and we just started digging more and more and more, um. So this might  We saw Were those 3, I
don?t really, I think that they?d come out and do a public forum/co-presentation for the GAAP update
that we did every three months and we had a big section on bill?and-hold that, um..I think we led that
part, Chris, didn?t we?, just kinda of makes a point to the, the people listening that We did have this 

that needed to be addressed.

Ah, I just..I can not remember. . ..

 

 

 

 

EA

JS

 

I 
LVN bell

Page 4  
It was a bigthat, that day, and that was sort of the kick off our project. And what
Chris had told the group at at time was kind of, get ready We were going to start asking a lot of

questions on bill?and?hold. And really, this is revenue recognition. . ..as bill and hold. Um. Now Chris,
do you want to talk about t- process we went through? 

  

  

- . ?R/lztat were yen ale-lie to find because that time- frame was  wett past
the implementation of  Hit; what was the original reverses recognition? What were you gays
able to find, if year did, from tricking: backwards  terms of what this organisation diet, and? maybe
Bryee yen: can help. til-l: originality  oat? ?Canse fall or? 2063 wontd have been
at toast 2? years after  eatne not I?m guessing. lcan?t remember my time frame.

111 told. . .. you couldn?t construct

There wasn?t a lot of focus on um, certainly ot on the legal side as 
the revenue

   
 
 
      
 
 
 
 

was 
a evenue recognition, where it was, you

Veil, listen, whatl think you are indireetty sayi? -, is that the organization didn?t do anything

 

 

 
 

  

I
when  ltll. eaters one. You: see what Pin saing? 1? don?t think?:
I 5 E,  find anything and Bryee, yon9  have to, you: lmow, pipe in here, but we, we tried: to
look around to see if there was sort of a fa lahlown  type analysis that was
done and that it, and a i don?t think it i as one done the? 

And the person. . .and then the person went to we Charles [Muchmore use, you know, that 101 
came out and a we asked what speci cally was done. eople that said. Nay, it was
simply not material that sorta thing 
icated that ?hey, SAB 101 has come out?, Urn. But
I think for the most part, the organization did not think that a, that bill?and-hold type transactions.
EA You know when we kicked off the project 1 think that it was the first time in our whole. . .peopie 
looked at it. It was like a a 1
At @17:25 minutes:
BT That?s correct. And I think that most people what they were, people were looking at when title was

transferring on goods, I mean, especially on direct sales, that had been an issue probably where we
thought some of our risk was up until that point was more on direct sales and when people were kinda
recognized revenue was on direct sales because o?en times they weren?t always looking at the terms of
the contract. It was when it left the manufach dock. And then we, we had been able to ah, we felt,

 

CH

Js?

JS

\t7-

- Page 5 -

at

ed on, on transfer of title for the direct sales in terms of triggering a, revenue

 
   
 

to get people more focu
recognition.

Right..Wes, Wes old] has been very focused on that ?cause he. . .the end of 2003 becausel know it?s
come up where ther 3 been having to go back and pull contracts and look at contracts.

Yeah, I mean..l wa actually at Weatherford in the original time frame of SAB 101 and revenue
recognition for this industry as I said when I was hired in this place, is a challenge because of the nature
of the way of the dustry does business and  ah, the way our clients/our customers push so many
things back up stre to us, have us store their products, a, and I?m not even..I?m just talking about
bill?and?hold I?m even getting into the multiple?elements area. This actually could be throw in a

cog. I you, ultimate y,  multiple-element issue.

   

And then, you know after a couple years past, Evelyn brings up these restatements. In fact, before I
came to Halliburton hen I was doing my own thing, I actually a, was contacted by several companies
that?s been going thro gh a restatement in the services side looking for someone to come in and kinda
srub ?em down and a. rimarily though small ?rms in town looking for additional expertise?Evelyn. . ..

\Although the issues wer different and I can?t remember if they were bill-and?hold or if they were

10..

J8

EA

CH

JS

CH

whatever, has gotten: peree.., has the pereeptieu that, that if th

multiple-element related, think we all need to recognize that it?s a. it?s a big isk.

 

a 33.1 pereep .- an end? te he metre about the hilhahdahetd. Chris, yett can hetp the here, is
somehew um, the ergattizatteh has, um, either, threugh eur guidance er through the or
invehtm?y is still in our passessie
ht?y as needing ta meet the hith

ll  can meet some predetermined criteria and met have it qua
amt-hold criteria. New, to the, the 




ough what happened in 20 .

- .I 

 
  

Sorry; just the fact that you resur. . .Yeah, you know, that?s a goo point Mark


Via 
. r'r. . . 
Keep on talking about a 2003. The issue was identi?ed.  
,0
And what was our process, Chris. a

Basically, we went out to every location and asked them if they had transact ons or situations where they
were holding customer inventory in our location.

Where were those predominately locations?

They?re international locations, okay? And then there?s the Gulf I think
the Gulf Coast was the only place that we?ve identi?ed that, that had completion products that they had
a, basically sold to customers and taken while they paid us for that and they were still holding them it in

their warehouse. . ..

 

Lumovu

?Page6? 

   

JS there,  it possible isolated to a, a particular number ifI remember right, it was only completion products.
Not Baroid?

 
  
 
 
 
 
  
  
 

Ah, ll didn?t get tnte- Barled hecatnse that had been  I mean Beretd inventery, li mean they heel
heen, yen knew, they had been leeheef at by everyhedy, including the shelters, mean asked

ehent that l, l, didn?t see any 
7/1 .

We talked? sheet lt= We telkeel ehent it.

CH

 

That was ens-at: the whole allewanee fer cencern which came  hefere enr time Mark,
that was semething that was hrenght up a 2 they  decided: that they were geing te recerd en
return allewence en sales frem that di ten?. 

The reason why Barten- an, is that happened: te see it ?rst hand was when was in;
Kazakhstan walking than one e?f enr warehouses. Richard the area manager, kind of
yen knew paints to an ~re wall that?s eeyeredt in bags cf hartte, and he says We?ve already billed
and eellected thatss inst tnventery, and so naturally my ?rst qnestien walways, ?Well, okay
from Kazakhstan. assume we met all the hill=and=



greatg? nm, e, nt an email eff to Bryce
held criteria.

 

Some of those. . .Some of those foreign ocahons, our contracts what I found were that our contracts

were like, okay, we?ll stock these because customer doesn?t have a warehouse, and okay we, we
basically say that we will stock this stuff for you and if, you cbn?t use it with in a year or 18 months
sometimes, you have to buy it and it?s yours. We?ll continue to store it for you, but you bought it.

JS Well, Okay, ?ne. Now you said predominantly. I mean, I could ask you a couple questions on that but

you think it?s predominantly Completion Tools?

CH  hut there were seme chemicals and I den?t knew if that was  know there was some 
chemical stuff  Angela that a, we were basically leasing the client?s..we were leasing the
warehense frem the clientfhey ewned it all and. we would tense it from them, and then we wenld
stere inventery fer them in the warehense that we were leasing frem them.

EA That was PO [Production Optimization segment] too, wasn?t it?
CH Uh, that was I need to think, yeah 1 think that was that wasn?t?Bariod.

EA Okay, the, the, the only other manufacturing business is Drill Bits, did we do much with Drill Bits,
Chris?
at senrces was that en drill hits, We eehtally did net.

he? might have 3 er 4% er 5 drill ent at the well
?okay, hew many did,

CH  tnferma?en that we get heck trem sever
 the client until the hits were eensnmed, so: 
site, Ere-Ln what.  was teltl, they weuitl call en, en a: hasts and say,

- Page 7 -

how many yen nse??= Se it?, there were stil?t 3 sitting ant unused, they were stitl oar

inventery and we wan-ti?! Vs: is? a? i   t-r them but we had: the ehiigatten ta take them- hack,
.4: 

             
 

. -
JS ?WThis is one of the things ?i 
Ah, do you rec a dollar magnitude of the inventory?

CH Ah the Gu Coast, we actually had to reverse, I think, a few of the customers. Ah, Shell, if I remember
right, it as very high margin stuffwant to say that we were talking . or $4 million I can?t remember the value of the inventory
ut I want to say it was. .  margin.

But was that, when you said - was that all the inventory that was on bill and hold.?  -a 

CH No its 

    
      

for the gross populations a that, that are yo uld be a ?eld reported in as customer-
um, still in our warehouses. Do yo ow? 

 

 
 

Instead Of] a 
owned A entory,

JS

 

 

 

 

A
CH We, we didn?t, we din a, we, we dig: tie a report,  a? ?o-ra ed. that  Beeaanse? mean?,
 staff gees got - ?natienal: locations that stores staff for custemers that ge- hack
years and years and; years  they den?t have, a aeettrate rd of what the eests were, and
things tike tha.

Youl?low, Ijust meant as of whenever you asked, I mean, current date. I mean, I wasn?t looking back

historically. I was saying whenever you asked and got the ?eld to report what inventory was being held
for a customer. I mean, did you get any sense. . 

Was billed or billed within the last..?

Yeah. What, whatever was sitting in inventory at the date and point in time that you asked.


 


I That?s what I am saying. I

5 ?Kay. ..

UnnfCanse it?s tntemattenat teeattens that I mean, W696 be in these contracts fer years and years,
and they have, they have inventery that, you knew, after months, if they, if the ehstamer
hadn?t henght it, then they hittet? fer it and they had to hey it, Se, it, it, it?s an aeeumnlatien of
 ever a tong period at  You: have ta, yen get te, you knew, if yes: wanted? te- get an antennt
you had: to say okay, ?well, yen knew, give me  staff that yeh?ve hiliedi the ehstether far in 

 

 

JL

 





CH
JS

CH

CH

EA

CF  Yeah,  was de?niteiy, uh,

   
  

WK

Page 8 -



last year that?s still sitting in our inventory?. We basically sold completion products to our

customers all over the world.

 

you eep on kind a descn mg 6 

9

Of what we did at year-end?
period ?03.

as? 

Ah, We just looked at each in ?ation and ah went down to the contractual terms of, you know,
?had title pass stomer? Ah, so that was de?nitely a big focus of what were the contractual
had ownership basically passed to the customer and did they have any rights um, to sell the

inv tory back to us? 4

?03?

  
 

0 you want to talk about role, Chris?



 
 
 
 
 
 
 

very heavil?y invetvedi in this every teens. And: ah did;
get tinderstanciing et? where we were te heip-  understand what we needed te start teeming when
we have these storage sitiiatiens.  ah, yeti knew, Grant, Grant was a very heipfui.  had

had same experience in. the, the past and ah, he de?niteiy  turn, that em you had te- their. at
eontraetuai terms and understa . ti when; titt passed to the Um..?li?ha.t was prehahiy the
single thing  feeiised en27:00 minutes:

    
 
    
  
  
 
   
 
  

have dif?culty in getting enough inventory, in fact SAB 104 talks
a

ah, you know, that they can?t  title passed something 
a1  who had physical possession and title had passed basically.

And, and, if title passes and you sti
about some other things to make 3
couple customers in there that had 1

nd 1 don?t know if it was in talking to Mark. Do We have any

Um, I thought I made the mistake in,
ation? Was it just, dealt with at the local level I thought

idea where this was in the KPMG or
I heard..something..

I, I, I do not know if Grant discussed this with their National Of?ce.

Grant, um, I told him I understand in our industry
what have you guys seen? And he in
called um, he called Carmen, (a tissue..)He called Carmen
she did. . .and verify that it was an issue, so I know that they
'3 was such an important issue that I, I I just called and

but I don?t know what they?ve to say

up to
SEC, right now. Um,

What I do remember is when I brought 1
revenue recognition is a big issue with
fact had seen some in our industry, and
and she actually did not chat with him bu
were aware. . .I thought that they because
bailed everybody out this past weekend. t,

I de - ew that they, hased en: the risk prefil?e 0f Hailihurten

denit [anew anything speeii'ie,
anti ail a enlisting. questiehs with these.

they were reel-aired te eiear any

-Page 9 

They might have. I don?t know.

scussed it, Of course they were involved in a lot of

With corporate, even though they may not have di
ments at that time; so they

these things and they were also actively just trying to resolve our SEC co
were on a, you know, daily conference call with

It wasn?t Melanie. Which one wa, which one ..

I heard Melanie?sname mentioned with heard from I think
I don?t know. I wouldn?t know who they might

Any way, I want to go through it and see what I can pin down

They were both' involved in the SEC stuff.

We might be able to tell, there by going to back their invoices. But would it be precise to say that the

highest level of executive KPMG involvement.

For sure.
I know it stems from Grant and Gary

Yeah. Grant, Grant, Grant and the local team were  every single document, every single PO, every
single memo in 

So anything else on the ?03 process. . 

Now, what I recall, what I recall, um, Chris, was that, you know, we, we had protracted discussions
about the Gulf Coast and ultimately concluded because they couldn?t really get the contracts right,
particularly with Shell, that they ended up reversing revenues.

Instead of 4 million or 10 million in sales.

Plus the ROS had you know, that delivery did not take place until we actually stuck it on the dock, on
their dock.

But they had booked it ahead

They had booked it ahead and they bought and paid for it but it was sitting in our warehouse 
contract. . .but it was about 100 miles from the dockside .

They even tried to 

I remember them trying to get us to change to the contract and Shell basically told them to take a

hike.

EA

CH

termsPage 10 -

[inaudible commentary]

I think Shell?s the ?rst contract was ?Oh yeah, I think we can do that? and then when ..change the
.they said ?those are our standard terms and we?re not changing them.? Theydidn?t want to go 

The ?rst contract . . . .

Now, what I, what I also recall is that there, as we were going through this thing, you know, I don?t
remember all the different locations, but I do remember speci?cally talking about the UK, that the UK,
you know, they had a similar scenario but yet, you know, there were some unique facts and
circumstances in the UK around, you know, the law and everything.

From what I understand is we store customer inventory and what was so unique to the UK is that we
actually charged them for that, so they were actually able they, they?ve got it down to where they were

billing the customer for storing it.

basically title passes when you

With the..ln the UK, the FOB shipping terms are a little bit different, ah,
you know, documents to

actually pay for it, either you pay for it or it was contractual underlying,
suggest that title passes. That would be a unique difference

that the courier is important in that Angola, too wasn?t it,-Chris?

payment by the customer.

Yeah, in Angola, the title passed at the earlier of either physical delivery or
be physically delivered and

So, in Angola they actually resorted to sort of a cash basis. So it may?ve not
once they got paid, title, title was passed and they would recognize revenue.

1'80 how did, um, do we, um, through with KMPG or others on the
title situation determine that those were not bill-and?hold scenarios? Or how did we articulate it to the,

to the ?eld?

 

 

The way it was articulated to the ?eld, and I think that? the way our business practice is written, is that
if you, you mea, if the product is considered delivered, then you?re not in a bill?and?hold hold situation
even if you have physical possession. If the client uses your warehouse as their warehouse and title has
passed, basically risk of ownership has passed, you?re not in the bill-and-hold criteria. There are some
addiitonal things you have to look at but you?re not in a bill-and-hold. A bill-and?hold is a situation

- where you have physical possession and the client has paid you for it, but that you haven?t delivered it
so title legally hasn?t passed. Then if you meet those additional seven criteria, you can still recognize

revenue even though title hasn?t passed.

 

lthink. . .and, and, 

Wait a second, Evetyn. There?s business practice." that?s not in the business practice,  don?t
think, The business practice kind of reads hike  til-4i, and so think that was in some guida ce

communicated through the Fundamentats} training 

I

 





-Pagell -

The  training

CH . . . .we put the guidance in the business practice I believe around delivery and what constitutes delivery.
Right Bryce? ..I don?t have it in front of me. ..

BT Yeah, well.. ..

AT @35:35 minutes:

[Noise]

EA . . .What we, what we discovered had to be similar to look at the speci?c situation that we had and the
fact that, urn, everything just really depends on when the title passes. We, we felt that we had a unique
situation when we delivered from our manufacturing facility to another location most of them ours, but
it was where inventory was kinda being stored for our customers and they had in the stuff in there old
and new and their own stuff that you know went off to the well site and kinda rotated through there and
you basically just let them have that stuff at that point, so. I mean, it wasn?t. It really..I don?t think it

was so simple as, 0k whatever, you lmow, the legal document says is kinda when the material was sold.
In addition to that, we had a very unique situation where um, where, um, We evaluated delivery 

CH Okay, now, it wasn?t, I mean I was just saying that that?s de?nitely one of few things that was special
because that  included all the facts.

EA And that?s what, I mean, that?s how KMPG felt that the distinction betWeen, urn, the Shell 

BP situation and Shell Murphy situation where, um, they, they were all stored in a separate location
within our facility but it was the title transfer that hadn?t occurred, so the two other 

[muf?ed comments]

EA And just, just an additional side note is I spent 2 days in Louisiana recently I think every freakin?
location we had there.

I think it would be really hot.

EA It was really hot. I was so happy to come home and feel clean again, but, um, but when 'we got to one of

the place. . .what it was they were telling Cris [Gaut] about how, ah, how this inventory .. .. our
inventory turns; and they go ?Well, it would be a hell of a lot better if it Weren?t for Sarbanes Oxley?. I
go ?what?? And they said ?Ever since they went through that process of  Sarbanes Oxley that they?d
been holding off on revenue recognition for, um, a lot of their equipment  and stuff. I know there?s
been changes in culture in the Gulf Coast and some standard of practice over there. So, they?ve been

holding back 

 

VI By the way, what does the business practice say 



 
 

TM

 

 
  
  
 

JS

BT

CH

BT

CH

 

  
 
 

-PagelZ?  (wt/n 

 a de?nes a- transae?ans that have been billed to;
the customers but the p=IfG?hl?t? [tad net been: delivered. and are being stereo? by ESG  the
eustemer?s request?i

At the enstemer?s request. ?(lees lt 

 

Yeah, ll think that 

..long as it goes, Doesn?t Doesn?t it also talk about what constitutes delivery and there are
examples of what constitutes delivery and what doesn?t constitute delivery? It got changed.

 

Yeah, it?s in the body of it. . comments]

lt says ?delivery generally is net considered to have ?recurred aimless the precinct has
been delivered- te the customerss place at? business anethet? site specified by the eustemer?.

Yeah, that is the language directly cut at?  ltl?.

 

Right. .I thought we had examples in there, um, I know
Yeah that?s what they are looking at right now.

There?s a few that. . .but, I read you the criteria these are additional bill-and?hold criteria.
Is that the one that Mike Saul drafted?

Yeah. There?s probably even, even, even later than that one.

The one that Mike and I worked on had all those examples in there about different scenarios where legal
title passed and 

There is some examples. Yeah, this one has the examples in it.

 
  
 

 

Gentlemen, I guess what we need to do is decme lnyuu know, w' 6 want to re. . .reconclude or conclude
differently on if we meet the delivery criteria because obviously it was concluded that we had met the
delivery criteria for that one sale  issue.

 

7"

David has one that I think he did the adjustments to, adjust 

Okay it?s the BP. . .Um..Ye=tt knew Grant was really big, am, an helping us evaluate the legal sitle
at it because theught that was very He spend quite a While and he went to get the
contractual terms, he actually called external counsel in Louisiana to make sure that from the, um, you
know that he was reading contracts the way it was interpreted in that state 

think, you knew, lacking at the guidance that 

I

   
   
 

'n on so 
when title passes we?ve met physical delivery.

 

EA

TM

 

JS

MIVI

in background, muf?ed]

EA

JS

EA

CH

 
 
 
 

EA

have dune, whenever hear that we are in physieal [mess

- Page 13 -

Well, I think, I mean, there?s. . .in some of the examples in the guidance that we need to look at a lot.
That?s one thing we really need to focus on  The fact that we scheduled it, you know. We, we just let
them store their basically it is theirs, we don?t mess it anymore, we don?t have any
obligations to deliver it anywhere else. And tha thought we 

      
     
  

Pessih? 2 i mean, if we have physieat nessessien and we are in a 
. I ?ugentent, then we have tn gs threugh the seven eriteria.   there might be a distinctien
hetween, hetween that and. act?natty saying hey, we are aetuaiiy net in a hiWuid situatien.

Okay.

'l?hat?s..te me, that?s where the crux at this, this, this dispute is at. i think that the eariier
was it yen had this spzeeitie arrangement and: eieilisery  occurred, iegaiiy, yausre not
far train, yen knew, this that it?s net physics-i, it?s iegat deiivery and: therefere, you cie- no
ge threugh. Anti that seuuds Like that?s what the eeneiusien was at the time and that serta
where KPMG was as weti.

I think that was discussed. . ..
Explicitly or implicitly. . .. I don?t know the answer to that 

Well we won?t know unless we talk to KPMG.

 

We worked with this memo for six months

 
  
   
 
 
 
 

Yeah, 13 nrean, FEE have is he henest. Uni. Where  struggte is is use, delivery and titie are two
different issues. Urn.  based an my experience, and that?s why in what. iiruited traveiing i
essien, and that is the erux ef the issue as

Mark said, the issue (if deiivery. And when were in, whenever we?re in physical? possession 0f the
inventery that we said, I default ta ask the questiens aheut 

Yeah. And I, I would agree that a, I, I?m just telling, trying to tell .. the conclusion and that was if it was,
if FOB was Carrolton warehouse], you know, if title had been transferred at Carrolton, 
and actually still had it delivered somewhere, I think that, that is a totally different situation. But ?om


Why they try to say your warehouse is their warehouse, 
That?s segregated BTT, Southeast, and Murphy that sits in the warehouse that We don?t mess with it.

Wh, Wh, When yeu kind of ask the questien ?Why did..why are there criteria ts-
h?egiu with, if titie is separate? Titie is a separate issue, 

 

 

 

-Png 

 
 
 
 
 
  
   

 
 
 
 
 
 
  
    
   

And? there?s ene decrements that Teny sent cut that says a ?prednet is generality considered

dettvered? c. when title passes from seller tc hnyer, and payment is expected an detiveryr? And
they?re getng inte FGE tern-mused l; thenght new l: het that  ef preset language in  164-
 says ?er a. customer?s designated piece at detiyery?. Beeanse they recegnia'e that, yen- knew,
 enstenter ere?ters and?  semething hat it. atways deesnst ge physicatty tn their
Eecatten.

JS ?17 I experience is that it is designed te he  party:

CH muf?e 

CH Well, I, they got you, when they got you storing their stuff for them, old and new. . ..

MNI . I understand that but 

CH he says can?t, Can?t follow that guidance and you are saying that. . .

aphtc rnetnery cf the rntes here, but, nrn, 1 dc

Here againpshetegr
?generatty? means that there are

reeaBE the  it says ?generalty? it says ?generality? a Eat, and
excenhens, that there can he a different way tc View that.

EA And all that I?m saying is that we  and believe me, the reason that Chris and I Were not ?ying to let
them recognize revenue ?cause we were the bad guys because we had them reverse quite a bit of
revenue in the end ..literally it was more that million dollars, but I don?t think we want to get into

that.

CH I mean it, it to me, it makes total sense that that?s what the revenue recognition  At the time,
ey use that equipment or

that..?om what I understand, they can never get their money back; whether th
not, it?s for, it?s for completion products and that we were sa that they had to order and have it
manufactured ahead of time, and, you know, sometimes they?re back up and sometimes they?ll never go
to the well site, they?ll never get used, they come back to our warehouse.

TM But that centd he an ehhgatien. think in the  sttnatten there was a, there was a exp?ett
chitgat?en far as he deliver te the welt site, and? that ehhgatien, ah, that atse brings tnte question
 sear tssnes whether at net yen centd separate that ehhgatten fretn the Se
even it yen meet the hitt=and=hetd criteria, I think yen need to ensure that yen have 
atene value far that, far that piece at equipment. New the UK, they wentd straggte with that
[me-sitters, hecanse cf the ehhgatten te-  tt to the weh site and then test and deptcy and ?re the,
the guns.

EA How do you feel about that?
CH Well I?m not talking about the explosives in the UK. I recognize that that?s a different situation. We, we
we weren?t looking at it closely and ah ..

EA I think that is pretty much all we know.

Page 15 -

I think, I think that, I think JR and you guys are doing, ah, trying to go the route where you are
not going to recognize revenue until you went in and sort of delivered and everything for the
customer. I mean we have a lot of situations where you just sitting there holding inventory

..correct me if that?s a misunderstanding.

 We?re just trying to determine what the facts are at this point in time

   
    
    
  

 
     

 

rienee this industry is raft with revenue
- i  't?s not signi?cant, is an

-. 

Now, as to:  with, think, it has been: my expe
and? for us to have kind of  -
teve Macecheck Partnerdon?t think we did that.
Right, I think you are 
To de?ne a situation that is actually kind of a. .. back in 2003 anyway

Well, and you know, this is just one, one observation I could, I could convey a couple of . . .I?ve learned
about style, if you are going to come to them and tell them that you want to do something
more conservative than you?ve done before, they?re gonna laugh at that. So, you know, I don?t know
how they?re going to effectively. But I guarantee that they would, they would  . 

.. important 

When you look at their article it talks about inventory being at a company-owned warehouse there is the

possibility of recognizing revenue recognition if you meet the other criteria.
Yeah, it: says it is hitl=and=heid.

It goes on to state that in this industry, that it would be very dif?cult to meet them because of the
delivery, that. . ..

It is more the time, you know, it?s more the tirneframe that they said was the higher risk issues, meaning
the ?xed delivery schedule would be the most dif?cult of the criteria because of the changing, ah,
schedules within offshore activity and when you are actually delivering the pre?sold equipment.

This hasn?t been published yet has it?

Oh yeah.

Oh it has? Even though it says Winter 2005?

?Page 16-

JS Winter 2005 in the January and February timeframe.

CH Oh 0k.  It doesn?t talk about delivery, whether or not delivery?s been met. It goes off on the. . 
JS I mean it?s pretty generic basically to be 0k.

JS Chris, I appreciate the 

CH [Muf?ed Comments] ..Let me know..

JS Okay. Thank you sir.

CH Okay.

JS Later

CH Bye.

At @49:20 minutes:

JS these documents that you

(Evelyn - indecipherable)

BT I think there were some within the Gulf Coast. There were some items, um, that Were reviewed, that
were,. .. in other words the revenue, ah, the revenue was there but then. ..

I mean, this was the exception where

BT There?s a Speci?c, a speci?c Shell one that they decided 

(Evelyn indecipherable)

BT But I think that in the, it was solely Gulf Coast was the only ones that we reversed.

(Evelyn indecipherable)

TM In that memo .. ..I think the ?rst example I think it goes through all 7 criteria, ah. The ?xed delivery
schedule they rely on a delivery to the Halliburton warehouse instead of the, the dthery schedule to the

well.
(Evelyn indecipherable)

AT @51:10 minutes:

a -Page 17 -

Here?s reahy where the quesiich hingess that?s East in year, you deh?t, eriterias er cchditichs fer
receghitieh as far as delivery echditicn ct product self is genera-[E31 evaihated hinder the cempieted
model's it?s the first generality, which resuits in the dehvery heing eensidered to seem
at  paint (if time rather than ever a pericd cf tithe9 aitheugh that paint if time is else the point in
time when: the is physically deiivered te a castemer, there are many arrangements 
which this  hat the case. it?s ehvieasiy in the5 in recognizes that delivery is hot hecessariiy
jest the physicai pessessich. That is the way read that.

    
  
 
  
   

 

 

That?s ok . Now, keep on following through on that thought process. That?s weeid emcepass the
hih=and=hcl?d situation elieariy5 and delivery has net and IE get tc meet these criteria

in c-rder to recognize revenue tha ?egeherahy? it tits that Yeah, the crux of the issue it
is act titie, it?s not risk at it?s delivery.

and

. EA Umhum. And the question raises up how do it as part of our UK to over 
comes 

JS What is interesting is how that aspect is a component part of . bill?and-hold. You know what I am
saying? In other words, one of the sevencriteria is that it?s segregated within your warehouse space

EA [Mu?led]

Yeah A - - uns are  then it?s segregated and speci?cally identi?able product.

Chriss New PM geihg hack to Chris?s met-hes i mean, his paragraph he says  recognisesS unis
additienai guidance with respect te deiivery and performance of  I04 prime examples,
the question and the SECS response to these sittratiens. E?s-r instances, when inventery
has heen manufactured fer the caster-her, hat the customer has net taken. physical; pessessich cf
invents-r37. The SEC describes cenditichs that must he met in order ts recognise revenue. Where
they have met taken pcssessicn, these types at transacticns are referred te- as 
bald:   
Ila . .

I'll. In 

were focused on in the Gulf Coast is with Shell and Murphy. You know, it, it, it, the deal was queered
on multiple levels but we just glanced off the physical..the ?xed schedule for delivery of the goods, um,
there was, there was a secOnd sentence to that it?s, beyond the schedule it?s that the date for delivery
must be reasonable and consistent with the buyers business pmpose. In other words, the storer carries
the customer in its inventory, and I think what happened was we got focused in on the last part of that

and not on the physical schedule.



EA I guess I missed another one kind of There was nothing left to support this. We basically,
we considered that where we delivered to our warehouses, delivery was met.

JS 1n the portions of the services industry that ?ts [noise] type manufacturers and all this stuff,
their common practice is manufacture it, client buys it, client paid for it and the thing lacks, sits in the
yard, waiting for the client to decide come pick it up and take it to it?s well site. All type of
manufactures are hit hard on the bill-and-hold. Ah, I don?t. if they didn?t put into individual
processes to meet the seven criteria nor do I know to the extent we have peers out there who trying to

  
   

  

 

 

BT
JS
BT
MIVI
[noise]

Page 18 

address the seven criteria. I think there is an issue about how precise you have to be on the delivery
date. In other words, if I can at least say months, if that?s precise enough on the delivery date?

You mean, in terms of . ..

I can say, you know, 

When they?re completing the wells and 
Again, you can have a 30 day, you know,. ..
coordinated window

..window .. .

Well, the customer?s schedule is such that, if they stick to they?re schedule, they know that exactly when
they 

Right and even as their schedule 

an control is that. . 

And even as the schedules move, those areas, you know, when the schedule moves there still is a
determinable time frame, either  -

Then, then, then, now you?re changing the..?xed delivery date. 
Right

And this is an example where,..our customers have pushed on us an aspect of their logistics.

. END OF CD

KPMG Audit Results Review Meeting

January 20, 2006
Participants: Grant Switzer, Dennis Whalen, John Christopher, Mark McCollum,

Christian Garcia, Bill 

Tony Menendez,

Undecinherable? (not relevant until 9:00 min).



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At @9:00 minutes:

Showed up for this meeting.

- Page 2 - 

A
GS: So anyway. I wasn?t sure if this room was available at all. Okay. John you want to go ahead and start it
up? We?ll run through, ah, the results what page 2. Two, just summarizes the audit
scope, um, which is consistent with the what we presented to the Audit Committee bank in February; you have
the international focus for our 2 homes and 32 countries reporting to us and the work we do as a US team in,
you know, getting out in the ?eld, covering. ..manufacturing centers, .. And for the most part it?s consistent
with what we have done in the past. The third bullet. Procedures related to fraud. The work we do around
fraud is become more and more each, over the last few years we do more interviewng of, ah, senior
management, particularly outside of accounting, more test work, more work around agency payments.
The third bullet from the bottom, other audit procedures, this year we had more emphasis around
contract reviews, particularly customer contracts, ah, revenue recognition and JV accounting. So the
take away, we?re not aware of any material, ah, issues at this point in our audit. We?ll get to the pending
matters at the back page.

GS: Page 3, accounts receivable and inventory, no, ah, signi?cant issues there, you know, so material to ESG
but you do a fair amount of work around it but it?s a with the reserves and the allowances are consistent with
your policies. In Q4 there was a 12 million dollar reduction in the AR reserve but that?s just doing af?rmative
of the mechanics of the policy, we have about a 20 million dollar reduction in over 360 receivables, that?s just
riding there. The nonowhoiiy owned investments if anyone wants to know what are issues there. You?ve
had- to go hack the East eonpie of years and the companyis pot 2. tot of effort into tightening up the
accounting around that and we?ve actnaiiy, ah, reviewed the work around that and we?ii get to that tater
hot the, ah, significant de?ciencies now are rernedliated, at ieast to the point where i donst thinhit?s
signi?cant any ionger.

 Revenue recognition i heard: the work in Q3 on cnstonsermowneti inventory anti the Q4 got
a lot of attention  we?ve reviewed the results of that. We?ve also a tot done a tot front a hroadzer
perspective of around revenne recognition,..nm..testeti, you; know, qnite a few contracts and supporting
documents, field tickets, and inst a iotta, iot of test items in which no, we see a few minor issues 
nothing, nothing hot we do think its an area he front and center in terms of
focus, you know it, ah,  higher risk than other areas, particniariy this, you know, this
item of the contract reviews anti, yon know, which getting the haiance right hetween which contracts can
he reviewed in the fieiti and which ones need to come tip- to corporate because of the complexities.

3W: Where are you gays on pns..1snshing ont instructions and. guidance to the iiehi on costonser=owneti
inventory?

MM: .. [there are instructions out there that are given on a hroaii basis in terms of what we need- to no
we?ii he pushing out in the ist quarter, so more specific acconnting goitieiines to the org  
We?ve aireaciy sent out a quarter ago aer?asthe?emieioyee on reviewing on type
scenarios and: gives that information there. That?s been one there and know there is some generai (than
guidance. There?s poiicies that exist;  anti reaiiy i think we wanna do is try to iinh this
together to try to, you know, get some peopie sorne generai and: then say, you: [moon], then if it?s
over certain threshoicis send into Houston. We aireaeiy have that on a broad basis. inst don?t want
something reaiiy advanced for ns.

 This East 

 

 

awe/?

MM: I (toast think, hang on  one second, 12 stat-sit. think there are hates in what we have,?

Page 3 -

lit-W: New

   
  

Edit/ii: I  that  is  trying tam

lit-W: ldid?n?t mean in teams at lac-ten, l: meant from mean; if yousae gonna send something out, 
whatss the timetine??  it i? quartet??

 Yeaho

We bullet izmething new, accounting policies. This is a new requirement that we have
to monitor any accounting policies which you may have. What this stems from is from are
companies that may assessed, companies immaterial at appointment time, but over time appear into something
that was a, that was signi?cant, um, and the way we, ah, approach it is looking at the policies as either totally
inconsequential, in which case we really don?t have any further obligations and anything consequential
meaning today and expected to always to be inconsequential. If it?s not clearly inconsequential then we have
the requirements to check, qualify it and then monitor it in each period going forward. So, all We?re aware of is
your policies around not capitalizing and inventory below $2,500

 

 

BM: Do you believe this actually looking up all our policies to make sure that these are the only two. I think
there?s gonna be, again, minor additions to those two type of procedures because we continuing to weskersin
We were just talking, one of the documents that we have to go to through for example,
customs and duties are not capitalized, is not capitalized, and  some countries we are talking about
spare parts. We just want to get that broad batch of our policies, so that, again, that we would have the

con?dence of the committee

GS: The most common example is Operating leases. A lot of companies went straight line or. . .if they?re
immaterial, you know. There might be escalations and they just expense as they pay which would have been
an issue over some years, so again that?s a prime example of one that is a policy

At 15:30 minutes:

Indecipherable. . .I mean if it?s not material, it?s no big deal, but do you have an opinion
I?m not positive what technically the technique to go to

This is in our rep letter to inconsequential or clearly inconsequential

We belieVe it?s totally inconsequential but see you negotiate that

How do you treat this or What?

At 3,500 or what?

 

 Page4 -

We?d like to see your analysis of how much of this expense is under $3,500
I?m working on that.

(laughing)

16.15

GS: Page 4 internal controis. The signi?cant de?ciencies from last year and previous quarters. Leases,
for instance, was remediated earlier this year and then JV which I think we talked about have been
remediated to the point where it is below signi?cant de?ciency and no other signi?cant de?ciencies or

control de?ciencies to bring up at this point.

Page 5 is Pemex contracts. There?s a lot of information on this page. Going to the bottom right column, the
last statement signed 55 million. In this quarter there were some ins and outs in the joint costs of the
revenue side, on the revenue side there is a decrease in revenues due to some stroke [scope] adjustments, and an
increase due to the change orders. Cost side?s some changes between categories. Not a lot of signi?cant
changes. The reserve for forecasted one time events was down to 4.8 million which you have 5 revs
left three of those are in the south which hasn?t encountered many problems so it seems to be barring any
major issues, the reserve seems adequate and if anything this estimate has some upside. The top of the schedule
is to show that you may have some upside in going after some change orders.

lhear ya, so the convenio process, everybody has to be solid about that, we?ve

signing . But heretofore not done, and being done before was not limiting them to drilling wells. Just
exactly when that happens, all others goes. So, when you add up the change orders for one of those convenios
then you shut and you don?t necessarily what to provide them.

No, I don?t think you ever provide it. In the meeting yesterday we were informed that this convenio is just a
?nal stage. I used to think that was a broad contract, and apparently it was the ?nal stage of a work order, of
approving the work order, and so a lot of these that had the large dialogs the work orders have been signed
and then convenios just a. . .if the pricing mechanism wasn?t in the original contract then you take convenios.
And most of the time that?s pretty much automatically once you get to the work order.

I hear what you are saying. Pemex so when the convenio is signed by the chief accountants of?ce. If he
doesn?t sign it then it doesn?t get paid. It doesn?t matter what the work order says. I still feel like that signature
on the convenio is what we really need to get paid. Those convenios are the issue of dependence progress and
there are work orders and things and contracts that we depend on but, the convenios are never signed.
That obligation for a regulation of a couple hundred million dollars. There?s a big difference there.

Yeah. I?m looking at the amounts on the work orders put out for those convenio orders.

What they are talking about is order magnitude for up lifting

They are not getting anything until the work done until work orders.

 Page 5 

And the ones at the bottom in this top schedule there is not revenue recognized that?s handicapping the chances
at 25% somewhere in that range, that should collect annuals being controlled

Talked about the other day in January small.

Not an issue there.
We think your accounting is and are not suggesting you take more income in January.

The next slide is a visual picture of where we stand in our global reporting from our KPMG international team.
As of today we are in pretty good shape, actually better shape than some of the past size styles. The other
countries that we are still waiting to get all of our debts delayed and 1?s dotted and t?s crossed are Mexico and
we have pretty much got all our info from them, it?s just because of the Pemex review, they was some of that
that was backed up back until yesterday, some of those well reconciliations are still being done through the
end of the day Wednesday and early into Thursday. Our teams are still looking at those, there are no issues that
they are aware of. They looked at the change orders, they looked at the roll up, And they felt that they are

done by today and there are no issues to report there.

At @22:00 minutes:

Angola, the only reason we haven?t gotten anything from them yet is a delay in them receiving ?nancial
information, they didn?t actually receive any of the ?nancials until Monday or early Tuesday in Rwanda, and

so they have delayed in those procedures.

And in Egypt and Saudi, its kinda. . .it makes that through the Haj. The Haj gets moved up about 21 days each
year. And it just happened to be that this year it was from like, January 6 through the 16?, so they weren?t
actually able to get ?nancial information there until Tuesday.

So it will be in December next year?

It will be in the December of next year.

10 days, that?s like that?s close. okay

So it shouldn?t be an issue next year. If you look at the bottom note, we found a no audit differences out in
the ?eld from our KPMG international teams rated at 3 million dollars and often, as everybody in the
room knows, we started a process of leveraging audit services for some of our audits this year, both
domestically and internationally and we see that Canada, and Algeria and Russia were the three international
audits that we leveraged. That went very well this year, we are seeing good results from that and we de?nitely
look forward to doing as much and more on leveraging with audit services this year and going forward.
Domestically, which isn?t on this list we alSo leveraged in the Gulf Coast region and in one of the

manufacturing centers and all of that went very well.

?Page6 

On the next page these are just ?xed normal communications that the auditor has with his clients, in the very
front. No audit differences were identi?ed during the our audit or during the 5th quarter. No correction
of prior period errors with the exception of the patents and process which was actually an upward 
adjustment during the 41th quarter related to some old patents that had actually been expensed and should
have been capitalized. What we found or we thought was that the root cause was basically due to the manual
nature of recording patents in the past. When the automated system was put into place in late 04 or early 05 we
began the more detailed long item reviews of the patents, it was found that there were some miscoded patents
and they subsequently reviewed it to see what the unamortized cost of them today should have been and this is

the entry to get to those patents.

No signi?cant changes in the company?s accounting policy during the quarter. No disagreements with
management, they are not aware of any consultations with other accountants, no dif?culties encountered in
performing the audit, we always get great service from the team here, very nice and competent group of
accountants that we work with. As far as independence matters, we are not aware of KPMG developing any
new relationships, that would impair our independence since the last time I told you that. We are not aware of
any KPMG partners or employees being hired by Halliburton, either here or internationally and all of our

services were properly approved by civil process.

At @2550 minutes:

And the next page is a list of our the normal pending matters that we will have usually at this time in the
process. One of the items that we, or two of the items that we also used audit services for leverage were cash
con?rms and AR con?rmations. They are substantially complete with those both cash and AR. There are no
exceptions that they have identi?ed. It?s just a normal process that take a little bit longer to document and bird

dog all of the reconciling items, that there is nothing to report on that.

The third bullet here is related to the overage estimate that you are required to do. To be fully leveraged to work
with audit services for the level of that has to take place there. There are actually 2 or 3 documents that we are
still waiting on. So we are substantially conclude there too, no issues to report. The BB well ?ll] value
analysis that performed, we have the draft report of it, we?ve had one of our evaluation specialist go
over it who didn?t identify any issues and thought it looked pretty good but we still obviously need the ?nal

report with the verbiage in it that signed off on.
I thought that was pending during the 3?rd year or just a review?

I?m not sure what was pending on that. From what we read in the report it looked good like I said our
evaluation specialist looked at it, and it?s ?ne, it?s just draft so we can?t close the loop on it until that draft
toggle mark is taken off and there?s a nice little memo in front of it with an signature on it.

Undecipherable

I didn?t really talk about the rep letter but it was dated January 25 related to the earnings release. And then the
10K disclosures were a separate event procedure that we will do up to the 10K ?ling and the related internal
control testing that we will do. up through the date of the 10K ?le.

Any questions? Okay.

 Page7 

Next page is some forward looking matters. We?ve probably spent as much time looking at 2006
transactions during this quarters as 2005, I?ll just mention quickly that I?m sure most of us are aware of the
arrangement that the company is looking into is about 75 million in production payment that is being
negotiated and the key was getting the bank to take off the price risk and the transportation risk.

Looking at from there

Undecipherable
Well I think that the best part of problems production and AR value in relation to expmt there on top of

I?m comfortable that we know what the answer is and we just deal with defenses to see what we offer.

There is a term sheet, there?s a meeting this afternoon that concerns that.

for us. And that one, they draft to avoid this issue of patents

Yeah, this will be the second round related to that,
fted it subject to dissolution rights, And then the other key is

to consolidate as the managing member, they dra
just make sure we stay clear of FIN 46 issues.

SAP upgrade, this is just something that is being looked at and we?ve been asked to look at some accounting
implications and it?s still pretty early in the process on those.

Okay. And that?s it.

Anything else?

Thank you all.

Thanks.

At @3050 minutes:

Hey guys. 

Undecipherable

Laughing.

Undecipherable? noise

Discussion between Tony Menendez Christian Garcia:
..Involved in this system?

Undecipherable conversations

AT @32:20 minutes:

- Page 8 -

TM: Fundamentally; really what it comes down to, if you are spending money, if you are extending assets..if

you?re spending money that you are going to capitalize, write it down and then substitute. . ..You can?t have
your cake and eat it too. ?Cause, what I would envision would be, this if you?re gonna spend the money, but it?s
not until you?ve spent all that money, all those bene?ts are in place that you would actually extend the life. You
see, what envision is that gets you probably towards the end of the 10 year period anyway 

CG: 32:56 .. Expecting Evelyn to talk to the SAP experts and to get their interpretation
Based 'on the interpretation 1 think the SAP experts SAP upgrade implementation issue
and Eventually.

TM: Yeah, I don?t know. I mean, when I talked to Roy [Stewart] the other day he came by and Susan was in
my of?ce to discuss this thing Yeah, and at least we?ve identi?ed Yeah we?ve assumed and maybe it?s
a. . .timing event so the costs will have to be really looked at. Which I don?t know that it really changes anything

fundamentally, Yeah, I think you?re still kind of in the same boat. but the costs would either suggest the same
life or are they costs that would be capitalized I don?t know.

CG: I the uh. . .PPI. I thinkl was just mis..misinformed.

TM: Okay, Yeah. Yeah, I mean..Ah

CG: I was just misinformed uh so uh and then there was nervousness around. . .?Oh my God, are. . 
I mean, I don?t know who to talk to. . .I don?t know, I mean really, really, Do you..Do I think the issue
that bubbled up to me is ?Oh, we are looking at this I think ultimately the reason I?ve
been very involved in the joint venture and none of the things we .. .about the relationship in getting We don?t
have any in?uence so they did a subtraction, we paid them money. We said this is against us, we might sue. I
is still there because we don?t 

TM: Well. . is your. . 
CG: So that?s why, I mean, 15% right there

TM: Well, that?s the point of contention, it?s not really 15% I mean the actual votes are based on a as
converted basis which gets you 19.83%, 19.87% or it?s like right there on the bubble

CG: Yeah. . .But again. . .In terms of, I guess, the small technical the in?uence there?

TM: Well, That?s..That?s right. I mean, But, if you go, I mean you have to go a little bit beyond that
argument and then you get in a situation where, you have a situation where such there?s not enough substantive

common stock to absorb the losses, so when you have nobody to 

GC: [interrupts with a question]  the money right?

TM: I don?t know, It?s kind of hard to tell from the current fmancials that, If you haVe an entity that basically
set up such that the preferred ?mding all of the losses Then it?s a different, different animal in the way you
look at how you should be picking up, how you should be applying the equity method.

 Page 9 

CG: Who?s calculating this equity at 
TM: 1 think they got it from 
CG: They do insist you have a conversion one for one but Halliburton?s ownership will never exceed 15%

TM: No, all that language is upon an IPO. If it is not an IPO ..it will not. . ..but if you read the, you know,
the articles, the bylaws and the preferred stock agreement. You basically, you know, it doesn?t like to attach

stuff
CG: at the time of life. . ..

TM: 1 don?t know

CG: So you know, so you know, what in reality is the PPI. . .understanding. They are trying to, I think,
That?s the reason 

TM: That what might be why. . .That is what I was saying, I mean, basically 

At 37:15 minutes:

CG: company, the company takes the investor?s side and, the company that invest their faith and
savings, that what they try subtraction where, you know, where they pick something up on
their investment. . .which, uh, given the numbers that. . given the numbers that we are talking about, 
going to be interesting, it?s not gonna, you know, there might be a gain

TM: [unknown?]

CG: Ye-ah. . I booked a loss

TM: Yeah. . 

CG: big pay out

TM: Really?

CG: So, I kind 

TM: Okay

CG: [indecipherable] Go 

TM: Well, it?s kinda of an interesting thing. I 

- Page 10 -

CG: Because, obviously all these guys are, you know, all the time doing like that, You know, they?re like,
they?re arguing that somebody has to pick up. . looking out for us and now

TM: Well, Gee, urn.. I said, they were doing a base cheek. . ..They asked me to look at a bunch of
stuff they were needing to modify. . because of footnotes. They wrote off the intangible, the 27M bucks or
whatever. . .because they said that they couldn?t get out to ltold them, I mean I Went ?Wow,

that?s an indicator of a write off.?

CG: Lets see, lets see, the uh..Either..Either one. . that or the classic it?s up to the CEO

that are, just mention my name and the tragedy of it that they?re always there and you would say,
?Hey, you did this, you did not do this,? you said you they?re gonna sue your ass. . .I mean they?re just
going back and forth and he said so bitter you promising something and I say I?m not
promising

TM: That I don?t know that they said
CG: I think what was said was that we have a signi?cantly less, but that the issue that has evolved is that

they?re gonna be, that there were ahead if they were successful is that they can do a you know. say they need
you ah for some reason to look through different numbers looking current pay off

amount, what is the interest payment, what are the terms of the IPOdon?t know
CG: Well, we?ll. ..Obviously let them get come back to me with the sound of it.

TM: Yeah, I mean, I guess, I hadn?t heard. . .They gave me a bunch of information like that and were concerned
about it. I gave them guidance. I kinda told them where they..what it..what it looked like to me, really, you
know. I mean, it looked like it to me that there was a high probability of an impairment. ..

CG: ..Then again they come back to me pending, but they the investors,
we?ve been trying to get. . .the investors. And now 1 think they are realizing it and are now actually doing a

transaction. . .
TM: Okay.

CG: So, give them time to access. . .because I have bigger dreams of making it a settlement. . .buying a company

TM: Buying something

CG: Right, so then don?t want to and be embarrassed and Admit it. . .Christian you said
TM: Well, I mean, 

CG: Can we agree to just let the transaction run. . .its course

TM: Yeah, its not for me to decide..l mean, I was just trying to give them. . .?gured out.

~Pagell 

CG: 1 still want, I just want you to know all the facts because it?s just talked about and

TM: Yeah, That didn?t come up at the meeting

CG: It?s also con?dential, right

TM: Yeah, I found it interesting though that in that pile of junk that we have there was a memo that said that
we tried to sell it for only 8 1/2 million and that we were gonna write it down or whatever. But then that didn?t

happen so then, I don?t know,
CG: Because . .And obviously, some of me, right?
TM: Yeah, I don?t know, like they asked me, I?m like I don?t know who wrote this,

CG: Financially, because it still sounds strange who prepared There again, and people says no, no,
we?re not convinced that whether or not this is right and then we talked about them and then they do this huge
projection and oh, that looks impossible and I admit that now..that?s way I?m kinda. . .I?m 

okay ..they asked for.. this impairment and now tell me we have a 

TM: Well it?s ve similar to, it?s ve similar to Fibers ar  Are ou involved with 
3?

CG: No, No.

TM: Well, it?s an entity that we have that uh. That funded through preferred; with very limited common, so we
had it at cost method and we?re liketaking the loss. I don?t know how much it lost, but

it basically we had to write the whole thing off
CG: No, no,no. . .. We?re gonna sell it for cheap 

TM: and that never 

CG: going to be a little bit squeamish because I like it said for the last 4 years they have been ringing
that bell. .. how?d they find. ..oh here?s a pick up of 6 million dollars

AT @42:15 minutes:

TM: Take Fiberspar for example..we had to write this thing off. Right? Not in this case. In the memo in ?04 it
said it was worth a 100 million or some ridiculous amount and then we were going to sell it and obviously that

never happened. . ..And now they just washed their hands of it

CG: This one is going to be interesting. . .This one is going to be interesting because uh And the
reason why it?s this one that it is interesting is that they now determined an acquisition company, an

investment in banking ?rm.

TM: Okay. Yeah.

- Page 12 -

CG: Yeah and indicate AIG. . .maybe they 

TM: Yeah.
CG: But I mean, the whole industry they are going to cash out.

TM: Okay Right, Yeah, see I?m just here to help, okay?. I mean, I?m. You know People come to me all the
time with, with problems and I?m, I?m just trying to help.

CG: Right..Right
TM: And then again, there just 43:24

CG: Tony, is the delicate part and we going to give you feed back on. But the only thing that clearly is
you?re a smart guys and that everybody, nobody said that?s not. But..but..ah.. they?re looking for,

people look at you for balanced view, right?

TM: Umhuh

CG: the ?rst thing is that you, I mean you, um, the ?rst thing you do is you go right straight for to the
most conservative and, I mean, I tell you, it would be nice, you but points
of view, so that?s, that?s my only feedback for you, right now. I think most of you, everybody says, if you
talk to Tony. You would know all the, the literature that you would have to look at.

TM: Uh Huh

CG: Like, you?re almost like a could do research or something, uh. I am con?dent that
you have done everything you know how to do and that you?re the only guy in the company that can do

that, right? . .- 

CG: Because I also think that now you also have to look at tons of stuff, how do you say? literature and
your extensive knowledge. But, I am hearing from other folks that people are struggling to get a
balanced point of view. And, okay, 

AT @44:47

TM: Uh Huh. know, I my own defense, I mean, the problem here is because I have
all that knowledge.

CG: Right.

-Page 13 

TM: And I know where you would start only way I could get people to really challenge and
understand the issues. Is to start from there because no one has any come to me with
issues and all they know is what they want. ?We want to recognize revenue.? ?We don?t want to
consolidate.? ?We don?t want to use equity method.? I mean, so that?s what they?re coming to me with.
None of the knowledge of the rules. None of the..None of the..Not an understanding of the signi?cant

judgments that need to be made. So I?m sitting is a tremendous tremendous

responsibility for me. ?Cause I?m sitting here going, ?Well, wait a minutewalk
through the process.?

CG: Absolutely
TM: And yet the advantage here I testing them? Oh go all 

CG: I hope you don?t, I hope you don?t. You don?t. I hope it is safe to say, say you don?t agree, right?
I mean that?s not what I, I mean  I hope you you don?t interpret this as saying as me telling you, Hey,
Tony, soak it up? That?s not my intent. My intent is to say, for you to say, ?This is  This is what it

looks like, this is what you need to do to get there.?

TM: Well, 

CG: And sometimes, like they somehow like feel this is what you need to get there doesn?t get,
communicated

TM: Uh huh

CG: But, the people here, I not going to, I?m just giving you feedback. I?ve never really worked with

you, Tony.
TM: No, no, ?nish that.

CG: But,what I?ve heard, is you look I don?t know if you can beat this, isn?t what
it is, it?s that its saying. .. And it?s really just packaging. Here?s what you need to do. But if you want do

to get to this side, here?s what you need to do, right? But somehow, th
that way only say this is where you are

ey don?t, they don?t kind of feel

TM: Yeah! That?s exactly right.

CG: In our case..in our case, you?re right. There?s no way that you can get there.

TM: Yeah, I mean. That?s true.

CG: 

TM: But, you know, I said here in the beginning, I am not here to make all the judgments. I am not here to
make all of the decisions. I?m just here to make sure people who ought to know the appropriate literature

 Page 14 -

understand the signi?cant judgments and assumptions that they?re. . .they?re taking responsibility for. But I think
what people want is they want to put it on me. They want me to be responsible for it

CG: 

TM: No. I That?s it. . .They want say, ?Hey, I want an accounting answer.? That?s all they care about.
They don?t want. See they don?t want to walk through. Right? They don?t want to understand the signi?cant
judgmentsin general. And so I ?m just kind sitting here at a loss with what? You know. And..and..and What
about the situations where they know what they want and I am sitting here going, well you have..it can very

dif?cult to get there. And in some cases 

CG: Impossible. . Impossible

TM: but that doesn?t stop anybody viewing my guidance as just, you know, he?s not
helping out or whatever. But Yeah

CG: Right.

TM: You know I struggle with like That?s what I shouldn?t my role shouldn?t be. You know. I took this
position because they said it would be like the national of?ce for a public accounting ?rm.

CG: Right. Right

TM: So if you have a local audit team. They go to national for technical guidance. The national
group is really kinda of challenging the other group to make sure they have gone through that process.

CG: Absolutely

TM: mean,. . .you don?t mean, it?s a dif?cult position because I?m trying to be
the one that is making sure people are challenged and making sure we if we have that
balance between what getting the best position for the company and protecting the company.

AT @4333

CG: of all, I think what what you say, I think maybe you can
help us, you You know to be sure, like I said there?s so much knowledge but I mean,
not that your gonna what maybe leaving the company, but I think it helps to have this  they don?t want
to be here and somehow obviously some of them don?t want to clearly you can help us in that if
you want to do that you just the stuff you need to if you want it get it the
burden on them right?. But again soYou?re here and the feedback is  and therefore, there?s no way to get

there is to say, give the impression.

TM: Well, There?s a couple issues. I?d say. lthink, you can get there.

CG: Yeah..Yeah

?PagelS-

[indecipherable]

TM: think it?s impossible but yet, You know. That doesn?t mean anything I guess. Ah, No, lappreciate
it, I. ..

CG: Let?s say, I tell you. You a lot of issues out there and some technical stuff of them


TM: I think I think the way that I have is making sure that We?ve got that give and take.
Hell, look.  the truth all the time

CG: 

TM: and I?ve got this impression that I?m this, this, the bad guy or whatever.

AT @50:00 minutes:
CG: 1 tell . .on PPI.. because really how it got over to me. It was truly misinformed.
TM: Ulihuh

CG: You show up at the meeting then saw everybody. . .?Oh my God,he. . . .Nah..I?m just telling you what I
heard. . way I sort of. . .because people .

TM: Yeah, that?s what I mean. Yeah, based on what I?ve seen. . .anytime you need me to walk you through. I
mean there are some. . .there are some signi?cant judgments

CG: [indecipherable] was just. . .I was just misinformed

TM: Right. I had to know. . .I mean you?re a very nice guy. When I got the message and it was like, heard
you were looking at this? and I said, wait a minute. You know, I was like I don?t need just
tired of this impression that I?m looking at stuff. I I?ve been hey can you look at
this joint venture were? not sure about the accounting. I look at it and I said, well look I think you?ve got
a problem with it. ?Holy Shit! What are you looking at that for anyway?!? You know and it?s like. I
can?t win. You know. Or I go over an accounting issue and I say, Look I don?t think you can get there.

I don?t think you should recognize revenue on this type of transaction. ?0h, We?ve been doing that shit
for years and everybody in half the country I can?t allow that.

CG: I mean basically that?s the thing
TM: No, I tell you I am close to 

CG: Because that?s the dif?culty that position

 Page 16 -

TM: Maybe that?s the difference with know? Chris?s role was really to help. I mean that
was really their role And not really what I?ve been told to do. But, no when I step

back maybe, maybe you?re right, maybe you?re right maybe it?s packaging.
CG: I think it think it is packaging.

TM: Yeah. You?re probably 

CG: It?s the..Because ah. You know. It?s think yon Show up in the meetings and
its 

TM: Laughing.
CG: at the end of the day, ah..could be hard to be effective that way

TM: It?s sad. It?s like effective at what, though? You that situation, I?m coming in
there making sure that these guys are taking the know, understanding the issues and making

the could be effective. It?s not

CG: No. No. No. De?nitely. De?nitely. De?nitely. know, Somehow, ah that?s
very, that?s effective. But right now. ..

TM: They don?t see that. They don?t value that, at all.

CG: But that?s not everybody, my call Chris again. It?s

nothing just make sure you don?t get hurt.

TM: Right! See it?s not my, it?s not my decision so you really know more all the junk
around it. I?ve just read a bunch of 

CG: That is the deal. If the bad guy, anybody, This is what
everybody just wanted to give you some perspective that one because, I think it
might be think you?ll ?nd think that all of a good process because. ..and the
software, to the stand you know. It?s so far down the road that no one is saying okay book
the revenues, reverse all But to me would not be..so maybe that?s what I mean that sounds

that happens, right. But I 
TM: Alright. I?ll take care of this

At @55:15 minutes

End of CD