BDO SEIDMAN, LLP’S December 2004 FINANCIAL REPORTING UPDATE SEC Matters

1. BDO SEIDMAN, LLP’SDecember 2004 FINANCIAL REPORTING UPDATESEC Matters

2. FASB Activities Statement 151, Inventory Costs • Amends ARB 43 to clarify that abnormal amounts of idle facility expense, freight, handling costs, and spoilage are current period costs • Effective for inventory costs incurred during fiscal years beginning after June 15, 2005

3. FASB Activities Statement 123R, Share-Based Payment Requirements Use fair value-based method of accounting for transactions in which employee services received are exchanged for either: • Equity, or • Liabilities based on FV of company’s equity or that may be settled by issuance of such equity

4. FASB Activities Statement 123R, Share-Based Payment Current Literature to be Impacted • Supersedes APB 25 and related interpretations • Amends SFAS 123, however, does not change accounting for transactions with nonemployees (EITF 96-18 still applies) • Does not change accounting for ESOP plans under AICPA Statement of Position 93-6 • Amends SFAS 95 with respect to excesstax benefits

5. FASB Activities Statement 123R, Share-Based Payment Changes from Exposure Draft • Effective for quarters after 6/15/05 for public companies, quarters after 12/15/05 for S-B filer • Reverts to original Statement 123 conclusions • No preference for particular option-pricing models • Limited offset of excess and deficient tax benefits • Straight-line amortization OK for awards with graded vesting • Conditions for noncompensatory plans

6. FASB Activities Statement 123R, Share-Based Payment Transition Public Companies • Modified prospective method • Apply new accounting to all awards granted after effective date • Apply Statement 123 to awards granted after 1994 but not vested as of effective date • Restatement of prior years permitted, but not required Private Companies • Pure prospective method • Apply new accounting to all awards granted after effective date (fiscal years beginning after 12/15/05)

7. FASB Activities Statement 123R, Share-Based Payment Planning Considerations • Carefully weigh the consequences of accelerating vesting • Consider alternative compensation strategies--shift to restricted stock versus options

8. FASB Activities Statement 152, Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67 • Amends Statements 67 and 68, to refer to the guidance in SOP 04-2 • Effective for financial statements for fiscal years beginning after June 15, 2005

9. FASB Activities Statement 153, Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29 • Eliminates the APB 29 exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance • Effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005

10. EITF Consensus Position Reached in November 03-13 -- Applying the Conditions in Para.42 Statement 144 in Determining Whether to Report Discontinued Operations Classification as a discontinued operation is appropriate only if the ongoing entity: • Has no continuing direct cash flows • Does not retain an interest, contract, or other arrangement sufficient to enable it to exert significant influence over the disposed component’s operating and financial policies after the disposal transaction

11. Section 404 Reporting Update • 3rd round of PCAOB FAQs (11-22-04) • Framework for evaluating deficiencies • Further acceleration deferred for one year • 45 day deferral of 404 reporting for accelerated filers • If public equity float < $700 million and • Fiscal Y/E from 11/15/04 – 2/28/05 • Rest of 10-K due at “regular” date

12. Acceleration Deferral Revised accelerated filing deadlines for Forms 10-K and 10-Q by accelerated filers

13. Other SEC/PCAOB Activities • SEC staff FAQ – New 8-K rules (http://www.sec.gov/divisions/corpfin/form8kfaq.htm) • SEC staff FAQ – Independence rules (http://www.sec.gov/info/accountants/ocafaqaudind121304.htm) • Securities Act reform proposal • Communications • Registration process • Final prospectus delivery • PCAOB tax services proposal – would prohibit: • Tax shelter work • Tax services to officers

14. AICPA SEC Conference – Themes • We’ve improved but need to do better • Financial reporting should be a communication exercise – not a compliance exercise • Rules are the floor – not the ceiling • Preparers can enhance quality without more rules • Staff recognizes many requirements are new • Do not expect perfection • Do expect total commitment to the change process

15. Communication Exercise • Contingencies • No disclosure before the charge • Zero accrued until settlement • Financial instruments disclosures • Disjointed, cover pieces, spread out, don’t tie to F/S • Hard to relate disclosures to F/S • Message: Say what’s needed to communicate, even if not specifically required

16. Communication Improvement Ideas • Direct method – cash flows reporting • Pensions – don’t use smoothing mechanisms • Disclose expense by nature (salaries, etc.) • Depreciable lives (stratify cost by life) • MD&A – Tables, real insight • Reasons for structured transactions Would you have what you need to invest?

17. Internal Control Reporting (Section 404) • Benefits (fewer restatements) outweigh the costs • Open dialog in the spring – identify best practices and ways to streamline • Concern re cost to small companies • Expect material weaknesses • Should not prompt severe reactions • Keys are full disclosure and remediation • Implementing new accounting standards

18. Accounting Consultations • Generally permitted, provided not construed to be bookkeeping • A/S-2 raises concerns as to whether: • Providing advice pre-empts a company from demonstrating it has adequate controls over accounting and F/S preparation • Failure to perform flawlessly indicates a significant deficiency or material weakness • Firms have adopted a variety of approaches • PCAOB did not intend to stop accounting discussions between companies and their auditors

19. 404 Reporting – Material Weaknesses • Disclose identified M/Ws in 10-K (don’t wait until 10-K/A) • M/W in ICFR = ineffective DCPs? (usually) • Revise Item 307 and 308(c) if necessary • New M/W in 10-K/A • Restatement • Disclose (in plain English) • What the problem is and what it impacts • How and when you plan to remediate

20. 404 Reporting – 45 Day Deferral – 10-K/As • Two 404 reports • Revised (full) 302 certifications • Revised Item 307/308(c) if necessary • Consent if necessary • S-2/S-3 – ineligible until 10-K/A filed • Can file S-8 and rely on Rule 144 before 10-K/A filed

21. SEC Staff Hot Buttons • Materiality project • Won’t affect 2004 reporting • Material out of period adjustments – require restatement • Pension accounting • Substantive plan • Discount rate • Mortality tables

22. SEC Staff Hot Buttons (Cont.) Modifications of Conversion Options in Convertible Debt • Under EITF 96-16, if the the present value of the cash flows of modified debt differs from the present value of the cash flows of the original debt by more than 10%, the modification should be treated as an extinguishment • The analysis should compare the fair value (not just the intrinsic value) of the conversion option immediately before and after the modification

23. NOT ACCEPTABLE To enact a change in an investment strategy To achieve accounting results more closely matching economic hedging strategies To reposition portfolio due to expected economic outlook ACCEPTABLE Upon the adoption of a new standard Change in statutory requirements A significant business combination that alters investing strategy An unusual situation highly unlikelyto recur in near term SEC Staff Hot Buttons (Cont.)Statement 115, Accounting for Certain Investments in Debt and Equity Securities Transfers to and from the trading account should be rare

24. SEC Staff Hot Buttons (Cont.)Statement 115, Accounting for Certain Investments in Debt and Equity Securities Accounting for Other Than Temporary Impairments of Certain Investments The effective date of recognition and measurement provisions of EITF 03-1 is deferred Continue to follow GAAP including SAB Topic 5.M, until FASB completes project Assessment and disclosure provisions of EITF 03-1 remain effective

25. SEC Staff Hot Buttons (Cont.) • Conceptual Differences Between Statements 141 and 142 • The determination of fair value under 141 differs from the useful life under 142. • 141 bases valuation on traditional notion of fair value, e.g., marketplace participants (willing buyer and seller, etc.). • 142 bases the intangible’s assumed life on its utility to the company. • SEC staff accepts this difference: • Valuation of the intangible should not be changed under 141 even if the useful life was limited to its company-specific utility under 142.

26. SEC Staff Hot Buttons (Cont.) • Accounting for Contingent Tax Benefits • Companies should disclose amount of recorded and unrecorded tax liabilities pursuant to Statement 5. • The Staff does not consider potentially alerting the IRS to uncertain deductions via these disclosures to be an acceptable reason for non-compliance with GAAP and SEC rules. • The FASB will soon expose, for public comment, an interpretation on this topic.

27. SEC Staff Hot Buttons (Cont.) • Changes in Circumstances and the Impact on Revenue Recognition • Companies must continually assess whether their current accounting policies properly reflect the economics of their sales transactions. • Software example: Repeated software upgrades to existing products may change conclusion that the software is only incidental. • Companies should have procedures and controls in place to ensure accounting policies evolve concurrently with the business. • This will improve financial statement reliability and comparability for industries with complex revenue models such as the technology sector.

28. SEC Staff Hot Buttons (Cont.) • Nonmonetary Exchange Transactions That Culminate the Earnings Process • Two main issues to be determined: timing of recognition and income statement classification. • Timing: based on Concept Statement 5 and SAB Topic 13 criteria, e.g., earned and realizable, delivery or performance, etc. • Classification: based on Concept Statement 6, e.g., revenue treatment is only appropriate if the inflow is derived from “activities that constitute …ongoing major or central operations.” Otherwise, classify as gain.

29. SEC Staff Hot Buttons (Cont.) • Accelerated Vesting of Option Grants Prior to the Adoption of Statement 123R • Under APB 25, accelerated vesting of underwater options generally does not result in additional expense. • However, any unrecognized compensation on the date of acceleration of “in-the-money” options would be recognized immediately. • Under FAS 123, the company would be required to disclose the effect of accelerating the unamortized portion of unvested underwater options in their pro forma footnotes. • Upon adoption of 123R using the MPA, compensation expense would be reduced or eliminated since acceleration mitigated the impact of existing underwater, unvested options.

30. SEC Staff Hot Buttons (Cont.) • Accelerated Vesting of Option Grants Prior to the Adoption of Statement 123R (Cont.) • The SEC staff views this treatment consistent with previously expressed views regarding “structured transactions” which are specifically designed to achieve certain accounting goals. • Accordingly, the staff expects disclosures of such transaction to be robust and transparent. Language to the effect of “during fiscal 2004 certain of the company’s stock options were modified to accelerate vesting…” would be considered insufficient.