BDO SEIDMAN, LLP’S December 22, 2005 FINANCIAL REPORTING UPDATE

1. BDO SEIDMAN, LLP’SDecember 22, 2005FINANCIAL REPORTING UPDATE

2. Speakers and Replay Information • Speakers • Jeff Lenz • Jay Howell • Wendy Hambleton • Adam Brown • Reva Steinberg • Replay Access • www.bdo.com/about/publications/assurance

3. Agenda • SEC Update • Internal Control Reporting Update • SEC Conference Report • Questions and Answers

4. SEC UPDATEDecember 2005

5. SEC Update – Agenda • Rulemaking – Changes in accelerated filing rules • Other SEC activities • Proposed rules • Interpretive release • FAQ • Advisory Committee on Smaller Public Companies

6. Changes in Accelerated Filing Rules • Final rules adopted 12/14/05; release not yet posted • Remarks are subject to reading the release • Press release at http://www.sec.gov/news/press/2005-176.htm • Changes from Proposed Rules • Large accelerated filers given one more year to file 10-K within 75 days • Will be easier to change to a less accelerated status (this year) • Accelerated filer becomes a non-accelerated filer in same year as Q2 public float drops below $50M • Since only accelerated filers are required to report on internal control, some companies will get a reprieve

7. Changes in Due Dates

8. Exiting an Accelerated Filing Category • Previous – Revenue and public equity float < $25M for two years • New – Large accelerated filer → accelerated filer • Change status in same year as Q2 float drops below $500M • New – Accelerated filer → non-accelerated filer • Change status in same year as Q2 float drops below $50M • Tests performed at year-end • First report in a new category is always an annual report

9. Exiting an Accelerated Filing Category - Example • Accelerated filer with a December year-end • 6/30/06 public equity float drops to $49 million • Issuer must file its 6/30/06 and 9/30/06 Form 10-Qs on an accelerated basis (within 40 days) • Issuer may file its 12/31/06 Form 10-K on a non-accelerated basis (within 90 days) • 404 reporting not required in 2006 Form 10-K • See Financial Reporting letter at www.bdo.com/about/publications/assurance

10. Other SEC ActivitiesProposed Rules • Internet Availability of Proxy Materials (Release 34-52926) • http://www.sec.gov/rules/proposed/34-52926.pdf • Amendments to the Tender Offer Best-Price Rule (Release 34-52968) • http://www.sec.gov/rules/proposed/34-52968.pdf • Allowing foreign private issuers to exit the Exchange Act reporting system (release not yet posted)

11. Other SEC Activities • Interpretive release – Revenue recognition – sales of certain vaccines for government stockpile programs • http://www.sec.gov/rules/interp/33-8642.pdf • FAQ – Securities Offering Reform, 11/30/05 • http://www.sec.gov/divisions/corpfin/faqs/securities_offering_reform_qa.pdf

12. Advisory Committee on Smaller Public Companies - Background • Established December 2004 to assess regulatory system for smaller public companies, including the impact of SOX • Recommendations due to SEC by April 2006 • Four subcommittees • Accounting Standards • Corporate Governance and Disclosure • Capital Formation • Internal Controls • http://www.sec.gov/info/smallbus/acspc.shtml

13. Advisory Committee Definitions • Smaller public company • Aggregate market cap = lowest 6% ($700-750M) AND • Revenues no greater than $250M • Microcap company • Aggregate market cap = lowest 1% ($100-125M) AND • Revenues no greater than $125M

14. Advisory Committee Process • August 2005 recommendations • 1-year deferral of internal control reporting (non-accelerated filers) • No further acceleration for smaller public companies • 12/14/05 – Approved preliminary formal recommendations • 1/23/06 – Approve draft report for public comment • 3/31/06 – Finalize report • April 2006 – Submit recommendations to SEC

15. Advisory Committee RecommendationsAccounting Standards • Reduce the number of years of financial statements required in SEC filings from 3 to 2 • Implement a de minimis provision for auditor independence rules • Permit microcap companies to apply the same effective dates as the FASB provides for private companies • Consider additional guidance with respect to materiality related to previously issued financial statements • Develop a “safe harbor” protocol for accounting

16. Advisory Committee RecommendationsCorporate Governance & Disclosure • As a condition to the relief from 404 reporting recommended by the 404 subcommittee, require: • Additional disclosure regarding internal controls and • Additional audit committee corporate governance standards • Increase the thresholds requiring registration and permitting de-registration • Allow smaller public companies to use Form S-3 and eliminate timely filing requirements

17. Advisory Committee RecommendationsCapital Formation • Adopt a new private offering exemption that does not prohibit general solicitation and advertising for transactions with certain purchasers • Make it easier for microcap companies to go private

18. Advisory Committee RecommendationsInternal Controls • Internal control reporting recommendations will be covered in the internal control reporting update

19. Internal Control Reporting Update December 2005

20. Section 404 Update Topics • PCAOB Update • COSO’s draft guidance on internal controls for smaller public companies • Smaller Public Company Advisory Committee • Recent Section 404 recommendations

21. PCAOB Update – Report on Initial Implementation of AS2 • Issued November 30 and located at: • http://www.pcaobus.org/Rules/Docket_014/2005-11-30_Release_2005-023.pdf • Based in significant part on inspections of the larger accounting firms • Focuses on effectiveness and efficiency of audits of internal controls • Provides additional clarifications

22. PCAOB Update – Report on Initial Implementation of AS2 • Matters pertaining to efficiency: • Integrating the audit of internal control • Applying the top-down approach • Altering the nature, timing and extent of testing • Performing more effective walkthroughs • Using the work of others

23. PCAOB Update – Report on Initial Implementation of AS2 • Matters pertaining to effectiveness: • Identification and testing of compensating controls • Controls over the financial statement preparation process • Disclosure checklists • Non-standard, consolidating, and eliminating journal entries • Cash flow and equity statements • Footnote disclosures

24. PCAOB Update – Report on Initial Implementation of AS2 • Additional Clarifications: • “More than remote” = “at least reasonably possible” • Strong indicators of material weaknesses in AS2 do not automatically result in a material weakness • Scope of audit should not be set to detect deficiencies that individually or in the aggregate are less severe than material weaknesses • Tests of control can be used to meet the objectives of both the financial audit and the internal control audit

25. PCAOB Update – Recent Personnel Changes • William J. McDonough - Retired Chairman of the Public Company Accounting Oversight Board • Bill Gradison – Acting Chairman • Douglas Carmichael – Outgoing Chief Auditor • Thomas Ray – New Chief Auditor

26. COSO Exposure DraftGuidance for Smaller Public Companies • Recognition of differences between larger vs. smaller entities • Twenty-six fundamental principles • Detailed guidance and examples for each principle • Controls need to be cost effective • Comments due December 31, 2005

27. Advisory Committee Recommendations Pertaining to Section 404 1. Exempt Microcaps from Section 404 • Market cap = lowest 1% ($100-125M), and • Revenues no greater than $125M 2. Exempt smaller public companies from the audit requirements of Section 404 • Market cap = lowest 6% ($700-750M), and • Revenues no greater than $250M 3. Alternatively to #2, develop a right-sized audit approach focused on the design of internal controls

28. Advisory Committee Recommendations Pertaining to Section 404 • Complete recommendations located at: • http://www.sec.gov/info/smallbus/acspc/pr-intcontrol.pdf • BDO’s recent comment letter and recommendations located at: • http://www.sec.gov/rules/proposed/s70603/bdoseidman103105.pdf

29. AICPA SEC Conference Report December 2005

30. Conference Themes • Overall themes of keynote speeches • Accounting standards are too complex • Management and auditors should be able to use judgment • Complexity is increased by exceptions in GAAP • Indirect cash flow method • Hedge accounting • Aggregation of segments • Narrow interpretations of rules

31. Conference Themes (cont.) • Carol Stacey (Chief Accountant in the Division of Corporation Finance) – Key comments: • MD&A area of filings needing most improvement • Other areas discussed by staff: • Classification in cash flow statements • Segment issues

32. Materiality SAB • The staff is aware of diversity in practice resulting from difference between “rollover” and “iron curtain” approaches to analyzing proposed adjustments • Believes both methods should be used • No clear indication from the SEC for timing of new guidance • However, the staff indicated any new guidance would not be effective for 2005 calendar year-ends • Transition will be a key issue • What should registrants do? • Analyze existing policies to ensure they’re consistently understood throughout the company • Start thinking about SAB 74 disclosures

33. Segments & Reporting Units • Proper aggregation of operating segments depends on • Similar economic characteristics, and • 5 criteria in paragraph 17 of SFAS 131 • Identification of operating segments impacts determination of reporting units under SFAS 142 • Affects goodwill impairment analysis • If material, treatment of reporting units may be a critical accounting policy

34. Valuation Issues • Prohibition of block discounts • The use of quoted market prices is required in existing GAAP (SFAS 107 and 115) • No longer allowed in specialized industries when Fair Value standard becomes effective (paragraph 28 of SFAS 15X) • Warrants issued to non-employees • Typically no transfer restrictions and little/no vesting period • When using Black-Scholes, use contractual term, not expected term

35. Income Statement Geography • EITF 99-19 was drafted in the context of internet-based companies, but its scope applies broadly. For example, • Cable television operator – who is responsible for vendor taxes? • Consider all facts and circumstances • Use consistent application for similar revenue streams, similar to adopting an accounting policy • Amortization of intangibles determined by function, as well as SEC rules for public cos. • Influences Cost of Sales vs. SG&A determination • S-X Rule 5-03 • SAB Topic 11B

36. Cash Flow Statement Geography • Discontinued operations presentation • Option to present cash flows from discontinued operations separately • If elected, present effect for all 3 categories • Dealer floor plan financing • If finance entity is a subsidiary of supplier, purchases are reflected as increases to inventory and trade loans in operating activities • If finance entity is not a subsidiary of supplier, cash flows to/from 3rd party lender are financing activities • Insurance settlements • Classification depends on nature of proceeds • Impacts MD&A discussion

37. Financial Instrument Issues • FAS 133 – Short cut method • Redeemable equity securities • Convertible debt and warrants • Implicit variable interests

38. FAS 133 – Short-Cut Method • Exception to certain requirements for assessing and testing hedge effectiveness • ALL conditions of paragraph 68 must be met • There is no “spirit” or “principle” that can be met • Interest rate swaps with financing elements • Would not meet shortcut criteria as swap fair value would not be equal to zero at inception • Inappropriate application of the shortcut method results in loss of hedge accounting

39. Redeemable Equity Securities • EITF Topic D-98 • Redeemable shares recognized at fair value and classified outside permanent equity • Subsequent treatment depends upon whether securities are currently redeemable, or probable of becoming currently redeemable in the future • Probability assessment should NOT consider likelihood that other options (such as a conversion option) might be exercised first

40. Convertible Debt & Warrants • Common area of accounting mistakes as guidance is very complex • FAS 133, EITF Issues 00-19, 98-5, 00-27 • Companies often focus on beneficial conversion feature issues and overlook the need to evaluate the instrument for embedded derivatives under Statement 133

41. Is Convertible Debt “Conventional”? • Conventional is defined in 00-19 and 05-2 • The holder may realize the value of the conversion option only by exercising the option and receiving the entire proceeds in a fixed number of shares, or the equivalent amount of cash (at the discretion of the issuer) • If conventional, conversion right generally is not separated from the debt instrument • Might have beneficial conversion feature • Might also have other embedded derivatives • If not conventional, must analyze conversion right under paragraphs 12-33 of EITF 00-19

42. Registration Rights • Often requires issuer to use best efforts to register underlying shares within a certain timeframe • If provisions are not met, the company is typically required to pay liquidating damages • If liquidating damages are not limited to the difference between the fair value of a registered share and an unregistered share, security would not be classified as equity

43. Sufficient Authorized and Unissued Shares • Another requirement for equity classification is that the company have sufficient authorized and unissued shares to settle the conversion option • Must consider ALL commitments that might require issuance of stock • If the number of shares to be issued is not capped, the company cannot conclude that sufficient authorized and unissued shares exist • Equity classification is not appropriate

44. Implicit Variable Interests • FSP FIN 46(R)-5 provides guidance for determining when activities around the entity would cause a reporting enterprise to have a variable interest • Driven by facts and circumstances, but the following questions should be considered: • Was the arrangement entered into in contemplation of the entity’s formation? • Was the arrangement entered into contemporaneously with the issuance of a variable interest? • Why was the arrangement entered into with a variable interest holder instead of with the entity? • Did the arrangement reference specified assets of the VIE?